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Kerzner, Harold, and Harold R. Kerzner. Project Management : A Systems Approach to Planning, Scheduling, and Controlling, John Wiley & Sons, Incorporated, 2013. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/seuniv-ebooks/detail.action?docID=1113482. Created from seuniv-ebooks on 2018-09-12 09:44:59.

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PROJECT MANAGEMENT

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Dr. Kerzner’s 16 Points to Project Management Maturity

1. Adopt a project management methodology and use it consistently.

2. Implement a philosophy that drives the company toward project management maturity and communicate it to everyone.

3. Commit to developing effective plans at the beginning of each project.

4. Minimize scope changes by committing to realistic objectives.

5. Recognize that cost and schedule management are inseparable.

6. Select the right person as the project manager.

7. Provide executives with project sponsor information, not project management information.

8. Strengthen involvement and support of line management.

9. Focus on deliverables rather than resources.

10. Cultivate effective communication, cooperation, and trust to achieve rapid project management maturity.

11. Share recognition for project success with the entire project team and line management.

12. Eliminate nonproductive meetings.

13. Focus on identifying and solving problems early, quickly, and cost effectively.

14. Measure progress periodically.

15. Use project management software as a tool—not as a substitute for effective planning or interpersonal skills.

16. Institute an all-employee training program with periodic updates based upon documented lessons learned.

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Overview

Related Case Studies Related Workbook Exercises (from PMBOK® Guide, 5th (from Kerzner/Project Kerzner/Project Management Edition, Reference Management Case Studies, Workbook and PMP ®/CAPM ® Exam Section for the PMP®

4th Edition) Study Guide, 11th Edition) Certification Exam

• Kombs Engineering • Multiple Choice Exam • Integration • Williams Machine Management

Tool Company* • Scope • Hyten Corporation Management • Macon, Inc. • Human Resource • Continental Computer Management

Corporation • Jackson Industries

1.0 INTRODUCTION

Executives will be facing increasingly complex challenges during the next decade. These challenges will be the result of high escalation factors for salaries and raw materials, increased union demands, pressure from stockholders, and the possibility of long-term high inflation accompanied by a mild recession and a lack of borrowing power with financial institutions. These environmental conditions have existed before, but not to the degree that they do today.

*Case Study also appears at end of chapter.

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In the past, executives have attempted to ease the impact of these environmental conditions by embark- ing on massive cost-reduction programs. The usual results of these programs have been early retirement, layoffs, and a reduction in manpower through attrition. As jobs become vacant, executives pressure line managers to accomplish the same amount of work with fewer resources, either by improving efficiency or by upgrading performance requirements to a higher position on the learning curve. Because people costs are more inflationary than the cost of equipment or facilities, executives are funding more and more capi- tal equipment projects in an attempt to increase or improve productivity without increasing labor.

Unfortunately, executives are somewhat limited in how far they can go to reduce manpower without running a high risk to corporate profitability. Capital equipment projects are not always the answer. Thus, executives have been forced to look elsewhere for the solutions to their problems.

Almost all of today’s executives are in agreement that the solution to the majority of corporate problems involves obtaining better control and use of existing corporate resources, looking internally rather than exter- nally for the solution. As part of the attempt to achieve an internal solution, executives are taking a hard look at the ways corporate activities are managed. Project management is one of the techniques under consideration.

The project management approach is relatively modern. It is characterized by methods of restructuring management and adapting special management techniques, with the purpose of obtaining better control and use of existing resources. Forty years ago project management was confined to U.S. Department of Defense contractors and construction companies. Today, the concept behind project management is being applied in such diverse industries and organizations as defense, construction, pharmaceuticals, chemicals, banking, hospitals, accounting, advertising, law, state and local governments, and the United Nations.

The rapid rate of change in both technology and the marketplace has created enormous strains on exist- ing organizational forms. The traditional structure is highly bureaucratic, and experience has shown that it cannot respond rapidly enough to a changing environment. Thus, the traditional structure must be replaced by project management, or other temporary management structures that are highly organic and can respond very rapidly as situations develop inside and outside the company.

Project management has long been discussed by corporate executives and academics as one of several workable possibilities for organizational forms of the future that could integrate complex efforts and reduce bureaucracy. The acceptance of project management has not been easy, however. Many executives are not willing to accept change and are inflexible when it comes to adapting to a different environment. The proj- ect management approach requires a departure from the traditional business organizational form, which is basically vertical and which emphasizes a strong superior–subordinate relationship.

1.1 UNDERSTANDING PROJECT MANAGEMENT

In order to understand project management, one must begin with the definition of a project. A project can be considered to be any series of activities and tasks that:

● Have a specific objective to be completed within certain specifications ● Have defined start and end dates ● Have funding limits (if applicable) ● Consume human and nonhuman resources (i.e., money, people, equipment) ● Are multifunctional (i.e., cut across several functional lines)

2 OVERVIEW

PMBOK® Guide, 5th Edition 1.2 What Is a Project?

1.3 What Is Project Management?

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Project management, on the other hand, involves five process groups as identified in the PMBOK® Guide, namely:

● Project initiation ● Selection of the best project given resource limits ● Recognizing the benefits of the project ● Preparation of the documents to sanction the project ● Assigning of the project manager

● Project planning ● Definition of the work requirements ● Definition of the quality and quantity of work ● Definition of the resources needed ● Scheduling the activities ● Evaluation of the various risks

● Project execution ● Negotiating for the project team members ● Directing and managing the work ● Working with the team members to help them improve

● Project monitoring and control ● Tracking progress ● Comparing actual outcome to predicted outcome ● Analyzing variances and impacts ● Making adjustments

● Project closure ● Verifying that all of the work has been accomplished ● Contractual closure of the contract ● Financial closure of the charge numbers ● Administrative closure of the papework

Successful project management can then be defined as having achieved the project objectives:

● Within time ● Within cost ● At the desired performance/technology level ● While utilizing the assigned resources effectively and efficiently ● Accepted by the customer

The potential benefits from project management are:

● Identification of functional responsibilities to ensure that all activities are accounted for, regardless of personnel turnover

● Minimizing the need for continuous reporting ● Identification of time limits for scheduling ● Identification of a methodology for trade-off analysis ● Measurement of accomplishment against plans

Understanding Project Management 3

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● Early identification of problems so that corrective action may follow ● Improved estimating capability for future planning ● Knowing when objectives cannot be met or will be exceeded

Unfortunately, the benefits cannot be achieved without overcoming obstacles such as:

● Project complexity ● Customer’s special requirements and scope changes ● Organizational restructuring ● Project risks ● Changes in technology ● Forward planning and pricing

Project management can mean different things to different people. Quite often, people misunderstand the concept because they have ongoing projects within their company and feel that they are using project management to control these activities. In such a case, the following might be considered an appropriate definition:

Project management is the art of creating the illusion that any outcome is the result of a series of predetermined, deliberate acts when, in fact, it was dumb luck.

Although this might be the way that some companies are running their projects, this is not project management. Project management is designed to make better use of existing resources by getting work to flow horizontally as well as vertically within the company. This approach does not really destroy the vertical, bureaucratic flow of work but simply requires that line organizations talk to one another horizontally so work will be accomplished more smoothly throughout the organization. The vertical flow of work is still the responsibility of the line managers. The horizontal flow of work is the responsibility of the project managers, and their primary effort is to communicate and coordinate activities horizontally between the line organizations.

Figure 1–1 shows how many companies are structured. There are always “class or prestige” gaps between various levels of management. There are also functional gaps between working units of the organization.

If we superimpose the management gaps on top of the functional gaps, we find that com- panies are made up of small operational islands that refuse to communicate with one another for fear that giving up information may strengthen their opponents. The project manager’s responsibility is to get these islands to communicate cross-functionally toward common goals and objectives.

The following would be an overview definition of project management:

Project management is the planning, organizing, directing, and controlling of company resources for a relatively short-term objective that has been established to complete specific goals and objectives. Furthermore, project management uti- lizes the systems approach to management by having functional personnel (the vertical hierarchy) assigned to a specific project (the horizontal hierarchy).

4 OVERVIEW

PMBOK® Guide, 5th Edition 1.7.2 Project Management Skills

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The above definition requires further comment. Classical management is usually con- sidered to have five functions or principles:

● Planning ● Organizing ● Staffing ● Controlling ● Directing

You will notice that, in the above definition, the staffing function has been omitted. This was intentional because the project manager does not staff the project. Staffing is a line responsibility. The project manager has the right to request specific resources, but the final decision of what resources will be committed rests with the line managers.

We should also comment on what is meant by a “relatively” short-term project. Not all industries have the same definition for a short-term project. In engineering, the project might be for six months or two years; in construction, three to five years; in nuclear components, ten years; and in insurance, two weeks. Long-term projects, which consume resources full-time, are usually set up as a separate division (if large enough) or simply as a line organization.

Figure 1–2 is a pictorial representation of project management. The objective of the figure is to show that project management is designed to manage or control company resources on a given activity, within time, within cost, and within performance. Time, cost, and performance are the constraints on the project. If the project is to be accomplished for an outside customer, then the project has a fourth constraint: good customer relations. The reader should immediately realize that it is possible to manage a project internally within time, cost, and performance and then alienate the customer to such a degree that no further business will be forthcoming. Executives often select project managers based on who the customer is and what kind of customer relations will be necessary.

Projects exist to produce deliverables. The person ultimately assigned as the project manager may very well be assigned based upon the size, nature, and scope of the deliver- ables. Deliverables are outputs, or the end result of either the completion of the project or the end of a life-cycle phase of the project. Deliverables are measurable, tangible outputs and can take such form as:

● Hardware Deliverables: These are hardware items, such as a table, a prototype, or a piece of equipment.

Understanding Project Management 5

TOP MANAGEMENT:

POLICY

MIDDLE MANAGEMENT:

PLANNING

SUPERVISORS: SCHEDULING

LABORERS: OPERATIONS

MANAGEMENT GAPS FUNCTIONAL GAPS: DEPARTMENTIZATION

OPERATIONAL ISLANDS

+ =

FIGURE 1–1. Why are systems necessary?

PMBOK® Guide, 5th Edition 2.1.3 Organizational Structures

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6 OVERVIEW

● Software Deliverables: These items are similar to hardware deliverables but are usually paper products, such as reports, studies, handouts, or documentation. Some companies do not differentiate between hardware and software deliverables.

● Interim Deliverables: These items can be either hardware or software deliver- ables and progressively evolve as the project proceeds. An example might be a series of interim reports leading up to the final report.

Another factor influencing the selection of the project manager would be the stakehold- ers. Stakeholders are individuals or organizations that can be favorably or unfavorably impacted by the project. As such, project managers must interface with these stakeholders, and many of the stakeholders can exert their influence or pressure over the direction of the project.

Some stakeholders are referred to as “active” or “key” stakeholders that can possess decision-making authority during the execution of the project. Each stakeholder can have his or her own set of objectives, and this could place the project manager in a position of having to balance a variety of stakeholder interests without creating a conflict-of-interest situation for the project manager.

Each company has its own categorization system for identifying stakeholders. A typ- ical system might be:

● Organizational stakeholders ● Executive officers ● Line managers ● Employees ● Unions

IT HI

N G OO

D CUS TOMER RELATIONS

T IM

E CO S

RESOURCES

PERFORMANCE/TECHNOLOGY

FIGURE 1–2. Overview of project management.

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● Product/market stakeholders ● Customers ● Suppliers ● Local committees ● Governments (local, state, and federal) ● General public

● Capital market stakeholders ● Shareholders ● Creditors ● Banks

1.2 DEFINING PROJECT SUCCESS

In the previous section, we defined project success as the completion of an activity within the constraints of time, cost, and performance. This was the definition used for the past twenty years or so. Today, the definition of pro-

ject success has been modified to include completion:

● Within the allocated time period ● Within the budgeted cost ● At the proper performance or specification level ● With acceptance by the customer/user ● With minimum or mutually agreed upon scope changes ● Without disturbing the main work flow of the organization ● Without changing the corporate culture

The last three elements require further explanation. Very few projects are completed within the original scope of the project. Scope changes are inevitable and have the poten- tial to destroy not only the morale on a project, but the entire project. Scope changes must be held to a minimum and those that are required must be approved by both the project manager and the customer/user.

Project managers must be willing to manage (and make concessions/trade-offs, if nec- essary) such that the company’s main work flow is not altered. Most project managers view themselves as self-employed entrepreneurs after project go-ahead, and would like to divorce their project from the operations of the parent organization. This is not always pos- sible. The project manager must be willing to manage within the guidelines, policies, pro- cedures, rules, and directives of the parent organization.

All corporations have corporate cultures, and even though each project may be inher- ently different, the project manager should not expect his assigned personnel to deviate from cultural norms. If the company has a cultural standard of openness and honesty when deal- ing with customers, then this cultural value should remain in place for all projects, regardless of who the customer/user is or how strong the project manager’s desire for success is.

As a final note, it should be understood that simply because a project is a success does not mean that the company as a whole is successful in its project management endeavors. Excellence in project management is defined as a continuous stream of successfully

Defining Project Success 7

PMBOK® Guide, 5th Edition 2.2.3 Project Success

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managed projects. Any project can be driven to success through formal authority and strong executive meddling. But in order for a continuous stream of successful projects to occur, there must exist a strong corporate commitment to project management, and this commitment must be visible.

1.3 SUCCESS, TRADE-OFFS, AND COMPETING CONSTRAINTS

Although many projects are completed successfully, at least in the eyes of the stakehold- ers, the final criteria from which success is measured may be different than the initial cri- teria because of trade-offs. As an example, the triangle shown in Figure 1–2 is referred to as the triple constraints on a project, namely time, cost, and performance, where perfor- mance can be scope, quality, or technology. These are considered to be the primary con- straints and are often considered to be the criteria for a project against which success is measured.

Today, we realize that there can be multiple constraints on a project and, rather than use the terminology of the triple constraints, we focus our attention on competing con- straints. Sometimes the constraints are referred to as primary and secondary constraints. There may be secondary factors such as risk, customer relations, image, and reputation that may cause us to deviate from our original success criteria of time, cost, and performance. This will be covered later in Section 2.10. These changes can occur any time during the life of a project and can then cause trade-offs in the triple constraints, thus requiring that changes be made to the success criteria. In an ideal situation, we would perform trade-offs on any or all of the competing constraints such that acceptable success criteria would still be met.

As an example, let’s assume that a project was initiated using the success criteria of the triple constraints as shown in Figure 1–3. Part way through the project, the environ- ment changes, a new senior management team is brought in with their own agenda, or a corporate crisis occurs such that the credibility of the corporation is at stake. In such a case, the competing constraints shown in Figure 1–3 can be more important than the original triple constraints. For simplicity’s sake, a triangle was used for the competing constraints in Figure 1–3. However, there can be significantly more than three competing constraints in which some geometric shape other than a triangle might work best.

Secondary factors are also considered to be constraints and may be more important than the primary constraints. For example, years ago, in Disneyland and Disneyworld, the project managers designing and building the attractions at the theme parks had six constraints:

● Time ● Cost ● Scope ● Safety ● Aesthetic value ● Quality

8 OVERVIEW

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At Disney, the last three constraints of safety, aesthetic value, and quality were con- sidered locked-in constraints that could not be altered during trade-offs. All trade-offs were made on time, cost, and scope. Some constraints simply cannot change while others may have flexibility.

Not all constraints are equal in importance. For example, in the initiation phase of a pro- ject, scope may be the critical factor and all trade-offs are made on time and cost. During the execution phase of the project, time and cost may become more important and then trade-offs will be made on scope. A more detailed discussion of trade-offs can be found in Chapter 16.

1.4 THE PROJECT MANAGER–LINE MANAGER INTERFACE

We have stated that the project manager must control company resources within time, cost, and performance. Most companies have six resources:

● Money ● Manpower ● Equipment ● Facilities ● Materials ● Information/technology

Actually, the project manager does not control any of these resources directly, except perhaps money (i.e., the project budget).1 Resources are controlled by the line managers, functional managers, or, as they are often called, resources managers. Project managers

The Project Manager–Line Manager Interface 9

Traditional Projects

(The Triple Constraints)

Complex Projects

(Competing Constraints)

V al

Q uality

Image/Reputation

Scope

Risk

Cost Time

Ti m

e Cost

Image/ Reputation

Risk

Quality Value

Scope

FIGURE 1–3. Competing constraints.

PMBOK® Guide, 5th Edition 1.7.2 Project Management Skills

1. Here we are assuming that the line manager and project manager are not the same individual. However, the terms line manager and functional manager are used interchangeably throughout the text.

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must, therefore, negotiate with line managers for all project resources. When we say that project managers control project resources, we really mean that they control those resources (which are temporarily loaned to them) through line managers.

Today, we have a new breed of project manager. Years ago, virtually all project man- agers were engineers with advanced degrees. These people had a command of technology rather than merely an understanding of technology. If the line manager believed that the project manager did in fact possess a command of technology, then the line manager would allow the assigned functional employees to take direction from the project manager. The result was that project managers were expected to manage people.

Most project managers today have an understanding of technology rather than a com- mand of technology. As a result, the accountability for the success of the project is now viewed as shared accountability between the project manager and all affected line man- agers. With shared accountability, the line managers must now have a good understanding of project management, which is why more line managers are now becoming PMP®S. Project managers are now expected to focus more so on managing the project’s deliver- ables rather than providing technical direction to the project team. Management of the assigned resources is more often than not a line function.

Another important fact is that project managers are treated as though they are manag- ing part of a business rather than simply a project, and as such are expected to make sound business decisions as well as project decisions. Project managers must understand business principles. In the future, project managers may be expected to become externally certified by PMI® and internally certified by their company on the organization’s business processes.

In recent years, the rapid acceleration of technology has forced the project manager to become more business oriented. According to Hans Thamhain,

The new breed of business leaders must deal effectively with a broad spectrum of con-

temporary challenges that focus on time-to-market pressures, accelerating technologies,

innovation, resource limitations, technical complexities, social and ethical issues, opera-

tional dynamics, cost, risks, and technology itself as summarized below:

● High task complexities, risks and uncertainties ● Fast-changing markets, technology, regulations ● Intense competition, open global markets ● Resource constraint, tough performance requirements ● Tight, end-date-driven schedules ● Total project life-cycle considerations ● Complex organizations and cross-functional linkages ● Joint ventures, alliances and partnerships, need for dealing with different organiza-

tional cultures and values ● Complex business processes and stakeholder communities ● Need for continuous improvements, upgrades and enhancements ● Need for sophisticated people skills, ability to deal with organizational conflict, power,

and politics ● Increasing impact of IT and e-business2

10 OVERVIEW

2. H. J. Thamhain, Management of Technology (Hoboken, NJ: Wiley, 2005), pp. 3–4.

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Dr. Thamhain further believes that there are paradigm shifts in technology-oriented business environments that will affect the business leaders of the future, including project managers. According to Dr. Thamhain, we are shifting from…

● … mostly linear work processes to highly dynamic, organic and integrated manage-

ment systems ● …efficiency toward effectiveness ● …executing projects to enterprise-wide project management ● …managing information to fully utilizing information technology ● …managerial control to self-direction and accountability ● …managing technology as part of a functional speciality to management of technol-

ogy as a distinct skill set and professional status3

Another example of the need for the project manager to become more actively involved in business aspects has been identified by Gary Heerkens. Heerkens provides sev- eral revelations of why business knowledge has become important, a few of which are4:

● It really doesn’t matter how well you execute a project, if you’re working on the wrong

project! ● There are times when spending more money on a project could be smart business—

even if you exceed the original budget! ● There are times when spending more money on a project could be smart business—

even if the project is delivered after the original deadline! ● Forcing the project team to agree to an unrealistic deadline may not be very smart,

from a business standpoint. ● A portfolio of projects that all generate a positive cash flow may not represent an orga-

nization’s best opportunity for investment.

It should become obvious at this point that successful project management is strongly dependent on:

● A good daily working relationship between the project manager and those line managers who directly assign resources to projects

● The ability of functional employees to report vertically to line managers at the same time that they report horizontally to one or more project managers

These two items become critical. In the first item, functional employees who are assigned to a project manager still take technical direction from their line managers. Second, employees who report to multiple managers will always favor the manager who controls their purse strings. Thus, most project managers appear always to be at the mercy of the line managers.

The Project Manager–Line Manager Interface 11

3. See note 2; Thamhain; p. 28. 4. G. Heerkens, The Business-Savvy Project Manager (New York: McGraw-Hill, 2006), pp. 4–8.

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Classical management has often been defined as a process in which the manager does not necessarily perform things for himself, but accomplishes objectives through others in a group situation. This basic definition also applies to the project manager. In addition, a project manager must help himself. There is nobody else to help him.

If we take a close look at project management, we will see that the project manager actu- ally works for the line managers, not vice versa. Many executives do not realize this. They have a tendency to put a halo around the head of the project manager and give him a bonus at project completion when, in fact, the credit should be shared with the line managers, who are continually pressured to make better use of their resources. The project manager is sim- ply the agent through whom this is accomplished. So why do some companies glorify the project management position?

To illustrate the role of the project manager, consider the time, cost, and performance constraints shown in Figure 1–2. Many functional managers, if left alone, would recognize only the performance constraint: “Just give me another $50,000 and two more months, and I’ll give you the ideal technology.”

The project manager, as part of these communicating, coordinating, and integrating responsibilities, reminds the line managers that there are also time and cost constraints on the project. This is the starting point for better resource control.

Project managers depend on line managers. When the project manager gets in trouble, the only place he can go is to the line manager because additional resources are almost always required to alleviate the problems. When a line manager gets in trouble, he usually goes first to the project manager and requests either additional funding or some type of authorization for scope changes.

To illustrate this working relationship between the project and line managers, consider the following situation:

Project Manager (addressing the line manager): “I have a serious problem. I’m looking at a $150,000 cost overrun on my project and I need your help. I’d like you to do the same amount of work that you are currently scheduled for but in 3,000 fewer man-hours. Since your orga- nization is burdened at $60/hour, this would more than compensate for the cost overrun.”

Line Manager: “Even if I could, why should I? You know that good line managers can always make work expand to meet budget. I’ll look over my manpower curves and let you know tomorrow.”

The following day . . .

Line Manager: “I’ve looked over my manpower curves and I have enough work to keep my people employed. I’ll give you back the 3,000 hours you need, but remember, you owe me one!”

Several months later . . .

Line Manager: “I’ve just seen the planning for your new project that’s supposed to start two months from now. You’ll need two people from my department. There are two

12 OVERVIEW

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employees that I’d like to use on your project. Unfortunately, these two people are avail- able now. If I don’t pick these people up on your charge number right now, some other pro- ject might pick them up in the interim period, and they won’t be available when your project starts.”

Project Manager: “What you’re saying is that you want me to let you sandbag against one of my charge numbers, knowing that I really don’t need them.”

Line Manager: “That’s right. I’ll try to find other jobs (and charge numbers) for them to work on temporarily so that your project won’t be completely burdened. Remember, you owe me one.”

Project Manager: “O.K. I know that I owe you one, so I’ll do this for you. Does this make us even?”

Line Manager: “Not at all! But you’re going in the right direction.”

When the project management–line management relationship begins to deteriorate, the project almost always suffers. Executives must promote a good working relationship between line and project management. One of the most common ways of destroying this relationship is by asking, “Who contributes to profits—the line or project manager?” Project managers feel that they control all project profits because they control the budget. The line managers, on the other hand, argue that they must staff with appropriately bud- geted-for personnel, supply the resources at the desired time, and supervise performance. Actually, both the vertical and horizontal lines contribute to profits. These types of con- flicts can destroy the entire project management system.

The previous examples should indicate that project management is more behavioral than quantitative. Effective project management requires an understanding of:

● Quantitative tools and techniques ● Organizational structures ● Organizational behavior

Most people understand the quantitative tools for planning, scheduling, and control- ling work. It is imperative that project managers understand totally the operations of each line organization. In addition, project managers must understand their own job description, especially where their authority begins and ends. During an in-house seminar on engi- neering project management, the author asked one of the project engineers to provide a description of his job as a project engineer. During the discussion that followed, several project managers and line managers said that there was a great deal of overlap between their job descriptions and that of the project engineer.

Organizational behavior is important because the functional employees at the inter- face position find themselves reporting to more than one boss—a line manager and one project manager for each project they are assigned to. Executives must provide proper training so functional employees can report effectively to multiple managers.

The Project Manager–Line Manager Interface 13

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1.5 DEFINING THE PROJECT MANAGER’S ROLE

The project manager is responsible for coordinating and integrating activ- ities across multiple, functional lines. The integration activities performed by the project manager include:

● Integrating the activities necessary to develop a project plan ● Integrating the activities necessary to execute the plan ● Integrating the activities necessary to make changes to the plan

These integrative responsibilities are shown in Figure 1–4 where the project manager must convert the inputs (i.e., resources) into outputs of products, services, and ultimately profits. In order to do this, the project manager needs strong communicative and interpersonal skills, must become familiar with the operations of each line organization, and must have knowledge of the technology being used.

An executive with a computer manufacturer stated that his company was looking externally for project managers. When asked if he expected candidates to have a command of computer technology, the executive remarked: “You give me an individual who has good communicative skills and interpersonal skills, and I’ll give that individual a job. I can teach people the technology and give them technical experts to assist them in decision making. But I cannot teach somebody how to work with people.”

The project manager’s job is not an easy one. Project managers may have increasing responsibility, but very little authority. This lack of authority can force them to “negotiate” with upper-level management as well as functional management for control of company resources. They may often be treated as outsiders by the formal organization.

In the project environment, everything seems to revolve about the project manager. Although the project organization is a specialized, task-oriented entity, it cannot exist apart from the traditional structure of the organization. The project manager, therefore, must

14 OVERVIEW

Products

Profits

Services Outputs

Capital

Materials

Equipment

Facilities

Information

Personnel

Resources

Integration Management

Integrated Processes

Inputs

FIGURE 1–4. Integration management.

PMBOK® Guide, 5th Edition Chapter 4 Integration

Management

PMBOK® Guide, 5th Edition 2.2.1 Stakeholders

Chapter 4 Project

Integration Management

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walk the fence between the two organizations. The term interface management is often used for this role, which can be described as managing relationships:

● Within the project team ● Between the project team and the functional organizations ● Between the project team and senior management ● Between the project team and the customer’s organization, whether an internal or

external organization

To be effective as a project manager, an individual must have management as well as technical skills. Because engineers often consider their careers limited in the functional disciplines, they look toward project management and project engineering as career path opportunities. But becoming a manager entails learning about psychology, human behav- ior, organizational behavior, interpersonal relations, and communications. MBA programs have come to the rescue of individuals desiring the background to be effective project managers.

In the past, executives motivated and retained qualified personnel primarily with financial incentives. Today other ways are being used, such as a change in title or the promise of more challenging work. Perhaps the lowest turnover rates of any professions in the world are in project management and project engineering. In a project environment, the project managers and project engineers get to see their project through from “birth to death.” Being able to see the fruits of one’s efforts is highly rewarding. A senior project manager in a construction company commented on why he never accepted a vice presi- dency that had been offered to him: “I can take my children and grandchildren into ten countries in the world and show them facilities that I have built as the project manager. What do I show my kids as an executive? The size of my office? My bank account? A stockholder’s report?”

The project manager is actually a general manager and gets to know the total opera- tion of the company. In fact, project managers get to know more about the total operation of a company than most executives. That is why project management is often used as a training ground to prepare future general managers who will be capable of filling top man- agement positions.

1.6 DEFINING THE FUNCTIONAL MANAGER’S ROLE

Assuming that the project and functional managers are not the same per- son, we can identify a specific role for the functional manager. There are three elements to this role:

● The functional manager has the responsibility to define how the task will be done and where the task will be done (i.e., the tech- nical criteria).

Defining the Functional Manager’s Role 15

PMBOK® Guide, 5th Edition Chapter 9 Human Resources

Management

9.1.2 HR Planning: Tools and

Techniques

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● The functional manager has the responsibility to provide sufficient resources to accomplish the objective within the project’s constraints (i.e., who will get the job done).

● The functional manager has the responsibility for the deliverable.

In other words, once the project manager identifies the requirements for the project (i.e., what work has to be done and the constraints), it becomes the line manager’s respon- sibility to identify the technical criteria. Except perhaps in R&D efforts, the line manager should be the recognized technical expert. If the line manager believes that certain techni- cal portions of the project manager’s requirements are unsound, then the line manager has the right, by virtue of his expertise, to take exception and plead his case to a higher authority.

In Section 1.1 we stated that all resources (including personnel) are controlled by the line manager. The project manager has the right to request specific staff, but the final appointments rest with line managers. It helps if project managers understand the line manager’s problems:

● Unlimited work requests (especially during competitive bidding) ● Predetermined deadlines ● All requests having a high priority ● Limited number of resources ● Limited availability of resources ● Unscheduled changes in the project plan ● Unpredicted lack of progress ● Unplanned absence of resources ● Unplanned breakdown of resources ● Unplanned loss of resources ● Unplanned turnover of personnel

Only in a very few industries will the line manager be able to identify to the project manager in advance exactly what resources will be available when the project is scheduled to begin. It is not important for the project manager to have the best available resources. Functional managers should not commit to certain people’s availability. Rather, the func- tional manager should commit to achieving his portion of the deliverables within time, cost, and performance even if he has to use average or below-average personnel. If the pro- ject manager is unhappy with the assigned functional resources, then the project manager should closely track that portion of the project. Only if and when the project manager is convinced by the evidence that the assigned resources are unacceptable should he confront the line manager and demand better resources.

The fact that a project manager is assigned does not relieve the line manager of his functional responsibility to perform. If a functional manager assigns resources such that the constraints are not met, then both the project and functional managers will be blamed. One company is even considering evaluating line managers for merit increases and promotion based on how often they have lived up to their commitments to the project managers.

16 OVERVIEW

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Therefore, it is extremely valuable to everyone concerned to have all project commitments made visible to all.

Some companies carry the concept of commitments to extremes. An aircraft compo- nents manufacturer has a Commitment Department headed by a second-level manager. The function of the Commitment Department is to track how well the line managers keep their promises to the project managers. The department manager reports directly to the vice pres- ident of the division. In this company, line managers are extremely careful and cautious in making commitments, but do everything possible to meet deliverables. This same company has gone so far as to tell both project and line personnel that they run the risk of being dis- charged from the company for burying a problem rather than bringing the problem to the surface immediately.

In one automotive company, the tension between the project and line managers became so combative that it was having a serious impact on the performance and con- straints of the project. The project managers argued that the line managers were not ful- filling their promises whereas the line managers were arguing that the project managers’ requirements were poorly defined. To alleviate the problem, a new form was created which served as a contractual agreement between the project and the line managers who had to commit to the deliverables. This resulted in “shared accountability” for the project’s deliverables.

Project management is designed to have shared authority and responsibility between the project and line managers. Project managers plan, monitor, and control the project, whereas functional managers perform the work. Table 1–1 shows this shared responsibility. The one exception to Table 1–1 occurs when the project and line managers are the same per- son. This situation, which happens more often than not, creates a conflict of interest. If a line manager has to assign resources to six projects, one of which is under his direct control, he might save the best resources for his project. In this case, his project will be a success at the expense of all of the other projects.

The exact relationship between project and line managers is of paramount importance

in project management where multiple-boss reporting prevails. Table 1–2 shows that

the relationship between project and line managers is not always in balance and thus,

of course, has a bearing on who exerts more influence over the assigned functional

employees.

Defining the Functional Manager’s Role 17

TABLE 1–1. DUAL RESPONSIBILITY

Responsibility

Topic Project Manager Line Manager

Rewards Give recommendation: Informal Provide rewards: Formal Direction Milestone (summary) Detailed Evaluation Summary Detailed Measurement Summary Detailed Control Summary Detailed

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1.7 DEFINING THE FUNCTIONAL EMPLOYEE’S ROLE

Once the line managers commit to the deliverables, it is the responsibility of the assigned functional employees to achieve the functional deliverables. For years the functional employ- ees were called subordinates. Although this term still exists in textbooks, industry prefers to regard the assigned employees as “associates” rather than subordinates. The reason for this is that in project management the associates can be a higher pay grade than the project man- ager. The associates can even be a higher pay grade than their functional manager.

In most organizations, the assigned employees report on a “solid” line to their func- tional manager, even though they may be working on several projects simultaneously. The employees are usually a “dotted” line to the project but solid to their function. This places the employees in the often awkward position of reporting to multiple individuals. This sit- uation is further complicated when the project manager has more technical knowledge

than the line manager. This occurs during R&D projects. The functional employee is expected to accomplish the following activities when

assigned to projects:

● Accept responsibility for accomplishing the assigned deliverables within the project’s constraints

● Complete the work at the earliest possible time ● Periodically inform both the project and line manager of the project’s status ● Bring problems to the surface quickly for resolution ● Share information with the rest of the project team

18 OVERVIEW

TABLE 1–2. REPORTING RELATIONSHIPS

Project Manager (PM)/Line Manager (LM)/Employee Relationship

Employee Employees Take PM Receives Performance

Type of Project Type of Matrix Technical Direction Functional Progress Evaluations Manager Structure* PM Negotiates For From From Made By

Lightweight Weak Deliverables LMs Primarily LMs LMs only with no input from PM

Heavyweight Strong People who report PM and LMs Assigned employees LMs with input informally to PM who report to LMs from PM but formally to LMs

Tiger teams Very strong People who report PM only Assigned employees PM only entirely to PM who now report full-time for directly to PM duration of project

*The types of organizational structures are discussed in Chapter 3.

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1.8 DEFINING THE EXECUTIVE’S ROLE

In a project environment there are new expectations of and for the executives, as well as a new interfacing role.5 Executives are expected to interface a project as follows:

● In project planning and objective-setting ● In conflict resolution ● In priority-setting ● As project sponsor6

Executives are expected to interface with projects very closely at project initiation and planning, but to remain at a distance during execution unless needed for priority-setting and conflict resolution. One reason why executives “meddle” during project execution is that they are not getting accurate information from the project manager as to project sta- tus. If project managers provide executives with meaningful status reports, then the so-called meddling may be reduced or even eliminated.

1.9 WORKING WITH EXECUTIVES

Success in project management is like a three-legged stool. The first leg is the project man- ager, the second leg is the line manager, and the third leg is senior management. If any of the three legs fail, then even delicate balancing may not prevent the stool from toppling.

The critical node in project management is the project manager–line manager inter- face. At this interface, the project and line managers must view each other as equals and be willing to share authority, responsibility, and accountability. In excellently managed companies, project managers do not negotiate for resources but simply ask for the line manager’s commitment to executing his portion of the work within time, cost, and perfor- mance. Therefore, in excellent companies, it should not matter who the line manager assigns as long as the line manager lives up to his commitments.

Since the project and line managers are “equals,” senior management involvement is necessary to provide advice and guidance to the project manager, as well as to provide encouragement to the line managers to keep their promises. When executives act in this capacity, they assume the role of project sponsors, as shown in Figure 1–5,7 which also shows that sponsorship need not always be at the executive levels. The exact person appointed as the project sponsor is based on the dollar value of the project, the priority of the project, and who the customer is.

The ultimate objective of the project sponsor is to provide behind-the-scenes assistance to project personnel for projects both “internal” to the company, as well as “external,” as shown in Figure 1–5. Projects can still be successful without this commitment and support, as long as all work flows smoothly. But in time of crisis, having a “big brother” available as a possible sounding board will surely help.

Working with Executives 19

5. The expectations are discussed in Section 9.3. 6. The role of the project sponsor is discussed in Section 10.1. 7. Section 10.1 describes the role of the project sponsor in more depth.

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When an executive is required to act as a project sponsor, then the executive has the responsibility to make effective and timely project decisions. To accomplish this, the execu- tive needs timely, accurate, and complete data for such decisions. Keeping management informed serves this purpose, while the all-too-common practice of “stonewalling” prevents an executive from making effective project decisions.

It is not necessary for project sponsorship to remain exclusively at the executive lev- els. As companies mature in their understanding and implementation of project manage- ment, project sponsorship may be pushed down to middle-level management. Committee sponsorship is also possible.

1.10 COMMITTEE SPONSORSHIP/GOVERNANCE

All projects have the potential of getting into trouble but, in general, project management can work well as long as the project’s requirements do not impose severe pressure upon the project manager and a project sponsor exists as an ally to assist the project manager when trouble does appear. Unfortunately, in today’s chaotic environment, this pressure appears to be increasing because:

● Companies are accepting high-risk and highly complex projects as a necessity for survival

● Customers are demanding low-volume, high-quality products with some degree of customization

20 OVERVIEW

PRIORITY PROJECTS

MAINTENANCE PROJECTS

PROJECT MANAGER

PROJECT SPONSOR

PROJECT MANAGER

PROJECT SPONSOR: SENIOR MANAGEMENT

PROJECT SPONSOR: LOWER/MIDDLE MANAGEMENT

PROJECT TEAM

RELATIONSHIP:

• OBJECTIVE SETTING • UP-FRONT PLANNING • PROJECT ORGANIZATION • KEY STAFFING • MASTER PLAN • POLICIES • MONITORING EXECUTION • PRIORITY SETTING • CONFLICT RESOLUTION • EXECUTIVE-CLIENT CONTACT

FIGURE 1–5. The project sponsor interface.

PMBOK® Guide, 5th Edition 2.2.1 Project Stakeholders

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● Project life cycles and new product development times are being compressed ● Enterprise environmental factors are having a greater impact on project execution ● Customers and stakeholders want to be more actively involved in the execution of

projects ● Companies are developing strategic partnerships with suppliers, and each supplier

can be at a different level of project management maturity ● Global competition has forced companies to accept projects from customers that

are all at a different level of project management maturity and with different reporting requirements

These pressures tend to slow down the decision-making processes at a time when stakeholders want the projects and processes to be accelerated. One person, while acting as the project sponsor, may have neither the time nor capability to address all of these addi- tional issues. The result will be a project slowdown and can occur because of:

● The project manager being expected to make decisions in areas where he or she has limited knowledge

● The project manager hesitating to accept full accountability and ownership for the projects

● Excessive layers of management being superimposed on top of the project man- agement organization

● Risk management being pushed up to higher levels in the organization hierarchy resulting in delayed decisions

● The project manager demonstrating questionable leadership ability on some of the nontraditional projects

The problems resulting from these pressures may not be able to be resolved, at least easily and in a timely manner, by a single project sponsor. These problems can be resolved using effective project governance. Project governance is actually a framework by which decisions are made. Governance relates to decisions that define expectations, accountabil- ity, responsibility, the granting of power, or verifying performance. Governance relates to consistent management, cohesive policies, and processes and decision-making rights for a given area of responsibility. Governance enables efficient and effective decision-making to take place.

Every project can have different governance even if each project uses the same enter- prise project management methodology. The governance function can operate as a sepa- rate process or as part of project management leadership. Governance is designed not to replace project decision-making but to prevent undesirable decisions from being made.

Historically, governance was provided by a single project sponsor. Today, governance is a committee and can include representatives from each stakeholder’s organization. Table 1-3 shows various governance approaches based upon the type of project team. The membership of the committee can change from project to project and industry to industry. The membership may also vary based upon the number of stakeholders and whether the project is for an internal or external client. On long-term projects, membership can change throughout the project.

Committee Sponsorship/Governance 21

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Governance on projects and programs sometimes fails because people confuse project governance with corporate governance. The result is that members of the committee are not sure what their role should be. Some of the major differences include:

● Alignment: Corporate governance focuses on how well the portfolio of projects is aligned to and satisfies overall business objectives. Project governance focuses on ways to keep a project on track.

● Direction: Corporate governance provides strategic direction with a focus on how project success will satisfy corporate objectives. Project governance is more oper- ation direction with decisions based upon the predefined parameters on project scope, time, cost, and functionality.

● Dashboards: Corporate governance dashboards are based upon financial, market- ing, and sales metrics. Project governance dashboards have operations metrics on time, cost, scope, quality, action items, risks, and deliverables.

● Membership: Corporate governance committees are composed of the seniormost levels of management. Project government membership may include some mem- bership from middle management.

Another reason why failure may occur is when members of the project or program governance group do not understand project or program management. This can lead to micromanagement by the governance committee. There is always the question of what decisions must be made by the governance committee and what decisions the project man- ager can make. In general, the project manager should have the authority for decisions related to actions necessary to maintain the baselines. Governance committees must have the authority to approve scope changes above a certain dollar value and to make decisions necessary to align the project to corporate objectives and strategy.

22 OVERVIEW

TABLE 1–3. TYPES OF PROJECT GOVERNANCE

Structure Description Governance

Dispersed locally Team members can be full- or Usually a single person is acting as the part-time. They are still attached sponsor but may be an internal administratively to their functional area. committee based upon the project’s

complexity.

Dispersed geographically This is a virtual team. The project Usually governance by committee and manager may never see some of the can include stakeholder membership. team members. Team members can be full- or part-time.

Colocated All of the team members are physically Usually a single person acting as the located in close proximity to the project sponsor. manager. The project manager does not have any responsibility for wage and salary administration.

Projectized This is similar to a colocated team but May be governance by committee the project manager generally functions based upon the size of the project and as a line manager and may have wage the number of strategic partners. and salary responsibilities.

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1.11 THE PROJECT MANAGER AS THE PLANNING AGENT

The major responsibility of the project manager is planning. If project planning is performed correctly, then it is conceivable that the project man- ager will work himself out of a job because the project can run itself. This rarely happens, however. Few projects are ever completed without some

conflict or trade-offs for the project manager to resolve. In most cases, the project manager provides overall or summary definitions of the

work to be accomplished, but the line managers (the true experts) do the detailed planning. Although project managers cannot control or assign line resources, they must make sure that the resources are adequate and scheduled to satisfy the needs of the project, not vice versa. As the architect of the project plan, the project manager must provide:

● Complete task definitions ● Resource requirement definitions (possibly skill levels) ● Major timetable milestones ● Definition of end-item quality and reliability requirements ● The basis for performance measurement ● Definition of project success

These factors, if properly established, result in:

● Assurance that functional units will understand their total responsibilities toward achieving project needs.

● Assurance that problems resulting from scheduling and allocation of critical resources are known beforehand.

● Early identification of problems that may jeopardize successful project completion so that effective corrective action and replanning can be taken to prevent or resolve the problems.

Project managers are responsible for project administration and, therefore, must have the right to establish their own policies, procedures, rules, guidelines, and directives— provided these policies, guidelines, and so on, conform to overall company policy. Companies with mature project management structures usually have rather loose company guidelines, so project managers have some degree of flexibility in how to control their projects. However, project managers cannot make any promises to a functional employee concerning:

● Promotion ● Grade ● Salary ● Bonus ● Overtime ● Responsibility ● Future work assignments

The Project Manager as the Planning Agent 23

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Resources Management

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These seven items can be administered by line managers only, but the project manager can have indirect involvement by telling the line manager how well an employee is doing (and putting it in writing), requesting overtime because the project budget will permit it, and offering individuals the opportunity to perform work above their current pay grade. However, such work above pay grade can cause severe managerial headaches if not coordi- nated with the line manager, because the individual will expect immediate rewards if he per- forms well.

Establishing project administrative requirements is part of project planning. Executives must either work with the project managers at project initiation or act as resources later. Improper project administrative planning can create a situation that requires:

● A continuous revision and/or establishment of company and/or project policies, procedures, and directives

● A continuous shifting in organizational responsibility and possible unnecessary restructuring

● A need for staff to acquire new knowledge and skills

If these situations occur simultaneously on several projects, there can be confusion throughout the organization.

1.12 PROJECT CHAMPIONS

Corporations encourage employees to think up new ideas that, if approved by the corpo- ration, will generate monetary and nonmonetary rewards for the idea generator. One such reward is naming the individual the “project champion.” Unfortunately, the project cham- pion often becomes the project manager, and, although the idea was technically sound, the project fails.

Table 1–4 provides a comparison between project managers and project champions. It shows that the project champions may become so attached to the technical side of the proj- ect that they become derelict in their administrative responsibilities. Perhaps the project champion might function best as a project engineer rather than the project manager.

24 OVERVIEW

TABLE 1–4. PROJECT MANAGERS VERSUS PROJECT CHAMPIONS

Project Managers Project Champions

• Prefer to work in groups • Prefer working individually • Committed to their managerial and technical • Committed to technology

responsibilities • Committed to the corporation • Committed to the profession • Seek to achieve the objective • Seek to exceed the objective • Are willing to take risks • Are unwilling to take risks; try to test everything • Seek what is possible • Seek perfection • Think in terms of short time spans • Think in terms of long time spans • Manage people • Manage things • Are committed to and pursue material values • Are committed to and pursue intellectual values

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This comparison does not mean that technically oriented project managers-champions will fail. Rather, it implies that the selection of the “proper” project manager should be based on all facets of the project.

1.13 THE DOWNSIDE OF PROJECT MANAGEMENT

Project management is often recognized only as a high-salaried, highly challenging posi- tion whereby the project manager receives excellent training in general management.

For projects that are done for external sources, the project manager is first viewed as starting out with a pot of gold and then as having to manage the project so that sufficient profits will be made for the stockholders. If the project manager performs well, the pro- ject will be successful. But the personal cost may be high for the project manager.

There are severe risks that are not always evident. Some project management posi- tions may require a sixty-hour workweek and extensive time away from home. When a project manager begins to fall in love more with the job than with his family, the result is usually lack of friends, a poor home life, and possibly divorce. During the birth of the missile and space programs, companies estimated that the divorce rate among project managers and project engineers was probably twice the national average. Accepting a project management assignment is not always compatible with raising a young family. Characteristics of the workaholic project manager include:

● Every Friday he thinks that there are only two more working days until Monday. ● At 5:00 P.M. he considers the working day only half over. ● He has no time to rest or relax. ● He always takes work home from the office. ● He takes work with him on vacations.

1.14 PROJECT-DRIVEN VERSUS NON–PROJECT-DRIVEN ORGANIZATIONS

On the micro level, virtually all organizations are either marketing-, engi- neering-, or manufacturing-driven. But on the macro level, organizations are either project- or non–project-driven. The PMBOK® Guide uses the terms project-based and non–project-based, whereas in this text the terms project-driven and non–project-driven or operational-driven are used. In a project-driven organization, such as construction or aerospace, all work

is characterized through projects, with each proj-ect as a separate cost center having its own profit-and-loss statement. The total profit to the corporation is simply the summation of the profits on all projects. In a project-driven organization, everything centers around the projects.

In the non–project-driven organization, such as low-technology manufacturing, profit and loss are measured on vertical or functional lines. In this type of organization, projects

Project-Driven versus Non–Project-Driven Organizations 25

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1.5.2 Organizations and Project

Management

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exist merely to support the product lines or functional lines. Priority resources are assigned to the revenue-producing functional line activities rather than the projects.

Project management in a non–project-driven organization is generally more difficult for these reasons:

● Projects may be few and far between. ● Not all projects have the same project management requirements, and therefore

they cannot be managed identically. This difficulty results from poor understand- ing of project management and a reluctance of companies to invest in proper training.

● Executives do not have sufficient time to manage projects themselves, yet refuse to delegate authority.

● Projects tend to be delayed because approvals most often follow the vertical chain of command. As a result, project work stays too long in functional departments.

● Because project staffing is on a “local” basis, only a portion of the organization understands project management and sees the system in action.

● There is heavy dependence on subcontractors and outside agencies for project management expertise.

Non–project-driven organizations may also have a steady stream of projects, all of which are usually designed to enhance manufacturing operations. Some projects may be customer-requested, such as:

● The introduction of statistical dimensioning concepts to improve process control ● The introduction of process changes to enhance the final product ● The introduction of process change concepts to enhance product reliability

If these changes are not identified as specific projects, the result can be:

● Poorly defined responsibility areas within the organization ● Poor communications, both internal and external to the organization ● Slow implementation ● A lack of a cost-tracking system for implementation ● Poorly defined performance criteria

Figure 1–6 shows the tip-of-the-iceberg syndrome, which can occur in all types of

organizations but is most common in non–project-driven organizations. On the surface, all

we see is a lack of authority for the project manager. But beneath the surface we see the

causes; there is excessive meddling due to lack of understanding of project management,

which, in turn, resulted from an inability to recognize the need for proper training.

In the previous sections we stated that project management could be handled on either

a formal or an informal basis. As can be seen from Figure 1–7, informal project manage-

ment most often appears in non–project-driven organizations. It is doubtful that informal

project management would work in a project-driven organization where the project man-

ager has profit-and-loss responsibility.

26 OVERVIEW

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Project-Driven versus Non–Project-Driven Organizations 27

DELEGATION OF

AUTHORITY TO

PROJECT MANAGER

EXECUTIVE MEDDLING

LACK OF UNDERSTANDING OF HOW PROJECT MANAGEMENT SHOULD WORK

LACK OF TRAINING IN COMMUNICATIONS/INTERPERSONAL SKILLS

MANY OF THE PROBLEMS SURFACE MUCH LATER IN THE PROJECT AND RESULT IN A MUCH HIGHER COST TO CORRECT AS WELL AS INCREASE PROJECT RISK

FIGURE 1–6. The tip-of-the-iceberg syndrome for matrix implementation.

RELATIVE INFLUENCE

PRODUCT INFLUENCE IN DECISION-MAKING

FUNCTIONAL INFLUENCE IN DECISION-MAKING

DUAL INFLUENCE

FUNCTIONAL ORGANIZATION

MATRIX PRODUCT ORGANIZATION

NON–PROJECT-

DRIVEN

PROJECT-

DRIVEN

NON–PROJECT-

DRIVEN

INFORMAL

P.M.

INFORMAL

P.M.

FORMAL

P.M.

FIGURE 1–7. Decision-making influence.

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1.15 MARKETING IN THE PROJECT-DRIVEN ORGANIZATION

Getting new projects is the lifeblood of any project-oriented business.

The practices of the project-oriented company are, however, substantially

different from traditional product businesses and require highly special-

ized and disciplined team efforts among marketing, technical, and operat-

ing personnel, plus significant customer involvement. Projects are

different from products in many respects, especially marketing. Marketing projects

requires the ability to identify, pursue, and capture one-of-a-kind business opportunities,

and is characterized by:

● A systematic effort. A systematic approach is usually required to develop a new program lead into an actual contract. The project acquisition effort is often highly

integrated with ongoing programs and involves key personnel from both the poten-

tial customer and the performing organization. ● Custom design. While traditional businesses provide standard products and services

for a variety of applications and customers, projects are custom-designed items to fit

specific requirements of a single-customer community. ● Project life cycle. Project-oriented businesses have a well-defined beginning and

end and are not self-perpetuating. Business must be generated on a project-by-

project basis rather than by creating demand for a standard product or service. ● Marketing phase. Long lead times often exist between the product definition, start-

up, and completion phases of a project. ● Risks. There are risks, especially in the research, design, and production of pro-

grams. The program manager not only has to integrate the multidisciplinary tasks and project elements within budget and schedule constraints, but also has to manage inventions and technology while working with a variety of technically ori- ented prima donnas.

● The technical capability to perform. Technical ability is critical to the successful pursuit and acquisition of a new project.

In spite of the risks and problems, profits on projects are usually very low in compar- ison with commerical business practices. One may wonder why companies pursue project businesses. Clearly, there are many reasons why projects are good business:

● Although immediate profits (as a percentage of sales) are usually small, the return on capital investment is often very attractive. Progress payment practices keep inventories and receivables to a minimum and enable companies to undertake proj- ects many times larger in value than the assets of the total company.

● Once a contract has been secured and is being managed properly, the project may be of relatively low financial risk to the company. The company has little addi- tional selling expenditure and has a predictable market over the life cycle of the project.

28 OVERVIEW

PMBOK® Guide, 5th Edition 1.4.3 Projects and Strategic

Planning

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● Project business must be viewed from a broader perspective than motivation for immediate profits. Projects provide an opportunity to develop the company’s tech- nical capabilities and build an experience base for future business growth.

● Winning one large project often provides attractive growth potential, such as (1) growth with the project via additions and changes; (2) follow-on work; (3) spare parts, maintenance, and training; and (4) being able to compete effec- tively in the next project phase, such as nurturing a study program into a develop- ment contract and finally a production contract.

Customers come in various forms and sizes. For small and medium businesses partic- ularly, it is a challenge to compete for contracts from large industrial or governmental organizations. Although the contract to a firm may be relatively small, it is often subcon- tracted via a larger organization. Selling to such a diversified heterogeneous customer is a marketing challenge that requires a highly sophisticated and disciplined approach.

The first step in a new business development effort is to define the market to be pursued. The market segment for a new program opportunity is normally in an area of relevant past experience, technical capability, and customer involvement. Good marketers in the program business have to think as product line managers. They have to understand all dimensions of the business and be able to define and pursue market objectives that are consistent with the capabilities of their organizations.

Program businesses operate in an opportunity-driven market. It is a common mistake, however, to believe that these markets are unpredictable and unmanageable. Market planning and strategizing is important. New project opportunities develop over periods of time, some- times years for larger projects. These developments must be properly tracked and cultivated to form the bases for management actions such as (1) bid decisions, (2) resource commit- ment, (3) technical readiness, and (4) effective customer liaison. This strategy of winning new business is supported by systematic, disciplined approaches, which are illustrated in Figure 1–8.

Marketing in the Project-Driven Organization 29

IDENTIFY NEW

BUSINESS OPPORTUNITY

PRELIM. BID

DECISION

DEVELOP THE NEW

OPPORTUNITY

BID DECISION

RFP DEVELOP

PROPOSAL & PRICING

NEGOTIATE CONTRACT

WIN

• SEARCH FOR NEW BUSINESS

• ANALYZE AND EVALUATE

• SELECT • DEDICATE RESOURCES

• SIGNIFICANT CUSTOMER CONTACT

• OBTAIN & ANALYZE REQUIREMENTS

• DEVELOP PROJECT BASELINE

• ESTABLISH R&D PROGRAMS

• BUILD FAVORABLE IMAGE

• ESTABLISH PROJECT ORGANIZATION

• PROPOSAL PLANNING

• PROPOSAL TEAM ORGANIZATION

• WIN STRATEGY • RFP ANALYSIS • CATEGORICAL OUTLINE

• TEXT & ART GENERATION

• COST ESTIMATING & PRICING

• REVIEWS • PROPOSAL PUBLICATION

• PRICING

• POST SUBMITTAL PLANNING

• ORAL REVIEWS, FACT FINDING, QUESTIONS & ANSWERS

• MARKETING • NEGOTIATIONS

FIGURE 1–8. The phases of winning new contracts in project-oriented businesses.

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1.16 CLASSIFICATION OF PROJECTS

The principles of project management can be applied to any type of project and to any industry. However, the relative degree of importance of these principles can vary from project to project and industry to industry. Table 1–5 shows a brief comparison of certain industries/projects.

For those industries that are project-driven, such as aerospace and large construction, the high dollar value of the projects mandates a much more rigorous project management approach. For non–project-driven industries, projects may be managed more informally than formally, especially if no immediate profit is involved. Informal project management is sim- ilar to formal project management but paperwork requirements are kept at a minimum.

1.17 LOCATION OF THE PROJECT MANAGER

The success of project management could easily depend on the location of the project manager within the organization. Two questions must be answered:

● What salary should the project manager earn? ● To whom should the project manager report?

Figure 1–9 shows a typical organizational hierarchy (the numbers represent pay grades). Ideally, the project manager should be at the same pay grade as the individuals with whom he must negotiate on a daily basis. Using this criterion, and assuming that the project manager interfaces at the department manager level, the project manager should earn a salary between grades 20 and 25. A project manager earning substantially more or less money than the line manager will usually create conflict. The ultimate reporting

30 OVERVIEW

TABLE 1–5. CLASSIFICATION OF PROJECTS/CHARACTERISTICS

Type of Project/Industry

In-house Small Large Aerospace/ R&D Construction Construction Defense MIS Engineering

Need for interpersonal skills Low Low High High High Low Importance of organizational Low Low Low Low High Low

structure Time management difficulties Low Low High High High Low Number of meetings Excessive Low Excessive Excessive High Medium Project manager’s supervisor Middle Top Top Top Middle Middle

management management management management management management Project sponsor present Yes No Yes Yes No No Conflict intensity Low Low High High High Low Cost control level Low Low High High Low Low Level of planning/scheduling Milestones Milestones Detailed plan Detailed plan Milestones Milestones

only only only only

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location of the project manager (and perhaps his salary) is heavily dependent on whether the organization is project- or non–project-driven, and whether the project manager is responsible for profit or loss.

Project managers can end up reporting both high and low in an organization during the life cycle of the project. During the planning phase of the project, the project manager may report high, whereas during implementation, he may report low. Likewise, the posi- tioning of the project manager may be dependent on the risk of the project, the size of the project, or the customer.

Finally, it should be noted that even if the project manager reports low, he should still

have the right to interface with top executives during project planning although there may

be two or more reporting levels between the project manager and executives. At the oppo-

site end of the spectrum, the project manager should have the right to go directly into the

depths of the organization instead of having to follow the chain of command downward,

Location of the Project Manager 31

VICE PRESIDENT

PRESIDENT

DIRECTOR

DIVISION

DEPARTMENT

SECTION

LABORER

1–9

PROJECT-DRIVEN

NON–PROJECT-DRIVEN

Typical position of a project manager

FIGURE 1–9. Organizational hierarchy.

PMBOK® Guide, 5th Edition 2.0 Organizational Influences

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especially during planning. As an example, see Figure 1–10. The project manager had two

weeks to plan and price out a small project. Most of the work was to be accomplished

within one section. The project manager was told that all requests for work, even estimat-

ing, had to follow the chain of command from the executive down through the section

supervisor. By the time the request was received by the section supervisor, twelve of the

fourteen days were gone, and only an order-of-magnitude estimate was possible. The les-

son to be learned here is:

The chain of command should be used for approving projects, not planning them.

Forcing the project manager to use the chain of command (in either direction) for project

planning can result in a great deal of unproductive time and idle time cost.

1.18 DIFFERING VIEWS OF PROJECT MANAGEMENT

Many companies, especially those with project-driven organizations, have differing views

of project management. Some people view project management as an excellent means to

achieving objectives, while others view it as a threat. In project-driven organizations, there

are three career paths that lead to executive management:

● Through project management ● Through project engineering ● Through line management

32 OVERVIEW

PROJECT MANAGER

VICE PRESIDENT ENGINEERING

DIVISION MANAGER

DEPARTMENT MANAGER

SECTION SUPERVISOR

IN FO

RM AT

IO N

RE QU

ES T

FIGURE 1–10. The organizational hierarchy: for planning and /or approval?

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In project-driven organizations, the fast-track position is in project management, whereas in a non–project-driven organization, it would be line management. Even though line managers support the project management approach, they resent the project manager because of his promotions and top-level visibility. In one construction company, a depart- ment manager was told that he had no chance for promotion above his present department manager position unless he went into project management or project engineering where he could get to know the operation of the whole company. A second construction company requires that individuals aspiring to become a department manager first spend a “tour of duty” as an assistant project manager or project engineer.

Executives may dislike project managers because more authority and control must be delegated. However, once executives realize that it is a sound business practice, it becomes important, as shown in the following letter8:

In order to sense and react quickly and to insure rapid decision-making, lines of commu-

nication should be the shortest possible between all levels of the organization. People with

the most knowledge must be available at the source of the problem, and they must have

decision-making authority and responsibility. Meaningful data must be available on a

timely basis and the organization must be structured to produce this environment.

In the aerospace industry, it is a serious weakness to be tied to fixed organization

charts, plans, and procedures. With regard to organization, we successfully married the

project concept of management with a central function concept. What we came up with

is an organization within an organization—one to ramrod the day-to-day problems; the

other to provide support for existing projects and to anticipate the requirements for future

projects.

The project system is essential in getting complicated jobs done well and on time, but it

solves only part of the management problem. When you have your nose to the project

grindstone, you are often not in a position to see much beyond that project. This is where

the central functional organization comes in. My experience has been that you need this

central organization to give you depth, flexibility, and perspective. Together, the two parts

permit you to see both the woods and the trees. Initiative is essential at all levels of the organization. We try to press the level of deci-

sion to the lowest possible rung of the managerial ladder. This type of decision-making provides motivation and permits recognition for the individual and the group at all levels. It stimulates action and breeds dedication.

With this kind of encouragement, the organization can become a live thing—sensitive

to problems and able to move in on them with much more speed and understanding than

would be normally expected in a large operation. In this way, we can regroup or reorga-

nize easily as situations dictate and can quickly focus on a “crisis.” In this industry a com-

pany must always be able to reorient itself to meet new objectives. In a more staid, old-line

organization, frequent reorientation usually accompanied by a corresponding shift of peo-

ple’s activities, could be most upsetting. However, in the aerospace industry, we must be

prepared for change. The entire picture is one of change.

Differing Views of Project Management 33

8. Letter from J. Donald Rath, Vice President of Martin-Marietta Corporation, Denver Division, to J. E. Webb, of NASA, October 18, 1963.

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1.19 PUBLIC-SECTOR PROJECT MANAGEMENT

For several decades, public-sector projects were managed by contractors whose primary objective was a profit motive. Many times, contractors would make trade-offs and accom- panying decisions just to support the profit motive. At the end of the project, the contrac- tor would provide the public-sector agency with a deliverable, but the contractor would walk away with the project management best practices and lessons learned.

Today, public-sector agencies are requesting the contractor to share with them all pro- ject management intellectual property accumulated during the course of the project. Also, more agencies are becoming experienced in project management to the point where the projects are managed with internal personnel rather than contractors.

As more and more government agencies adopt the project management approach, we discover that public-sector projects can be more complex than private-sector projects and more difficult to manage. According to David Wirick9:

34 OVERVIEW

9. D. W. Wirick, Public-Sector Project Management (Wiley, Hoboken, NJ, 2009), pp.8–10, 18–19.

THE CHALLENGES OF PUBLIC-SECTOR PROJECT MANAGEMENT

Private-sector project managers like to assume that their work is more demanding than projects in the public sector. They assume that their projects are more complex, subject to tougher management oversight, and mandated to move at faster speeds. Although private-sector projects can be tough, in many cases, it is easier to accomplish results in the private sector than in the public sector.

Public-sector projects can be more difficult than many private-sector projects because they:

● Operate in an environment of often-conflicting goals and outcome ● Involve many layers of stakeholders with varied interests ● Must placate political interests and operate under media scrutiny ● Are allowed little tolerance for failure ● Operate in organizations that often have a difficult time identifying outcome

measures and missions ● Are required to be performed under constraints imposed by administrative rules

and often-cumbersome policies and processes that can delay projects and con- sume project resources

● Require the cooperation and performance of agencies outside of the project team for purchasing, hiring, and other functions

● Must make do with existing staff resources more often than private-sector pro- jects because of civil-service protections and hiring systems

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Public-sector or Project Management 35

● Are performed in organizations that may not be comfortable or used to directed action and project success

● Are performed in an environment that may include political adversaries

If these challenges were not tough enough, because of their ability to push the bur- den of paying for projects to future generations, public-sector projects have a reach deep into the future. That introduces the challenges of serving the needs of stakehold- ers who are not yet “at the table” and whose interests might be difficult to identify. Some also cite the relative lack of project management maturity in public organizations as a challenge of public-sector projects.

In addition to these complications, public projects are often more complex than those in the private sector. For some projects, the outcome can be defined at the begin- ning of the project. Construction projects are one example. For other projects, the desired outcome can only be defined as the project progresses. Examples of those are organizational change projects and complex information technology projects. Although the first type of project can be difficult and require detailed planning and implementa- tion, the second type, those whose outcomes are determined over the course of the pro- ject, are regarded as more challenging. They require more interaction with stakeholders and more openness to factors outside of the control of the project team.

Because of the multiple stakeholders involved in public-sector projects, the types of projects the public sector engages in, and the difficulty of identifying measurable outcomes in the public sector, more public-sector projects are likely to be of the latter variety and more difficult. Project complexity and tools for managing complexity and chaos will be discussed later in this book.

As a result of the distinguishing characteristics of public-sector organizations, public-sector projects require the management, not only of the project team, but of an entire community. Little is accomplished in the public sector by lone individuals or even by teams working in isolation. Instead, public-sector projects engage broad groups of stakeholders who not only have a stake in the project but also have a voice and an opportunity to influence outcomes. In public-sector projects, even though the project manager may be ultimately accountable, governance of the project and credit for successes must be shared.

The good news for public-sector project managers is that the community of stake- holders, which may seem to be a burden, can also be an opportunity and a source of resources and support. Many of those stakeholders stand ready to provide help to the project manager as he or she attempts to navigate the constraints affecting the project. Others can be enlisted to support the project, and their authority can make the differ- ence between project success and failure.

THE COMING STORM

In addition to the existing challenges of public-sector projects listed previously, some factors will place soon more stress on public-sector organizations and demand even

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36 OVERVIEW

more emphasis on solid project management. Some of the emerging challenges for pub- lic-sector organizations will include:

● Modest or stagnant economic growth ● Globalization and the loss of the industrial revenue base and, increasingly, the

service-sector revenue base ● A decline in real wages and pressures for tax reform ● Private-sector practices that pass the corporate safety net back to individuals,

who may then look to government for such essential security mechanisms as health coverage

● Difficulty in passing on the need for government revenue to taxpayers and a general loss of confidence in government

● Structural limitations on revenue generation, such as Proposition 13 and prop- erty tax indexing

● The redirection of scarce public revenues to homeland security and defense without the imposition of war taxes

● The erosion of public-sector income as entitlement programs drain revenues in response to an aging population

● An age imbalance, with fewer workers in the workforce to support an expand- ing number of retirees and children

● Longer life expectancy, which further burdens entitlement and health programs ● Increasing costs of health care well beyond the level of inflation ● Long-delayed investments in our national infrastructure, including roads,

bridges and water systems

In combination, these factors constitute a looming storm that will require us to question our assumptions about government operations and services. Doing far more with much less will require new thinking about how government performs its work. It will require more innovation than the development of new services. It will take radical rethinking of what government does and how it goes about getting it done.

WHY DO PUBLIC-SECTOR PROJECTS FAIL?

Public-sector projects fail for all of the normal reasons that any project fails. Projects in all sectors of the economy fail because they:

● Fail to identify the needs of customers or users of the product or the project ● Create overly optimistic schedules and fail to anticipate the impact of late

deliverables

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Public-sector or Project Management 37

● Do not get the resources necessary to complete the project ● Do not devote enough time to project planning ● Are subject to changing management priorities ● Employ technology that does not work as expected ● Do not get good performance from vendors ● Get overwhelmed by competing projects and do not apply solid project

prioritization ● Do not adequately identify, analyze, and address project risks ● Make assumptions that are not validated and agreed to ● Dissolve in the face of conflict among stakeholders ● Get overtaken by unexpected events [More will be said in Chapter 14 about the

challenges of managing uncertainty and chaos.] ● Do not apply solid and repeatable project management methods ● Do not have the benefit of an experienced project manager ● Do not engage and involve stakeholders throughout the project ● Do not identify lessons learned from prior projects ● Define an overly broad project scope that cannot be well-defined

In addition, public-sector projects can fail for a set of reasons related to the unique character of public-sector projects. In that regard, they:

● Run afoul of political processes ● Lack the necessary resources because of requirements to use existing staff

rather than to contract for the right expertise ● Are constrained by civil-service rules that limit assignment of activities to

project staff ● Lose budget authorization ● Lose support at the change of administration due to electoral cycles ● Are overwhelmed by administrative rules and required processes for purchas-

ing and hiring ● Fail to satisfy oversight agencies ● Adopt overly conservative approaches due to the contentious nature of the

project environment ● Are victimized by suboptimal vendors who have been selected by purchasing

processes that are overly focused on costs or that can be influenced by factors that are not relevant to performance

● Are compromised by the bias of public-sector managers and staff toward com- pliance over performance

● Fail to identify project goals given the wide array of project stakeholders in the public sector and the challenges of identifying public-sector goals and metrics for success

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1.20 INTERNATIONAL PROJECT MANAGEMENT

As the world marketplace begins to accept project management and recognizes the need for experienced project managers, more opportunities have become available for people aspiring to become project managers. The need is there and growing. According to Thomas Grisham10:

38 OVERVIEW

10. T. W. Grisham, International Project Management, (Wiley, Hoboken, NJ, 2010), p. 3.

International business and project management practice have converged in the last 10 years. Organizations are tending toward hiring multitalented people who are self- motivated, intelligent, and willing to take responsibility. Some of the reasons are:

● The need for leaner and flatter organizations to reduce cost ● The need for leadership skills throughout the organizational food chain from top

to bottom—lead one day, follow the next, and be comfortable personally in either role

● The need for knowledge workers throughout the organization ● Globalization and the need to improve quality while reducing cost ● Kaizen to keep quality high while reducing cost ● Diversity

Years ago, companies had three pay grades for project managers; junior project managers, project managers, and senior project managers. Today, we are adding in a fourth pay grade, namely global project managers. Unfortunately, there may be addi- tional skills needed to be a global project manager. Some of the additional skills include managing virtual teams, understanding global cultural differences, working in an envi- ronment where politics can dictate many of the decisions, and working under commit- tee governance rather than a single sponsor.

1.21 CONCURRENT ENGINEERING: A PROJECT MANAGEMENT APPROACH

In the past decade, organizations have become more aware of the fact that America’s most formidable weapon is its manufacturing ability, and yet more and more work seems to be departing for Southeast Asia and the Far East. If America and other countries are to remain competitive, then survival may depend on the manufacturing of a quality product and a rapid introduction into the marketplace. Today, companies are under tremendous pressure to rapidly introduce new products because product life cycles are becoming shorter. As a result, organizations no longer have the luxury of performing work in series.

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Concurrent or simultaneous engineering is an attempt to accomplish work in parallel rather than in series. This requires that marketing, R&D, engineering, and production are all actively involved in the early project phases and making plans even before the product design has been finalized. This concept of current engineering will accelerate product devel- opment, but it does come with serious and potentially costly risks, the largest one being the cost of rework.

Almost everyone agrees that the best way to reduce or minimize risks is for the organi- zation to plan better. Since project management is one of the best methodologies to foster better planning, it is little wonder that more organizations are accepting project management as a way of life.

1.22 ADDED VALUE

People often wonder what project managers do with their time once the project plan is cre- ated. While it is true that they monitor and control the work being performed, they also look for ways to add value to the project. Added value can be defined as incremental improve- ments to the deliverable of a project such that performance is improved or a significant busi- ness advantage is obtained, and the client is willing to pay for this difference. Looking for added-value opportunities that benefit the client is a good approach whereas looking for “fictitious” added-value opportunities just to increase the cost of the project is bad.

In certain projects, such as in new product development in the pharmaceutical indus- try, project managers must be aware of opportunities. According to Trevor Brown and Stephen Allport11:

The critical issues facing companies which understand the importance of building cus-

tomer value into new products is how to incorporate this into the development process

and invest appropriately to fully understand the opportunity. In practice, project teams

have more opportunity than is generally realized to add, enhance, or diminish value in

each of the four perspectives. . . corporate, prescriber, payer and patient. The tools at

the project teams’’ disposal to enhance customer value include challenging and improv-

ing established processes, adopting a value-directed approach to the management of

development projects, and taking advantage of tried and tested methodologies for

understanding product value.

Project managers generally do not take enough time in evaluating opportunities. In such a case, either the scope change is disapproved or the scope change is allowed and sud- denly the project is at risk when additional information is discovered. Opportunities must be fully understood.

Added Value 39

11. T. J. Brown and S. Allport, “Developing Products with Added Value,” in P. Harpum (Ed.), Portfolio, Program, and Project Management in the Pharmaceutical and Biotechnology Industries (Wiley, Hoboken, NJ, 2010), p. 218.

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1.23 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles or to support an understanding of the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses some material from the PMBOK® Guide knowledge areas:

● Integration Management ● Scope Management ● Human Resources Management

Understanding the following principles is beneficial if the reader is using this textbook together with the PMBOK® Guide to study for the PMP® Certification Exam:

● Definition of a project ● Definition of the competing constraints ● Definition of successful execution of a project ● Benefits of using project management ● Responsibility of the project manager in dealing with stakeholders and how stake-

holders can affect the outcome of the project ● Responsibility of the project manager in meeting deliverables ● The fact that the project manager is ultimately accountable for the success of the

project ● Responsibilities of the line manager during project management staffing and

execution ● Role of the executive sponsor and champion ● Difference between a project-driven and non–project-driven organization

Be sure to review the appropriate sections of the PMBOK® Guide and the glossary of terms at the end of the PMBOK® Guide.

Some multiple-choice questions are provided in this section as a review of the mater- ial. There are other sources for practice review questions that are specific for the PMP®

Exam, namely:

● Project Management IQ® from the International Institute for Learning (iil.com) ● PMP® Exam Practice Test and Study Guide, by J. LeRoy Ward, PMP, editor ● PMP® Exam Prep, by Rita Mulcahy ● Q & As for the PMBOK® Guide, Project Management Institute

The more practice questions reviewed, the better prepared the reader will be for the PMP®

Certification Exam. In Appendix C, there are a series of mini–case studies called Dorale Products that

reviews some of the concepts. The minicases can be used as either an introduction to the chapter or as a review of the chapter material. These mini–case studies were placed in

40 OVERVIEW

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Appendix C because they can be used for several chapters in the text. For this chapter, the following are applicable:

● Dorale Products (A) [Integration and Scope Management] ● Dorale Products (B) [Integration and Scope Management]

Answers to the Dorale Products minicases appear in Appendix D. The following multiple-choice questions will be helpful in reviewing the above principles:

1. The traditional competing constraints on a project are: A. Time, cost, and profitability B. Resources required, sponsorship involvement, and funding C. Time, cost, and quality and/or scope D. Calendar dates, facilities available, and funding

2. Which of the following is not part of the definition of a project? A. Repetitive activities B. Constraints C. Consumption of resources D. A well-defined objective

3. Which of the following is usually not part of the criteria for project success? A. Customer satisfaction B. Customer acceptance C. Meeting at least 75 percent of specification requirements. D. Meeting the triple-constraint requirements

4. Which of the following is generally not a benefit achieved from using project management? A. Flexibility in the project’s end date B. Improved risk management C. Improved estimating D. Tracking of projects

5. The person responsible for assigning the resources to a project is most often: A. The project manager B. The Human Resources Department C. The line manager D. The executive sponsor

6. Conflicts between the project and line managers are most often resolved by: A. The assistant project manager for conflicts B. The project sponsor C. The executive steering committee D. The Human Resources Department

7. Your company does only projects. If the projects performed by your company are for customers external to your company and a profit criterion exists on the project, then your organization is most likely: A. Project-driven B. Non–project-driven C. A hybrid D. All of the above are possible based upon the size of the profit margin.

Studying Tips for the PMI® Project Management Certification Exam 41

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42 OVERVIEW

ANSWERS

1. C

2. A

3. C

4. A

5. C

6. B

7. A

PROBLEMS

1–1 In the project environment, cause-and-effect relationships are almost always readily apparent. Good project management will examine the effect in order to better understand the cause and possibly prevent it from occurring again. Below are causes and effects. For each one of the effects, select the possible cause or causes that may have existed to create this situation:

Effects

1. Late completion of activities 2. Cost overruns 3. Substandard performance 4. High turnover in project staff 5. High turnover in functional staff 6. Two functional departments performing the same activities on one project

Causes

a. Top management not recognizing this activity as a project b. Too many projects going on at one time c. Impossible schedule commitments d. No functional input into the planning phase e. No one person responsible for the total project f. Poor control of design changes g. Poor control of customer changes h. Poor understanding of the project manager’s job i. Wrong person assigned as project manager j. No integrated planning and control k. Company resources are overcommitted l. Unrealistic planning and scheduling

m. No project cost accounting ability n. Conflicting project priorities o. Poorly organized project office

(This problem has been adapted from Russell D. Archibald, Managing High-Technology Programs and Projects, New York: John Wiley, 1976, p. 10.)

1–2 Because of the individuality of people, there always exist differing views of what man- agement is all about. Below are lists of possible perspectives and a selected group of organiza-

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tional members. For each individual select the possible ways that this individual might view project management:

Individuals

1. Upper-level manager 2. Project manager 3. Functional manager 4. Project team member 5. Scientist and consultant

Perspectives

a. A threat to established authority b. A source for future general managers c. A cause of unwanted change in ongoing procedures d. A means to an end e. A significant market for their services f. A place to build an empire g. A necessary evil to traditional management h. An opportunity for growth and advancement i. A better way to motivate people toward an objective j. A source of frustration in authority k. A way of introducing controlled changes l. An area of research

m. A vehicle for introducing creativity n. A means of coordinating functional units o. A means of deep satisfaction p. A way of life

1–3 Consider an organization that is composed of upper-level managers, middle- and lower- level managers, and laborers. Which of the groups should have first insight that an organiza- tional restructuring toward project management may be necessary?

1–4 How would you defend the statement that a project manager must help himself?

1–5 Will project management work in all companies? If not, identify those companies in which project management may not be applicable and defend your answers.

1–6 In a project organization, do you think that there might be a conflict in opinions over whether the project managers or functional managers contribute to profits?

1–7 What attributes should a project manager have? Can an individual be trained to become a project manager? If a company were changing over to a project management structure, would it be better to promote and train from within or hire from the outside?

1–8 Do you think that functional managers would make good project managers?

1–9 What types of projects might be more appropriate for functional management rather than project management, and vice versa?

1–10 Do you think that there would be a shift in the relative degree of importance of the following terms in a project management environment as opposed to a traditional management environment?

a. Time management

Problems 43

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b. Communications c. Motivation

1–11 Classical management has often been defined as a process in which the manager does not necessarily perform things for himself, but accomplishes objectives through others in a group situation. Does this definition also apply to project management?

1–12 Which of the following are basic characteristics of project management?

a. Customer problem b. Responsibility identification c. Systems approach to decision-making d. Adaptation to a changing environment e. Multidisciplinary activity in a finite time duration f. Horizontal and vertical organizational relationships

1–13 Project managers are usually dedicated and committed to the project. Who should be “looking over the shoulder” of the project manager to make sure that the work and requests are also in the best interest of the company? Does your answer depend on the priority of the project?

1–14 Is project management designed to transfer power from the line managers to the project manager?

1–15 Explain how career paths and career growth can differ between project-driven and non–project-driven organizations. In each organization, is the career path fastest in project man- agement, project engineering, or line management?

1–16 Explain how the following statement can have a bearing on who is ultimately selected as part of the project team: “There comes a time in the life cycle of all projects when one must shoot the design engineers and begin production.”

1–17 How do you handle a situation where the project manager has become a generalist, but still thinks that he is an expert?

44 OVERVIEW

WILLIAMS MACHINE TOOL COMPANY

For 85 years, the Williams Machine Tool Company had provided quality products to its clients, becoming the third largest U.S.-based machine tool company by 1990. The company was highly profitable and had an extremely low employee turnover rate. Pay and benefits were excellent.

Between 1980 and 1990, the company’s profits soared to record levels. The company’s suc- cess was due to one product line of standard manufacturing machine tools. Williams spent most of its time and effort looking for ways to improve its bread-and-butter product line rather than to

CASE STUDY

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develop new products. The product line was so successful that companies were willing to modify their production lines around these machine tools rather than asking Williams for major modifica- tions to the machine tools.

By 1990, Williams Company was extremely complacent, expecting this phenomenal suc- cess with one product line to continue for 20 to 25 more years. The recession of the early 1990s forced management to realign their thinking. Cutbacks in production had decreased the demand for the standard machine tools. More and more customers were asking for either major modi- fications to the standard machine tools or a completely new product design.

The marketplace was changing and senior management recognized that a new strategic focus was necessary. However, lower-level management and the work force, especially engi- neering, were strongly resisting a change. The employees, many of them with over 20 years of employment at Williams Company, refused to recognize the need for this change in the belief that the glory days of yore would return at the end of the recession.

By 1995, the recession had been over for at least two years yet Williams Company had no new product lines. Revenue was down, sales for the standard product (with and without modifications) were decreasing, and the employees were still resisting change. Layoffs were imminent.

In 1996, the company was sold to Crock Engineering. Crock had an experienced machine tool division of its own and understood the machine tool business. Williams Company was allowed to operate as a separate entity from 1995 to 1996. By 1996, red ink had appeared on the Williams Company balance sheet. Crock replaced all of the Williams senior managers with its own personnel. Crock then announced to all employees that Williams would become a spe- cialty machine tool manufacturer and that the “good old days” would never return. Customer demand for specialty products had increased threefold in just the last twelve months alone. Crock made it clear that employees who would not support this new direction would be replaced.

The new senior management at Williams Company recognized that 85 years of traditional management had come to an end for a company now committed to specialty products. The company culture was about to change, spearheaded by project management, concurrent engi- neering, and total quality management.

Senior management’s commitment to product management was apparent by the time and money spent in educating the employees. Unfortunately, the seasoned 20-year-plus veterans still would not support the new culture. Recognizing the problems, management provided con- tinuous and visible support for project management in addition to hiring a project management consultant to work with the people. The consultant worked with Williams from 1996 to 2001.

From 1996 to 2001, the Williams Division of Crock Engineering experienced losses in 24 consecutive quarters. The quarter ending March 31, 2002, was the first profitable quarter in over six years. Much of the credit was given to the performance and maturity of the project management system. In May 2002, the Williams Division was sold. More than 80% of the employees lost their jobs when the company was relocated over 1,500 miles away.

Case Study 45

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Project Management Growth: Concepts and Definitions

4th Edition) Study Guide, 11th Edition) Certification Exam

• Goshe Corporation • Multiple Choice Exam • Integration • MIS Project Management Management

at First National Bank • Scope • Cordova Research Group Management • Cortez Plastics • L. P. Manning Corporation • Project Firecracker • Apache Metals, Inc. • Haller Specialty Manufacturing • Creating a Methodology*

2.0 INTRODUCTION

The growth and acceptance of project management has changed signifi- cantly over the past forty years, and these changes are expected to con- tinue well into the twenty-first century, especially in the area of

PMBOK® Guide, 5th Edition Chapter 4 Integration Management

*Case Study appears at end of the chapter.

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multinational project management. It is interesting to trace the evolution and growth of project manage- ment from the early days of systems management to what some people call “modern project management.”

The growth of project management can be traced through topics such as roles and responsibilities, organi- zational structures, delegation of authority and decision-making, and especially corporate profitability. Twenty years ago, companies had the choice of whether or not to accept the project management approach. Today, some companies foolishly think that they still have the choice. Nothing could be further from the truth. The survival of the firm may very well rest upon how well project management is implemented, and how quickly.

2.1 GENERAL SYSTEMS MANAGEMENT

Organizational theory and management philosophies have undergone a dramatic change in recent years with the emergence of the project management approach to management. Because project management is an outgrowth of systems management, it is only fitting that the under- lying principles of general systems theory be described. Simply stated, general systems theory can be classified as a management approach that attempts to integrate and unify scientific infor- mation across many fields of knowledge. Systems theory attempts to solve problems by look- ing at the total picture, rather than through an analysis of the individual components.

General systems theory has been in existence for more than four decades. Unfortunately, as is often the case with new theory development, the practitioners require years of study and analysis before implementation. General systems theory is still being taught in graduate pro- grams. Today, project management is viewed as applied systems management.

In 1951, Ludwig von Bertalanffy, a biologist, described so-called open systems using anatomy nomenclature. The body’s muscles, skeleton, circulatory system, and so on, were all described as subsystems of the total system (the human being). Dr. von Bertalanffy’s contribution was important in that he identified how specialists in each subsystem could be integrated so as to get a better understanding of the interrelationships, thereby con- tributing to the overall knowledge of the operations of the system. Thus, the foundation was laid for the evolution and outgrowth of project management.

In 1956, Kenneth Boulding identified the communications problems that can occur dur- ing systems integration. Professor Boulding was concerned with the fact that subsystem spe- cialists (i.e., physicists, economists, chemists, sociologists, etc.) have their own languages. He advocated that, in order for successful integration to take place, all subsystem specialists must speak a common language, such as mathematics. Today we use the PMBOK® Guide, the Project Management Body of Knowledge, to satisfy this need for project management.

General systems theory implies the creation of a management technique that is able to cut across many organizational disciplines—finance, manufacturing, engineering, market- ing, and so on—while still carrying out the functions of management. This technique has come to be called systems management, project management, or matrix management (the terms are used interchangeably).

2.2 PROJECT MANAGEMENT: 1945–1960

During the 1940s, line managers used the concept of over-the-fence management to man- age projects. Each line manager, wearing the hat of a project manager, would perform the

48 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

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work necessitated by their line organization, and when completed, would throw the “ball” over the fence in hopes that someone would catch it. Once the ball was thrown over the fence, the line managers would wash their hands of any responsibility for the project because the ball was no longer in their yard. If a project failed, blame was placed on whichever line manager had the ball at that time.

The problem with over-the-fence management was that the customer had no single

contact point for questions. The filtering of information wasted precious time for both the

customer and the contractor. Customers who wanted firsthand information had to seek out

the manager in possession of the ball. For small projects, this was easy. But as projects

grew in size and complexity, this became more difficult.

Following World War II, the United States entered into the Cold War. To win a Cold

War, one must compete in the arms race and rapidly build weapons of mass destruction. The

victor in a Cold War is the one who can retaliate with such force as to obliterate the enemy.

The arms race made it clear that the traditional use of over-the-fence management would

not be acceptable to the Department of Defense (DoD) for projects such as the B52 Bomber,

the Minuteman Intercontinental Ballistic Missile, and the Polaris Submarine. The govern-

ment wanted a single point of contact, namely, a project manager who had total account-

ability through all project phases. The use of project management was then mandated for

some of the smaller weapon systems such as jet fighters and tanks. NASA mandated the use

of project management for all activities related to the space program.

Projects in the aerospace and defense industries were having cost overruns in excess of

200 to 300%. Blame was erroneously placed upon improper implementation of project

management when, in fact, the real problem was the inability to forecast technology.

Forecasting technology is extremely difficult for projects that could last ten to twenty years.

By the late 1950s and early 1960s, the aerospace and defense industries were using

project management on virtually all projects, and they were pressuring their suppliers to

use it as well. Project management was growing, but at a relatively slow rate except for

aerospace and defense.

Because of the vast number of contractors and subcontractors, the government needed

standardization, especially in the planning process and the reporting of information. The

government established a life-cycle planning and control model and a cost monitoring sys-

tem, and created a group of project management auditors to make sure that the govern-

ment’s money was being spent as planned. These practices were to be used on all

government programs above a certain dollar value. Private industry viewed these practices

as an over-management cost and saw no practical value in project management.

2.3 PROJECT MANAGEMENT: 1960–1985

The growth of project management has come about more through necessity than through desire. Its slow growth can be attributed mainly to lack of acceptance of the new manage- ment techniques necessary for its successful implementation. An inherent fear of the unknown acted as a deterrent for managers.

Between the middle and late 1960s, more executives began searching for new manage- ment techniques and organizational structures that could be quickly adapted to a changing

Project Management: 1960–1985 49

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environment. The table below identifies two major variables that executives consider with regard to organizational restructuring.

50 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

Type of Industry Tasks Environment

A Simple Dynamic B Simple Static C Complex Dynamic D Complex Static

Almost all type C and most type D industries have project management–related struc- tures. The key variable appears to be task complexity. Companies that have complex tasks and that also operate in a dynamic environment find project management mandatory. Such industries would include aerospace, defense, construction, high-technology engineering, computers, and electronic instrumentation.

Other than aerospace, defense, and construction, the majority of the companies in the 1960s maintained an informal method for managing projects. In informal project manage- ment, just as the words imply, the projects were handled on an informal basis whereby the authority of the project manager was minimized. Most projects were handled by functional managers and stayed in one or two functional lines, and formal communications were either unnecessary or handled informally because of the good working relationships between line managers. Many organizations today, such as low-technology manufacturing, have line man- agers who have been working side by side for ten or more years. In such situations, informal project management may be effective on capital equipment or facility development projects.

By 1970 and again during the early 1980s, more companies departed from informal project management and restructured to formalize the project management process, mainly because the size and complexity of their activities had grown to a point where they were unmanageable within the current structure. Figure 2–1 shows what happened to one such construction company. The following five questions help determine whether formal proj- ect management is necessary:

● Are the jobs complex? ● Are there dynamic environmental considerations? ● Are the constraints tight? ● Are there several activities to be integrated? ● Are there several functional boundaries to be crossed?

If any of these questions are answered yes, then some form of formalized project man- agement may be necessary. It is possible for formalized project management to exist in only one functional department or division, such as for R&D or perhaps just for certain types of projects. Some companies have successfully implemented both formal and infor- mal project management concurrently, but these companies are few and far between. Today we realize that the last two questions may be the most important.

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The moral here is that not all industries need project management, and executives must determine whether there is an actual need before making a commitment. Several industries with simple tasks, whether in a static or a dynamic environment, do not need project management. Manufacturing industries with slowly changing technology do not need project management, unless of course they have a requirement for several special projects, such as capital equipment activities, that could interrupt the normal flow of work in the routine manufacturing operations. The slow growth rate and acceptance of project management were related to the fact that the limitations of project management were readily apparent, yet the advantages were not completely recognizable. Project man- agement requires organizational restructuring. The question, of course, is “How much restructuring?” Executives have avoided the subject of project management for fear that “revolutionary” changes must be made in the organization. As will be seen in Chapter 3, project management can be achieved with little departure from the existing traditional structure.

Project management restructuring has permitted companies to:

● Accomplish tasks that could not be effectively handled by the traditional structure ● Accomplish onetime activities with minimum disruption of routine business

The second item implies that project management is a “temporary” management structure and, therefore, causes minimum organizational disruption. The major problems identified by those managers who endeavored to adapt to the new system all revolved around conflicts in authority and resources.

Project Management: 1960–1985 51

AV E R A G E VA L U E

O F P R O J E C T

( $ M M )

100

1960 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84

FIGURE 2–1. Average project size capability for a construction company, 1960–1984.

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Three major problems were identified by Killian1:

● Project priorities and competition for talent may interrupt the stability of the orga- nization and interfere with its long-range interests by upsetting the normal busi- ness of the functional organization.

● Long-range planning may suffer as the company gets more involved in meeting schedules and fulfilling the requirements of temporary projects.

● Shifting people from project to project may disrupt the training of new employees and specialists. This may hinder their growth and development within their fields of specialization.

Another major concern was that project management required upper-level managers to relinquish some of their authority through delegation to the middle managers. In several situations, middle managers soon occupied the power positions, even more so than upper-level managers. Despite these limitations, there were several driving forces behind the project management approach.

As the driving forces overtook the restraining forces, project management began to mature. Executives began to realize that the approach was in the best interest of the com- pany. Project management, if properly implemented, can make it easier for executives to overcome such internal and external obstacles as:

● Unstable economy ● Shortages ● Soaring costs ● Increased complexity ● Heightened competition ● Technological changes ● Societal concerns ● Consumerism ● Ecology ● Quality of work

Project management may not eliminate these problems, but may make it easier for the company to adapt to a changing environment.

If these obstacles are not controlled, the results may be:

● Decreased profits ● Increased manpower needs ● Cost overruns, schedule delays, and penalty payments occurring earlier and earlier ● An inability to cope with new technology ● R&D results too late to benefit existing product lines ● New products introduced into the marketplace too late

52 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

1. William P. Killian, “Project Management—Future Organizational Concepts,” Marquette Business Review, Vol. 2, 1971, pp. 90–107.

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● Temptation to make hasty decisions that prove to be costly ● Management insisting on earlier and greater return on investment ● Greater difficulty in establishing on-target objectives in real time ● Problems in relating cost to technical performance and scheduling during the exe-

cution of the project

Project management became a necessity for many companies as they expanded into multiple product lines, many of which were dissimilar, and organizational complexities grew. This growth can be attributed to:

● Technology increasing at an astounding rate ● More money invested in R&D ● More information available ● Shortening of project life cycles

To satisfy the requirements imposed by these four factors, management was “forced”

into organizational restructuring; the traditional organizational form that had survived for

decades was inadequate for integrating activities across functional “empires.”

By 1970, the environment began to change rapidly. Companies in aerospace, defense,

and construction pioneered in implementing project management, and other industries

soon followed, some with great reluctance. NASA and the Department of Defense

“forced” subcontractors into accepting project management. The 1970s also brought much

more published data on project management. As an example2:

Project teams and task forces will become more common in tackling complexity. There will

be more of what some people call temporary management systems as project management

systems where the men [and women] who are needed to contribute to the solution meet,

make their contribution, and perhaps never become a permanent member of any fixed or

permanent management group.

The definition simply states that the purpose of project management is to put together

the best possible team to achieve the objective, and, at termination, the team is disbanded.

Nowhere in the definition do we see the authority of the project manager or his rank, title,

or salary.

Because current organizational structures are unable to accommodate the wide variety

of interrelated tasks necessary for successful project completion, the need for project man-

agement has become apparent. It is usually first identified by those lower-level and mid-

dle managers who find it impossible to control their resources effectively for the diverse

activities within their line organization. Quite often middle managers feel the impact of a

changing environment more than upper-level executives.

Once the need for change is identified, middle management must convince upper-level

management that such a change is actually warranted. If top-level executives cannot

Project Management: 1960–1985 53

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recognize the problems with resource control, then project management will not be

adopted, at least formally. Informal acceptance, however, is another story. As project management developed, some essential factors in its successful implemen-

tation were recognized. The major factor was the role of the project manager, which became the focal point of integrative responsibility. The need for integrative responsibility was first identified in research and development activities3:

Recently, R&D technology has broken down the boundaries that used to exist between

industries. Once-stable markets and distribution channels are now in a state of flux. The

industrial environment is turbulent and increasingly hard to predict. Many complex facts

about markets, production methods, costs and scientific potentials are related to investment

decisions.

All of these factors have combined to produce a king-size managerial headache. There

are just too many crucial decisions to have them all processed and resolved through regu-

lar line hierarchy at the top of the organization. They must be integrated in some other way.

Providing the project manager with integrative responsibility resulted in:

● Total accountability assumed by a single person ● Project rather than functional dedication ● A requirement for coordination across functional interfaces ● Proper utilization of integrated planning and control

Without project management, these four elements have to be accomplished by execu- tives, and it is questionable whether these activities should be part of an executive’s job description. An executive in a Fortune 500 corporation stated that he was spending seventy hours a week acting as an executive and as a project manager, and he did not feel that he was performing either job to the best of his abilities. During a presentation to the staff, the executive stated what he expected of the organization after project management implementation:

● Push decision-making down in the organization ● Eliminate the need for committee solutions ● Trust the decisions of peers

Those executives who chose to accept project management soon found the advantages of the new technique:

● Easy adaptation to an ever-changing environment ● Ability to handle a multidisciplinary activity within a specified period of time ● Horizontal as well as vertical work flow ● Better orientation toward customer problems

54 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

3. Reprinted by permission of Harvard Business Review. From Paul R. Lawrence and Jay W. Lorsch, “New Management Job: The Integrator,” Harvard Business Review, November–December 1967, p. 142. Copyright © 1967 by the Harvard Business School Publishing Corporation; all rights reserved.

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● Easier identification of activity responsibilities ● A multidisciplinary decision-making process ● Innovation in organizational design

2.4 PROJECT MANAGEMENT: 1985–2012

By the 1990s, companies had begun to realize that implementing project management was a necessity, not a choice. The question was not how to implement project management, but how fast could it be done?

Table 2–1 shows the typical life-cycle phases that an organization goes through to implement project management. In the first phase, the Embryonic Phase, the organization recognizes the apparent need for project management. This recognition normally takes place at the lower and middle levels of management where the project activities actually take place. The executives are then informed of the need and assess the situation.

There are six driving forces that lead executives to recognize the need for project management:

● Capital projects ● Customer expectations ● Competitiveness ● Executive understanding ● New project development ● Efficiency and effectiveness

Project Management: 1985–2012 55

TABLE 2–1. LIFE-CYCLE PHASES FOR PROJECT MANAGEMENT MATURITY

Executive Management Line Management Embryonic Phase Acceptance Phase Acceptance Phase Growth Phase Maturity Phase

• Recognize need • Visible executive • Line management • Use of life-cycle • Development of a support support phases management cost/

schedule control system

• Recognize benefits • Executive understanding • Line management • Development of a • Integrating cost and of project management commitment project management schedule control

methodology • Recognize • Project sponsorship • Line management • Commitment to • Developing an

applications education planning educational program to enhance project management skills

• Recognize what • Willingness to • Willingness to • Minimization of must be done change way of doing release employees “creeping scope”

business for project management training

• Selection of a project tracking system

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Manufacturing companies are driven to project management because of large capital projects or a multitude of simultaneous projects. Executives soon realize the impact on cash flow and that slippages in the schedule could end up idling workers.

Companies that sell products or services, including installation, to their clients must have good project management practices. These companies are usually non–project-driven but function as though they were project-driven. These companies now sell solutions to their customers rather than products. It is almost impossible to sell complete solutions to customers without having superior project management practices because what you are actually selling is your project management expertise.

There are two situations where competitiveness becomes the driving force: internal proj- ects and external (outside customer) projects. Internally, companies get into trouble when the organization realizes that much of the work can be outsourced for less than it would cost to perform the work themselves. Externally, companies get into trouble when they are no longer competitive on price or quality, or simply cannot increase their market share.

Executive understanding is the driving force in those organizations that have a rigid traditional structure that performs routine, repetitive activities. These organizations are quite resistant to change unless driven by the executives. This driving force can exist in conjunction with any of the other driving forces.

New product development is the driving force for those organizations that are heavily invested in R&D activities. Given that only a small percentage of R&D projects ever make it into commercialization where the R&D costs can be recovered, project management becomes a necessity. Project management can also be used as an early warning system that a project should be cancelled.

Efficiency and effectiveness, as driving forces, can exist in conjunction with any other driving forces. Efficiency and effectiveness take on paramount importance for small companies experiencing growing pains. Project management can be used to help such companies remain competitive during periods of growth and to assist in determining capacity constraints.

Because of the interrelatedness of these driving forces, some people contend that the only true driving force is survival. This is illustrated in Figure 2–2. When the company

56 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

SURVIVAL

Efficiency and Effectiveness

New Product Development

Executive Understanding

Capital Projects

Customers’ Expectations

Competitiveness

FIGURE 2–2. The components of survival. Source: Reprinted from H. Kerzner, In Search of Excellence in Project Management. New York: Wiley, 1998, p. 51.

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recognizes that survival of the firm is at stake, the implementation of project management becomes easier.

The speed by which companies reach some degree of maturity in project management is most often based upon how important they perceive the driving forces to be. This is illustrated generically in Figure 2–3. Non–project-driven and hybrid organizations move quickly to maturity if increased internal efficiencies and effectiveness are needed. Competitiveness is the slowest path because these types of organizations do not recognize that project management affects their competitive position directly. For project-driven organizations, the path is reversed. Competitiveness is the name of the game and the vehi- cle used is project management.

Once the organization perceives the need for project management, it enters the second life-cycle phase of Table 2–1, Executive Acceptance. Project management cannot be implemented rapidly in the near term without executive support. Furthermore, the support must be visible to all.

The third life-cycle phase is Line Management Acceptance. It is highly unlikely that any line manager would actively support the implementation of project management with- out first recognizing the same support coming from above. Even minimal line management support will still cause project management to struggle.

The fourth life-cycle phase is the Growth Phase, where the organization becomes committed to the development of the corporate tools for project management. This includes the project management methodology for planning, scheduling, and controlling, as well as selection of the appropriate supporting software. Portions of this phase can begin during earlier phases.

The fifth life-cycle phase is Maturity. In this phase, the organization begins using the tools developed in the previous phase. Here, the organization must be totally dedicated to project management. The organization must develop a reasonable project management curriculum to provide the appropriate training and education in support of the tools, as well as the expected organizational behavior.

Project Management: 1985–2012 57

Fast Slow Speed of Maturity

Non–Project-Driven and Hybrid

Organizations

Project-Driven Organizations

Internal Efficiencies & Effectiveness

C u

s to

m e

r E

x p

e c

ta ti o

n s

Competitiveness

FIGURE 2–3. The speed of maturity.

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58 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

TABLE 2–2. BENEFITS OF PROJECT MANAGEMENT

Past View

• Project management will require more people and add to the overhead costs.

• Profitability may decrease. • Project management will increase the

amount of scope changes. • Project management creates

organizational instability and increases conflicts.

• Project management is really “eye wash” for the customer’s benefit.

• Project management will create problems.

• Only large projects need project management.

• Project management will increase quality problems.

• Project management will create power and authority problems.

• Project management focuses on suboptimization by looking at only the project.

• Project management delivers products to a customer.

• The cost of project management may make us noncompetitive.

Present View

• Project management allows us to accomplish more work in less time, with fewer people.

• Profitability will increase. • Project management will provide better

control of scope changes. • Project management makes the

organization more efficient and effective through better organizational behavior principles.

• Project management will allow us to work more closely with our customers.

• Project management provides a means for solving problems.

• All projects will benefit from project management.

• Project management increases quality.

• Project management will reduce power struggles.

• Project management allows people to make good company decisions.

• Project management delivers solutions.

• Project management will increase our business.

PMBOK® Guide, 5th Edition 1.5 Project Management in

Operations Management

Time?

Cost of Project Management Additional

Profits from Better Project Management

Pegged

FIGURE 2–4. Project management costs versus benefits.

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By the 1990s, companies finally began to recognize the benefits of project manage- ment. Table 2–2 shows the benefits of project management and how our view of project management has changed..

Recognizing that the organization can benefit from the implementation of project management is just the starting point. The question now becomes, “How long will it take us to achieve these benefits?” This can be partially answered from Figure 2–4. In the beginning of the implementation process, there will be added expenses to develop the proj- ect management methodology and establish the support systems for planning, scheduling, and control. Eventually, the cost will level off and become pegged. The question mark in Figure 2–4 is the point at which the benefits equal the cost of implementation. This point can be pushed to the left through training and education.

2.5 RESISTANCE TO CHANGE

Why was project management so difficult for companies to accept and implement? The answer is shown in Figure 2–5. Historically, project management resided only in the project- driven sectors of the marketplace. In these sectors, the project managers were given the responsibility for profit and loss, which virtually forced companies to treat project man- agement as a profession.

In the non–project-driven sectors of the marketplace, corporate survival was based upon products and services, rather than upon a continuous stream of projects. Profitability was identified through marketing and sales, with very few projects having an identifiable P&L. As a result, project management in these firms was never viewed as a profession.

In reality, most firms that believed that they were non–project-driven were actually hybrids. Hybrid organizations are typically non–project-driven firms with one or two

Resistance to Change 59

Project-Driven

Project Management

PM has P&L responsibility

PM is a recognized profession

Multiple career paths

Income comes from projects

•

Non– Project-Driven

Product Management

Very few projects• Profitability from production

•

Large brick walls•

Long life-cycle products

•

Hybrid

Program Management

Primarily production- driven but with many projects

Emphasis on new product development

•

Marketing-oriented• Short product life cycles

•

Need for rapid development process

•

Present Past

FIGURE 2–5. Industry classification (by project management utilization).

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divisions that are project-driven. Historically, hybrids have functioned as though they were non–project-driven, as shown in Figure 2–5, but today they are functioning like project- driven firms. Why the change? Management has come to the realization that they can most effectively run their organization on a “management by project” basis, and thereby achieve the benefits of both a project management organization and a traditional organization. The rapid growth and acceptance of project management during the last ten years has taken place in the non–project-driven/hybrid sectors. Now, project management is being pro- moted by marketing, engineering, and production, rather than only by the project-driven departments (see Figure 2–6).

A second factor contributing to the acceptance of project management was the econ- omy, specifically the recessions of 1979–1983 and 1989–1993. This can be seen from Table 2–3. By the end of the recession of 1979–1983, companies recognized the benefits of using project management but were reluctant to see it implemented. Companies returned to the “status quo” of traditional management. There were no allies or alternative management techniques that were promoting the use of project management.

The recession of 1989–1993 finally saw the growth of project management in the non–project-driven sector. This recession was characterized by layoffs in the white col- lar/management ranks. Allies for project management were appearing and emphasis was being placed upon long-term solutions to problems. Project management was here to stay.

60 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

1960–1990 Hybrid

Traditional Project Management

Entrance via project- driven divisions such as MIS and R&D

1990–2012 Hybrid

Modern Project Management

Entrance via marketing, engineering, and R&D

FIGURE 2–6. From hybrid to project-driven.

TABLE 2–3. RECESSIONARY EFFECTS

Characteristics

Solutions Results of the Recession Layoffs R&D Training Sought Recessions

1979–1983 Blue collar Eliminated Eliminated Short-term • Return to status quo • No project management

support • No allies for project

management 1989–1993 White collar Focused Focused Long-term • Change way of doing

business • Risk management • Examine lessons

learned

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The allies for project management began surfacing in 1985 and continued throughout the recession of 1989–1993. This is seen in Figure 2–7.

● 1985: Companies recognize that they must compete on the basis of quality as well as cost. Companies begin using the principles of project management for the implementation of total quality management (TQM). The first ally for project management surfaces with the “marriage” of project management and TQM.

● 1990: During the recession of 1989–1993, companies recognize the importance of schedule compression and being the first to market. Advocates of concurrent engineering begin promoting the use of project management to obtain better sched- uling techniques. Another ally for project management is born.

● 1991–1992: Executives realize that project management works best if decision- making and authority are decentralized, but recognize that control can still be achieved at the top by functioning as project sponsors.

● 1993: As the recession of 1989–1993 comes to an end, companies begin “re-engineering” the organization, which really amounts to elimination of organi- zational “fat.” The organization is now a “lean and mean” machine. People are asked to do more work in less time and with fewer people; executives recognize that being able to do this is a benefit of project management.

● 1994: Companies recognize that a good project cost control system (i.e., horizon- tal accounting) allows for improved estimating and a firmer grasp of the real cost

of doing work and developing products. ● 1995: Companies recognize that very few projects are completed within the

framework of the original objectives without scope changes. Methodologies are

created for effective change management.

Resistance to Change 61

Increasing Support

1960– 1985

No Allies

1985

Total Quality

Manage- ment

1990

Concurrent Engineer-

ing

1993

Re- Engineering

1994

Life- Cycle

Costing

1995

Scope Change Control

1996

Risk Management

1999

Co- Located Teams

1991– 1992

Empower- ment and

Self- Directed Teams

1997– 1998

Project Offices

and COEs

2000

Multi- National Teams

2001

Maturity Models

2002

Strategic Planning

for Project

Management

Six Sigma Project

Management

2003

Intranet Status

Reports

2004

Capacity Planning Models

2005

Virtual Project Teams

2006

Lean Project Teams

Best Practice Libraries

2007 2008

2009

Business Processes

2010

Complex Projects

2011 2012

Value Constraints

2013

Metric Measurement

Committee Governance

FIGURE 2–7. New processes supporting project management.

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● 1996: Companies recognize that risk management involves more than padding an estimate or a schedule. Risk management plans are now included in the project

plans. ● 1997–1998: The recognition of project management as a professional career path

mandates the consolidation of project management knowledge and a centrally

located project management group. Benchmarking for best practices forces the

creation of centers for excellence in project management. ● 1999: Companies that recognize the importance of concurrent engineering and

rapid product development find that it is best to have dedicated resources for the

duration of the project. The cost of overmanagement may be negligible compared

to risks of undermanagement. More organizations begin to use colocated teams all

housed together. ● 2000: Mergers and acquisitions create more multinational companies.

Multinational project management becomes a major challenge. ● 2001: Corporations are under pressure to achieve maturity as quickly as possible.

Project management maturity models help companies reach this goal. ● 2002: The maturity models for project management provide corporations with a

basis to perform strategic planning for project management. Project management is now viewed as a strategic competency for the corporation.

● 2003: Intranet status reporting comes of age. This is particularly important for multinational corporations that must exchange information quickly.

● 2004: Intranet reporting provides corporations with information on how resources are being committed and utilized. Corporations develop capacity planning models to learn how much additional work the organization can take on.

● 2005: The techniques utilized in Six Sigma are being applied to project management, especially for continuous improvement to the project management methodology. This will result in the establishment of categories of Six Sigma applications some of which are nontraditional.

● 2006: Virtual project teams and virtual project management offices will become more common. The growth of virtual teams relies heavily upon trust, teamwork, cooperation, and effective communication.

● 2007: The concepts of lean manufacturing will be applied to project management. ● 2008: Companies will recognize the value of capturing best practices in project

management and creating a best practices library or knowledge repository. ● 2009: Project management methodologies will include more business processes to

support project management. ● 2010: The undertaking of more complex projects has brought with it additional

stakeholders with which the project manager interfaces. Therefore, stakeholder relations management will take on paramount importance.

● 2011: With additional stakeholders interfacing projects, governance will be performed by a committee rather than just the project sponsor.

● 2012: The concept of project value as a project management constraint will become just as important as time, cost, quality, and other competing constraints.

● 2013: Companies will recognize that effective project management requires more information than just time and cost. As such, project managers will be required to develop a long list of metrics for each project.

62 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

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As project management continues to grow and mature, it will have more allies. In the twenty-first century, second and third world nations will come to recognize the benefits and importance of project management. Worldwide standards for project management will be established.

If a company wishes to achieve excellence in project management, then it must go through a successful implementation process. This is illustrated in Situation 2–1.

Situation 2–1: The aerospace division of a Fortune 500 company had been using project management for more than thirty years. Everyone in the organization had attended courses in the principles of project management. From 1985 to 1994, the division went through a yearly ritual of benchmarking themselves against other aero- space and defense organizations. At the end of the benchmarking period, the staff would hug and kiss one another, believing that they were performing project man- agement as well as could be expected.

In 1995, the picture changed. The company decided to benchmark itself against organizations that were not in the aerospace or defense sector. It soon learned that there were companies that had been using project management for fewer than six years but whose skills at implementation had surpassed the aerospace/defense firms. It was a rude awakening.

Another factor that contributed to resistance to change was senior management’s pref- erence for the status quo. Often this preference was based upon what was in the executives’ best interest rather than the best interest of the organization. It was also common for someone to attend basic project management programs and then discover that the organi- zation would not allow full implementation of project management, leading to frustration for those in the lower and middle levels of management. Consider Situation 2–2:

Situation 2–2: The largest division of a Fortune 500 company recognized the need for project management. Over a three-year period, 200 people were trained in the basics of project management, and 18 people passed the national certification exam for project management. The company created a project management division and developed a methodology. As project management began to evolve in this division, the project managers quickly realized that the organization would not allow their “illusions of grandeur” to materialize. The executive vice president made it clear that the functional areas, rather than the project management division, would have bud- getary control. Project managers would not be empowered with authority or critical decision-making opportunities. Simply stated, the project managers were being treated as expediters and coordinators, rather than real project managers.

Even though project management has been in existence for more than forty years, there are still different views and misconceptions about what it really is. Textbooks on operations research or management science still have chapters entitled “Project Management” that discuss only PERT scheduling techniques. A textbook on organiza- tional design recognized project management as simply another organizational form.

All companies sooner or later understand the basics of project management. But com- panies that have achieved excellence in project management have done so through success- ful implementation and execution of processes and methodologies.

Resistance to Change 63

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2.6 SYSTEMS, PROGRAMS, AND PROJECTS: A DEFINITION

In the preceding sections the word “systems” has been used rather loosely. The exact definition of a system depends on the users, environment, and ultimate goal. Business practitioners define a system as:

A group of elements, either human or nonhuman, that is organized and arranged in such a

way that the elements can act as a whole toward achieving some common goal or objec-

tive.

Systems are collections of interacting subsystems that, if properly organized, can provide a synergistic output. Systems are characterized by their boundaries or interface conditions. For example, if the business firm system were completely isolated from the environmen- tal system, then a closed system would exist, in which case management would have com- plete control over all system components. If the business system reacts with the environment, then the system is referred to as open. All social systems, for example, are categorized as open systems. Open systems must have permeable boundaries.

If a system is significantly dependent on other systems for its survival, then it is an

extended system. Not all open systems are extended systems. Extended systems are ever- changing and can impose great hardships on individuals who desire to work in a regi-

mented atmosphere.

Military and government organizations were the first to attempt to define the bound-

aries of systems, programs, and projects. Below are two definitions for systems:

● Air Force Definition: A composite of equipment, skills, and techniques capable of performing and/or supporting an operational role. A complete system includes

related facilities, equipment, material services, and personnel required for its opera-

tion to the degree that it can be considered as a self-sufficient unit in its intended

operational and/or support environment. ● NASA Definition: One of the principal functioning entities comprising the project

hardware within a project or program. The meaning may vary to suit a particular

project or program area. Ordinarily a “system” is the first major subdivision of pro-

ject work (spacecraft systems, launch vehicle systems).

Programs can be construed as the necessary first-level elements of a

system. Two representative definitions of programs are given below:

● Air Force Definition: The integrated, time-phased tasks neces- sary to accomplish a particular purpose.

● NASA Definition: A relative series of undertakings that continue over a period of time (normally years) and that are designed to accomplish a broad, scientific or

technical goal in the NASA long-range plan (lunar and planetary exploration,

manned spacecraft systems).

Programs can be regarded as subsystems. However, programs are generally defined as

time-phased efforts, whereas systems exist on a continuous basis.

64 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

PMBOK® Guide, 5th Edition 1.4.1 Program Management

Definition

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Projects are also time-phased efforts (much shorter than programs) and are the first

level of breakdown of a program. A typical definition would be:

● NASA/Air Force Definition: A project is within a program as an undertaking that has a scheduled beginning and end, and that normally involves some primary purpose.

As shown in Table 2–4, the government sector tends to run efforts as programs, headed up by a program manager who hopes that their program will receive government funding year after year. Today, the majority of the industrial sector uses both project and program managers. Throughout this text, I have used the terms project and program man- agement as being the same because they are generally regulated by the same policies, pro- cedures, and guidelines. In general, as will be discussed in Chapter 11, projects are often considered to be the first level of subdivision of a program, and programs are often longer in duration that projects. However, there are many other significant differences, such as:

● Projects may have a single objective whereas programs may have multiple objects with a heavy orientation toward business rather than technical objectives.

● The length of programs often makes them more susceptible to changing environ- mental conditions, politics, the economy, business strategy, and interest rates.

● The possibility for changing economic conditions may play havoc with pricing out long-term programs based upon estimates on forward pricing rates.

● Functional managers are often reluctant to give up their best workers that are in high demand by committing them to a single program that will run for years.

● Program governance is conducted by a committee rather than by a single individ- ual, and the membership may change over the life of the program.

● Program funding may be on a yearly basis and changes in planned funding are based upon existing need, which may change from year to year, and economic conditions.

● Scope changes may occur more frequently and have a greater impact on the project. ● Rebaselining and replanning will occur more frequently. ● Based upon the program’s length, succession planning may be necessary for workers

with critical skills. ● The loss of some workers over the length of the program may be expected because

of changing positions, better opportunities in another company, and retirements. ● Workers may not believe that a long-term assignment on just one program is an

opportunity for career advancement.

Systems, Programs, and Projects: A Definition 65

TABLE 2–4. DEFINITION SUMMARY

Level Sector Title

System* — — Program Government Program managers Project Industry Project managers

*Definitions, as used here, do not include in-house industrial systems such as management information systems or shop floor control systems.

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PMI has certification programs for both project and program managers and does differentiate between the two. There are textbooks written that are dedicated entirely to program management.

Once a group of tasks is selected and considered to be a project, the next step is to define the kinds of project units. There are four categories of projects:

● Individual projects: These are short-duration projects normally assigned to a single individual who may be acting as both a project manager and a functional manager.

● Staff projects: These are projects that can be accomplished by one organizational unit, say a department. A staff or task force is developed from each section involved. This works best if only one functional unit is involved.

● Special projects: Often special projects occur that require certain primary func- tions and/or authority to be assigned temporarily to other individuals or units. This works best for short-duration projects. Long-term projects can lead to severe con- flicts under this arrangement.

● Matrix or aggregate projects: These require input from a large number of func- tional units and usually control vast resources.

Project management may now be defined as the process of achieving project objec- tives through the traditional organizational structure and over the specialties of the indi- viduals concerned. Project management is applicable for any ad hoc (unique, one-time, one-of-a-kind) undertaking concerned with a specific end objective. In order to complete a task, a project manager must:

● Set objectives ● Establish plans ● Organize resources

● Provide staffing ● Set up controls ● Issue directives ● Motivate personnel ● Apply innovation for alternative actions ● Remain flexible

The type of project will often dictate which of these functions a project manager will be required to perform.

66 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

PMBOK® Guide, 5th Edition 1.3 What Is Project Management?

2.7 PRODUCT VERSUS PROJECT MANAGEMENT: A DEFINITION

Some people mistakenly argue that there is no major difference between a project and a program other than the time duration. Project managers focus on the end date of their project from the day they are assigned as project manager. Program managers usually have a much longer time frame that project managers and never want to see their program come to an end. In the early years of project management with the Department of

PMBOK® Guide, 5th Edition 4.1.1 Inputs to Project

Charter

4.1.1.1 Product Scope and Project

Scope and Chapter 5 Introduction

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Defense serving as the primary customer, aerospace and defense project managers were called program managers because the intent was to get follow-on government contracts each year.

But what about the definition of product management or product line management? Product managers function closely like program managers. The product manager wants his or her product to be as long-lived as possible and as profitable as possible. Even when the demand for the product diminishes, the product manager will always look for spin-offs to keep a product alive.

There is also a difference between project and product scope:

● Project scope defines the work that must be accomplished to produce a deliverable with specified features or functions. The deliverable can be a product, service, or other result.

● Product scope defines the features or functions that characterize the deliverable.

Figure 2–8 shows the relationship between project and product management. When the project is in the R&D phase, a project manager is involved. Once the product is developed and introduced into the marketplace, the product manager takes control. In some situations, the project manager can become the product manager. Product and project management can, and do, exist concurrently within companies.

Figure 2–8 shows that product management can operate horizontally as well as verti- cally. When a product is shown horizontally on the organizational chart, the implication is that the product line is not big enough to control its own resources full-time and therefore

Product versus Project Management: A Definition 67

VICE PRESIDENT GENERAL MANAGER

NEW BUSINESS

MARKET RESEARCH PLANNING

ONGOING BUSINESS MANU. ENG. FINANCE

ADM. PERS.

A X

B Y

C Z

PROJECT MANAGERS PRODUCT MANAGERS

RESEARCH SALES/

MARKETING PRODUCTION ADMIN

FIGURE 2–8. Organizational chart.

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shares key functional resources. If the product line were large enough to control its own resources full-time, it would be shown as a separate division or a vertical line on the orga- nization chart.

Also shown in Figure 2–8 is the remarkable fact that the project manager (or project engineer) is reporting to a marketing-type person. The reason is that technically oriented project leaders get too involved with the technical details of the project and lose sight of when and how to “kill” a project. Remember, most technical leaders have been trained in an academic rather than a business environment. Their commitment to success often does not take into account such important parameters as return on investment, profitability, competition, and marketability.

To alleviate these problems, project managers and project engineers, especially on R&D-type projects, are now reporting to marketing so that marketing input will be included in all R&D decisions because of the high costs incurred during R&D. Executives must exer- cise caution with regard to this structure in which both product and project managers report to the marketing function. The marketing executive could become the focal point of the entire organization, with the capability of building a very large empire.

2.8 MATURITY AND EXCELLENCE: A DEFINITION

Some people contend that maturity and excellence in project management are the same. Unfortunately, this is not the case. Consider the following definition:

Maturity in project management is the implementation of a standard methodology

and accompanying processes such that there exists a high likelihood of repeated

successes.

This definition is supported by the life-cycle phases shown in Table 2–1. Maturity implies that the proper foundation of tools, techniques, processes, and even culture, exists. When projects come to an end, there is usually a debriefing with senior management to discuss how well the methodology was used and to recommend changes. This debriefing looks at “key performance indicators,” which are shared learning topics, and allows the organization to maximize what it does right and to correct what it did wrong.

The definition of excellence can be stated as:

Organizations excellent in project management are those that create the environment

in which there exists a continuous stream of successfully managed projects and where success is measured by what is in the best interest of both the company and the project (i.e., customer).

Excellence goes well beyond maturity. You must have maturity to achieve excellence. Figure 2–9 shows that once the organization completes the first four life-cycle phases in Table 2–1, it may take two years or more to reach some initial levels of maturity. Excellence, if achievable at all, may take an additional five years or more.

68 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

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Informal Project Management: A Definition 69

Projects

Time

Failures

Successes

MATURITY 2 YEARS

EXCELLENCE 5 YEARS

FIGURE 2–9. The growth of excellence.

Executives who always make the right decision are not making enough deci- sions. Likewise, organizations in which all projects are completed successfully are not taking enough risks and are not working on enough projects.

Figure 2–9 also brings out another important fact. During maturity, more successes than failures occur. During excellence, we obtain a continuous stream of successful projects. Yet, even after having achieved excellence, there will still be some failures.

It is unrealistic to believe that all projects will be completed successfully. Some peo- ple contend that the only true project failures are the ones from which nothing is learned. Failure can be viewed as success if the failure is identified early enough so that the resources can be reassigned to other more opportunistic activities.

2.9 INFORMAL PROJECT MANAGEMENT: A DEFINITION

Companies today are managing projects more informally than before. Informal project management does have some degree of formality but emphasizes managing the project with a minimum amount of paperwork. Furthermore, informal project management is based upon guidelines rather than the policies and procedures that are the basis for formal project management. This was shown previously to be a characteristic of a good project manage- ment methodology. Informal project management mandates:

● Effective communications ● Effective cooperation ● Effective teamwork ● Trust

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These four elements are absolutely essential for effective informal project management. Figure 2–10 shows the evolution of project documentation over the years. As companies

become mature in project management, emphasis is on guidelines and checklists. Figure 2–11 shows the critical issues as project management matures toward more informality.

As a final note, not all companies have the luxury of using informal project management. Customers often have a strong voice in whether formal or informal project management will be used. Customers are often reluctant to accept a paperless project management system.

2.10 THE MANY FACES OF SUCCESS

Historically, the definition of success has been meeting the customer’s expectations regardless of whether or not the customer is internal or external. Success also includes get- ting the job done within the constraints of time, cost, and quality. Using this standard def- inition, success is defined as a point on the time, cost, quality/performance grid. But how many projects, especially those requiring innovation, are accomplished at this point?

Very few projects are ever completed without trade-offs or scope changes on time, cost, and quality. Therefore, success could still occur without exactly hitting this singular point. In this regard, success could be defined as a cube, such as seen in Figure 2–12. The singular point of time, cost, and quality would be a point within the cube, constituting the convergence of the critical success factors (CSFs) for the project.

Another factor to consider is that there may exist both primary and secondary definitions of success, as shown in Table 2–5. The primary definitions of success are seen through the eyes of the customer. The secondary definitions of success are usually internal benefits. If achieving 86 percent of the specification is acceptable to the customer and follow-on work is received, then the original project might very well be considered a success.

70 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

CONVENTIONAL PROJECT MANAGEMENT PROJECT MANAGEMENT

WITH CONCURRENT ENGINEERING

1970s

Life-Cycle Phases

Policy and Procedure Manuals

Guidelines per Life-Cycle

Phase

General Project

Guidelines

Checklists with Periodic Review

Points

Early 1980s Mid-1980s Late 1980s 1990 to today

FIGURE 2–10. Evolution of policies, procedures, and guidelines. Source: Reprinted from H. Kerzner, In Search of Excellence in Project Management. New York: Wiley, 1998, p. 196.

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The definition of success can also vary according to who the stakeholder is. For example, each of the following can have his or her own definition of success on a project:

● Consumers: safety in its use ● Employees: guaranteed employment ● Management: bonuses ● Stockholders: profitability ● Government agencies: compliance with federal regulations

The Many Faces of Success 71

GENERAL MATURITY PATH

CRITICAL ISSUES

RELATIVE MAGNITUDE OF

DOCUMENTATION

POLICIES AND PROCEDURES

• HIGH-

• CONTINUOUS COMPETITION FOR RESOURCES

• CONSTANTLY CHANGING PRIORITIES

• POOR MOTIVATION

• PROTECTION MEMOS

• TRUST

• COMMUNI- CATION

• COOPERA- TION

• TEAMWORK

• DEVELOP- MENT OF A METHODOL- OGY

FORMAL PROJECT MANAGEMENT INFORMAL PROJECT

MANAGEMENT

• LIFE-CYCLE PHASES

• CORE SKILLS TRAINING

• SCHEDULE SLIPPAGES

• CREEPING SCOPE

• RESISTANCE

• RELIANCE ON

• INVISIBLE SPONSORS

• POWER/ AUTHORITY PROBLEMS

• CONTINUOUS MEETINGS

GUIDELINES PER LIFE-

CYCLE PHASE

GUIDELINES PER PROJECT

CHECKLISTS FOR END-OF-PHASE REVIEWS

INTENSITY CONFLICTS

TO MULTIPLE BOSS REPORTING

POLICIES/ PROCEDURES

FIGURE 2–11. Maturity path.

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It is possible for a project management methodology to identify primary and secondary success factors. This could provide guidance to a project manager for the development of a risk management plan and for deciding which risks are worth taking and which are not.

Critical success factors identify what is necessary to meet the desired deliverables of the customer. We can also look at key performance indicators (KPIs), which measure the quality of the process used to achieve the end results. KPIs are internal measures or metrics that can be reviewed on a periodic basis throughout the life cycle of the project. Typical KPIs include:

● Use of the project management methodology ● Establishment of the control processes ● Use of interim metrics ● Quality of resources assigned versus planned for ● Client involvement

72 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

C o st

Time

Qu ali

(or S

co pe

)

FIGURE 2–12. Success: point or cube?

TABLE 2–5. SUCCESS FACTORS

Primary Secondary

• Within time • Follow-on work from this customer • Within cost • Using the customer’s name as a reference on your literature • Within quality limits • Commercialization of a product • Accepted by the customer • With minimum or mutually agreed upon scope changes

• Without disturbing the main flow of work • Without changing the corporate culture • Without violating safety requirements • Providing efficiency and effectiveness of operations • Satisfying OSHA/EPA requirements • Maintaining ethical conduct • Providing a strategic alignment • Maintaining a corporate reputation • Maintaining regulatory agency relations

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Key performance indicators answer such questions as: Did we use the methodology cor- rectly? Did we keep management informed, and how frequently? Were the proper resources assigned and were they used effectively? Were there lessons learned that could necessitate updating the methodology or its use? Companies excellent in project manage- ment measure success both internally and externally using CSFs and KPIs. Later in this book we will provide a more detailed description of KPIs.

2.11 THE MANY FACES OF FAILURE 4

Previously we stated that success might be a cube rather than a point. If we stay within the cube but miss the point, is that a failure? Probably not! The true definition of failure is when the final results are not what were expected, even though the original expectations may or may not have been reasonable. Sometimes customers and even internal executives set performance targets that are totally unrealistic in hopes of achieving 80–90 percent. For simplicity’s sake, let us define failure as unmet expectations.

With unmeetable expectations, failure is virtually assured since we have defined fail- ure as unmet expectations. This is called a planning failure and is the difference between what was planned and what was, in fact, achieved. The second component of failure is poor performance or actual failure. This is the difference between what was achievable and what was actually accomplished.

Perceived failure is the net sum of actual failure and planning failure. Figures 2–13 and 2–14 illustrate the components of perceived failure. In Figure 2–13, project manage- ment has planned a level of accomplishment (C) lower than what is achievable given project circumstances and resources (D). This is a classic underplanning situation. Actual accomplishment (B), however, was less than planned.

A slightly different case is illustrated in Figure 2–14. Here, we have planned to accomplish more than is achievable. Planning failure is again assured even if no actual fail- ure occurs. In both of these situations (overplanning and underplanning), the actual failure is the same, but the perceived failure can vary considerably.

Today, most project management practitioners focus on the planning failure term. If this term can be compressed or even eliminated, then the magnitude of the actual failure, should it occur, would be diminished. A good project management methodology helps to reduce this term. We now believe that the existence of this term is largely due to the project manager’s inability to perform effective risk management. In the 1980s, we believed that the failure of a project was largely a quantitative failure due to:

● Ineffective planning ● Ineffective scheduling ● Ineffective estimating ● Ineffective cost control ● Project objectives being “moving targets”

The Many Faces of Failure 73

4. Adapted from Robert D. Gilbreath, Winning at Project Management. New York: Wiley, 1986, pp. 2–6.

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During the 1990s, we changed our view of failure from being quantitatively oriented to qualitatively oriented. A failure in the 1990s was largely attributed to:

● Poor morale ● Poor motivation ● Poor human relations ● Poor productivity ● No employee commitment

74 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

None

Accomplishment Perceived Failure

Actual Failure

Planning Failure

Actual Planned Achievable Perfection

A B C D E

FIGURE 2–13. Components of failure (pessimistic planning).

None

Accomplishment Perceived Failure

Actual

Actual Failure

Planning Failure

Achievable Planned Perfection

A B C D E

FIGURE 2–14. Components of failure (optimistic planning).

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● No functional commitment ● Delays in problem solving ● Too many unresolved policy issues ● Conflicting priorities between executives, line managers, and project

managers

Although these quantitative and qualitative approaches still hold true to some degree, today we believe that the major component of planning failure is inappropriate or inade- quate risk management, or having a project management methodology that does not pro- vide any guidance for risk management.

Sometimes, the risk management component of failure is not readily identified. For example, look at Figure 2–15. The actual performance delivered by the contractor was sig- nificantly less than the customer’s expectations. Is the difference due to poor technical ability or a combination of technical inability and poor risk management? Today we believe that it is a combination.

When a project is completed, companies perform a lessons-learned review. Sometimes lessons learned are inappropriately labeled and the true reason for the risk event is not known. Figure 2–16 illustrates the relationship between the marketing per- sonnel and technical personnel when undertaking a project to develop a new product. If the project is completed with actual performance being less than customer expectations, is it because of poor risk management by the technical assessment and forecasting personnel or poor marketing risk assessment? The relationship between marketing and technical risk management is not always clear.

Figure 2–16 also shows that opportunities for trade-offs diminish as we get further downstream on the project. There are numerous opportunities for trade-offs prior to estab- lishing the final objectives for the project. In other words, if the project fails, it may be because of the timing when the risks were analyzed.

The Many Faces of Failure 75

Poor Risk Management

Technical Inability

Cu sto

me r E

xp ec

tat ion

Actua l Perfo

rmanc eP

e rf

o rm

a n

c e

Time

FIGURE 2–15. Risk planning.

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2.12 THE STAGE-GATE PROCESS

When companies recognize the need to begin developing processes for project management, the starting point is normally the stage-gate process. The stage-gate process was created because the traditional organizational structure was designed primarily for top-down, centralized management, control, and communications, all of which were no longer practical for organizations that use project management and horizontal work flow. The

stage-gate process eventually evolved into life-cycle phases. Just as the words imply, the process is composed of stages and gates. Stages are

groups of activities that can be performed either in series or parallel based upon the mag- nitude of the risks the project team can endure. The stages are managed by cross-functional teams. The gates are structured decision points at the end of each stage. Good project man- agement processes usually have no more than six gates. With more than six gates, the project team focuses too much attention on preparing for the gate reviews rather than on the actual management of the project.

Project management is used to manage the stages between the gates, and can shorten the time between the gates. This is a critical success factor if the stage-gate process is to be used for the development and launch of new products. A good corporate methodology for project management will provide checklists, forms, and guidelines to make sure that critical steps are not omitted.

Checklists for gate reviews are critical. Without these checklists, project managers can waste hours preparing gate review reports. Good checklists focus on answering these questions:

● Where are we today (i.e., time and cost)? ● Where will we end up (i.e., time and cost)?

76 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

Technical Risk Assessment

and Forecasting

Financial Risk Assessment

Project Objectives

Numerous Opportunities for Trade-offs

Resulting from Risk Analyses Limited

Market Risk Assessment

and Forecasting

Schedule Risk Assessment

Project Planning

Project Execution

Technical

Strategy

Pr od

uc t/M

ar ke

St ra

te gy

FIGURE 2–16. Mitigation strategies available.

PMBOK® Guide, 5th Edition 2.4 Project Life Cycles

2.1.1 Characteristics of Project

Phases

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● What are the present and future risks? ● What assistance is needed from management?

Project managers are never allowed to function as their own gatekeepers. The gate- keepers are either individuals (i.e., sponsors) or groups of individuals designated by senior management and empowered to enforce the structured decision-making process. The gate- keepers are authorized to evaluate the performance to date against predetermined criteria and to provide the project team with additional business and technical information.

Gatekeepers must be willing to make decisions. The four most common decisions are:

● Proceed to the next gate based upon the original objectives ● Proceed to the next gate based upon revised objectives ● Delay making a gate decision until further information is obtained ● Cancel the project

Sponsors must also have the courage to terminate a project. The purpose of the gates is not only to obtain authorization to proceed, but to identify failure early enough so that resources will not be wasted but will be assigned to more promising activities.

We can now identify the three major benefits of the stage-gate process:

● Providing structure to project management ● Providing possible standardization in planning, scheduling, and control (i.e., forms,

checklists, and guidelines) ● Allowing for a structured decision-making process

Companies embark upon the stage-gate process with good intentions, but there are pitfalls that may disrupt the process. These include:

● Assigning gatekeepers and not empowering them to make decisions ● Assigning gatekeepers who are afraid to terminate a project ● Denying the project team access to critical information ● Allowing the project team to focus more on the gates than on the stages

It should be recognized that the stage-gate process is neither an end result nor a self- sufficient methodology. Instead, it is just one of several processes that provide structure to the overall project management methodology.

Today, the stage-gate process appears to have been replaced by life-cycle phases. Although there is some truth in this, the stage-gate process is making a comeback. Since the stage-gate process focuses on decision-making more than life-cycle phases, the stage- gate process is being used as an internal, decision-making tool within each of the life- cycle phases. The advantage is that, while life-cycle phases are the same for every project, the stage-gate process can be custom-designed for each project to facilitate decision- making and risk management. The stage-gate process is now an integral part of project management, whereas previously it was used primarily for new product development efforts.

The Stage-Gate Process 77

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2.13 PROJECT LIFE CYCLES

Every program, project, or product has certain phases of development

known as life-cycle phases. A clear understanding of these phases permits

managers and executives to better control resources to achieve goals.

During the past few years, there has been at least partial agreement about the life-cycle

phases of a product. They include:

● Research and development ● Market introduction ● Growth ● Maturity ● Deterioration ● Death

Today, there is no agreement among industries, or even companies within the same

industry, about the life-cycle phases of a project. This is understandable because of the

complex nature and diversity of projects.

The theoretical definitions of the life-cycle phases of a system can be applied to a

project. These phases include:

● Conceptual ● Planning ● Testing ● Implementation ● Closure

The first phase, the conceptual phase, includes the preliminary evaluation of an idea.

Most important in this phase is a preliminary analysis of risk and the resulting impact on the

time, cost, and performance requirements, together with the potential impact on company

resources. The conceptual phase also includes a “first cut” at the feasibility of the effort.

The second phase is the planning phase. It is mainly a refinement of the elements in

the conceptual phase and requires a firm identification of the resources required and the

establishment of realistic time, cost, and performance parameters. This phase also includes

the initial preparation of documentation necessary to support the system. For a project

based on competitive bidding, the conceptual phase would include the decision of whether

to bid, and the planning phase would include the development of the total bid package

(i.e., time, schedule, cost, and performance).

Because of the amount of estimating involved, analyzing system costs during the con-

ceptual and planning phases is not an easy task. As shown in Figure 2–17, most project or sys-

tem costs can be broken down into operating (recurring) and implementation (nonrecurring)

categories. Implementation costs include one-time expenses such as construction of a new

facility, purchasing computer hardware, or detailed planning. Operating costs include recur-

ring expenses such as manpower. The operating costs may be reduced as shown in Figure

2–17 if personnel perform at a higher position on the learning curve. The identification of a

78 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

PMBOK® Guide, 5th Edition 2.4 Project Life Cycles

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learning curve position is vitally important during the planning phase when firm cost positions

must be established. Of course, it is not always possible to know what individuals will be

available or how soon they will perform at a higher learning curve position. Once the approximate total cost of the project is determined, a cost-benefit analysis

should be conducted (see Figure 2–18) to determine if the estimated value of the informa- tion obtained from the system exceeds the cost of obtaining the information. This analysis is often included as part of a feasibility study. There are several situations, such as in com- petitive bidding, where the feasibility study is actually the conceptual and definition phases. Because of the costs that can be incurred during these two phases, top-manage- ment approval is almost always necessary before the initiation of such a feasibility study.

The third phase—testing—is predominantly a testing and final standardization effort so that operations can begin. Almost all documentation must be completed in this phase.

The fourth phase is the implementation phase, which integrates the project’s product or services into the existing organization. If the project was developed for establishment of a marketable product, then this phase could include the product life-cycle phases of mar- ket introduction, growth, maturity, and a portion of deterioration.

The final phase is closure and includes the reallocation of resources. Consider a com- pany that sells products to consumers. As one product begins the deterioration and death phases of its life cycle (i.e., the divestment phase of a system), new products or projects must be established. Such a company would, therefore, require a continuous stream of projects to survive, as shown in Figure 2–19. As projects A and B begin their decline, new efforts (project C) must be developed for resource reallocation. In the ideal situation these new projects will be established at such a rate that total revenue will increase and company growth will be clearly visible.

Project Life Cycles 79

C O

S T

TIME

IMPLEMENTATION COST (NONRECURRING)

REDUCED COSTS DUE TO IMPROVED POSITION ON LEARNING CURVE

OPERATING COSTS (RECURRING—MANPOWER, EQUIPMENT, FACILITIES)

SAVINGS

FIGURE 2–17. System costs.

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C O

S T

A N

D V

A L U

E O

F T

H E

I N

F O

R M

A T

IO N

TIME

FAVORABLE COST/BENEFIT POSITION

ESTIMATED VALUE OF THE INFORMATION

COST OF OBTAINING INFORMATION

FIGURE 2–18. Cost–benefit analysis.

R E

V E

N U

TOTAL REVENUE

PROJECT A

PROJECT B PROJECT C

TIME

FIGURE 2–19. A stream of projects.

80 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

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The closure phase evaluates the efforts of the total system and serves as input to the

conceptual phases for new projects and systems. This final phase also has an impact on

other ongoing projects with regard to identifying priorities.

Thus far no attempt has been made to identify the size of a project or system. Large pro-

jects generally require full-time staffs, whereas small projects, although they undergo the same

system life-cycle phases, may require only part-time people. This implies that an individual

can be responsible for multiple projects, possibly with each project existing in a different life-

cycle phase. The following questions must be considered in multiproject management:

● Are the project objectives the same? ● For the good of the project? ● For the good of the company?

● Is there a distinction between large and small projects? ● How do we handle conflicting priorities?

● Critical versus critical projects ● Critical versus noncritical projects ● Noncritical versus noncritical projects

Later chapters discuss methods of resolving conflicts and establishing priorities.

The phases of a project and those of a product are compared in Figure 2–20. Notice

that the life-cycle phases of a product generally do not overlap, whereas the phases of a

project can and often do overlap.

Table 2–6 identifies the various life-cycle phases that are commonly used. Even in

mature project management industries such as construction, one could survey ten different

construction companies and find ten different definitions for the life-cycle phases.

The life-cycle phases for computer programming, as listed in Table 2–6, are also shown

in Figure 2–21, which illustrates how manpower resources can build up and decline during

a project. In Figure 2–21, PMO stands for the present method of operations, and PMO� will be the “new” present method of operations after conversion. This life cycle would probably

be representative of a twelve-month activity. Most executives prefer short data processing life

cycles because computer technology changes rapidly. An executive of a major utility com-

mented that his company was having trouble determining how to terminate a computer pro-

gramming project to improve customer service because, by the time a package is ready for

full implementation, an updated version appears on the scene. Should the original project be

canceled and a new project begun? The solution appears to lie in establishing short data pro-

cessing project life-cycle phases, perhaps through segmented implementation.

Top management is responsible for the periodic review of major projects. This should

be accomplished, at a minimum, at the completion of each life-cycle phase.

More companies are preparing procedural manuals for project management and for

structuring work using life-cycle phases. There are several reasons for this trend:

● Clear delineation of the work to be accomplished in each phase may be possible. ● Pricing and estimating may be easier if well-structured work definitions exist. ● Key decision points exist at the end of each life-cycle phase so that incremental

funding is possible.

Project Life Cycles 81

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R E

T U

R N

IN V

E S

T M

E N

RESEARCH AND DEVELOPMENT

PURE BASIC

RESEARCH

APPLIED RESEARCH GROWTH

RE VE

NU E

PR OF

MATURITY DETERIORATION

M A

R K

E T

IN T

R O

D U

C T

IO N

D E

A T

PLANNING

TESTING

IMPLEMENTATION

CLOSURE

BREAKEVEN POINT

RO I

INVESTMENT

CONCEPTUAL

FIGURE 2–20. System/product life cycles.

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As a final note, the reader should be aware that not all projects can be simply trans- posed into life-cycle phases (e.g., R&D). It might be possible (even in the same company) for different definitions of life-cycle phases to exist because of schedule length, complex- ity, or just the difficulty of managing the phases.

2.14 GATE REVIEW MEETINGS (PROJECT CLOSURE)

Gate review meetings are a form of project closure. Gate review meetings could result in the closure of a life-cycle phase or the closure of the entire project. Gate review meetings must be planned for, and this includes the gathering, analysis, and dissemination of pertinent informa- tion. This can be done effectively with the use of forms, templates, and checklists.

There are two forms of closure pertinent to gate review meetings: contractual closure and administrative closure. Contractual closure precedes administrative closure.

Gate Review Meetings (Project Closure) 83

CONCEPTUAL PHASE

PMO

PLANNING PHASE

DEFINITION AND DESIGN PHASE

IMPLEMENTATION PHASE

CONVERSION PHASE

REQUIRED RESOURCES

T END

PMO9

R E

S O

U R

C E

FIGURE 2–21. Definition of a project life cycle.

TABLE 2–6. LIFE-CYCLE PHASE DEFINITIONS

Engineering Manufacturing Computer Programming Construction

• Start-up • Formation • Conceptual • Planning, data gathering, and • Definition • Buildup • Planning procedures • Main • Production • Definition and design • Studies and basic engineering • Termination • Phase-out • Implementation • Major review

• Final audit • Conversion • Detail engineering • Detail engineering/

construction overlap

• Construction • Testing and commissioning

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Contractual closure is the verification and signoff that all deliverables required for this phase have been completed and all action items have been fulfilled. Contractual closure is the responsibility of both the project manager and the contract administrator.

Administrative closure is the updating of all pertinent records required for both the customer and the contractor. Customers are particularly interested in documentation on any as-built or as-installed changes or deviations from the specifications. Also required is an archived trail of all scope changes agreed to during the life of the project. Contractors are interested in archived data that include project records, minutes, memos, newsletters, change management documentation, project acceptance documentation, and the history of audits for lessons learned and continuous improvement.

A subset of administrative closure is financial closure, which is the closing out of all charge numbers for the work completed. Even though contractual closure may have taken place, there may still exist open charge numbers for the repair of defects or to complete archived paperwork. Closure must be planned for, and this includes setting up a timetable and budget. Table 2–7 shows the activities for each type of closure.

2.15 ENGAGEMENT PROJECT MANAGEMENT

Companies have traditionally viewed each customer as a one-time opportunity, and after this customer’s needs were met, emphasis was placed upon finding other customers. This is acceptable as long as there exists a potentially large customer base. Today, project- driven organizations, namely those that survive on the income from a continuous stream of customer-funded projects, are implementing the “engagement project management” approach. With engagement project management, each potential new customer is

84 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

TABLE 2–7. FORMS OF PROJECT CLOSURE

Engineering Administrative Financial

Purpose Customer signoff Documentation and traceability Shut down the completed work completed packages

When End of the project After contractual closure Throughout the project when is completed work packages are completed

Activities Verification and Completion of minutes, memos, Closing out work orders for validation handouts, reports, and all other completed work Conformance to forms of documentation acceptance criteria, Archiving of documentation Documenting results for including quality administrative closure Transferring unused funds to the assurance requirements Capturing the lessons learned management reserve or profits Walkthroughs, testing, and best practices reviews, and audits Releasing resources Compliance testing User testing Review of scope changes Documenting as-built changes

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approached in a way that is similar to an engagement in marriage where the contractor is soliciting a long-term relationship with the customer rather than a one-time opportunity. With this approach, contractors are selling not only deliverables and complete solutions to the client’s business needs but also a willingness to make changes to the way that they manage their projects in order to receive future contracts from this client.

To maintain this level of customer satisfaction and hopefully a long-term relationship, customers are requested to provide input on how the contractor’s project management methodology can be better utilized in the future. Some companies have added into their methodology a life-cycle phase entitled “Customer Satisfaction Management.” This life-cycle phase takes place after administrative closure is completed. The phase involves a meeting between the client and the contractor, and in attendance are the project managers from each organization, the sponsors, selected team members and functional managers, and the sales force. The question that needs to be addressed by the contractor is, “What can we do better on the next project we perform for you?”

While this approach of adding in a life-cycle phase for customer satisfaction manage- ment seems plausible, it can create severe problems. Customers can now expect to have a say in the design of the contractor’s EPM methodology. One automotive supplier decided to solicit input from one of the Big Three in Detroit when developing its project manage- ment methodology. Although this created goodwill and customer satisfaction with one client, it created a severe problem with other clients that had different requirements and different views of project management. The result was a different project management methodology for each client. How much freedom should a client be given in making rec- ommendations for changes to a contractor’s EPM system? How much say should a cus- tomer have in how a contractor manages projects? What happens if this allows customers to begin telling contractors how to do their job? Obviously there are risks to be considered for this level of customer satisfaction.

If the project manager is expected to manage several projects for this client, then the pro- ject manager must understand the nature of the client’s business and the environment in which the client does business. This is essential in order to identify and mitigate the risks associated with these projects. Some companies maintain an engagement manager and a pro- ject manager for each client. The engagement manager functions like an account executive for that client and may provide the project manager with the needed business information.

2.16 PROJECT MANAGEMENT METHODOLOGIES: A DEFINITION

Achieving project management excellence, or maturity, is more likely with a repetitive process that can be used on each and every project. This repetitive process is referred to as the project management methodology.

If possible, companies should maintain and support a single methodology for project management. Good methodologies integrate other processes into the project management methodology, as shown in Figure 2–22. Companies have all five of these processes inte- grated into their project management methodology.

Project Management Methodologies: A Definition 85

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During the 1990s, the following processes were integrated into a single methodology:

● Project Management: The basic principles of planning, scheduling, and control- ling work

● Total Quality Management: The process of ensuring that the end result will meet the quality expectations of the customer

● Concurrent Engineering: The process of performing work in parallel rather than series in order to compress the schedule without incurring serious risks

● Scope Change Control: The process of controlling the configuration of the end result such that value added is provided to the customer

● Risk Management: The process of identifying, quantifying, and responding to the risks of the project without any material impact on the project’s objectives

In the coming years, companies can be expected to integrate more of their business processes in the project management methodology. This is shown in Figure 2–23. Managing off of a single methodology lowers cost, reduces resource requirements for support, minimizes paperwork, and eliminates duplicated efforts.

The characteristics of a good methodology based upon integrated processes include:

● A recommended level of detail ● Use of templates ● Standardized planning, scheduling, and cost control techniques ● Standardized reporting format for both in-house and customer use ● Flexibility for application to all projects ● Flexibility for rapid improvements ● Easy for the customer to understand and follow ● Readily accepted and used throughout the entire company ● Use of standardized life-cycle phases (which can overlap) and end of phase

reviews (Section 2.13) ● Based upon guidelines rather than policies and procedures (Section 2.9) ● Based upon a good work ethic

86 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

Project Management

Concurrent Engineering

Change Management

Total Quality Management

Risk Management

FIGURE 2–22. Integrated processes for the twenty-first century.

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Methodologies do not manage projects; people do. It is the corporate culture that exe- cutes the methodology. Senior management must create a corporate culture that supports project management and demonstrates faith in the methodology. If this is done success- fully, then the following benefits can be expected:

● Faster “time to market” through better control of the project’s scope ● Lower overall project risk ● Better decision-making process ● Greater customer satisfaction, which leads to increased business ● More time available for value-added efforts, rather than internal politics and inter-

nal competition

One company found that its customers liked its methodology so much and that the projects were so successful, that the relationship between the contractor and the customer improved to the point where the customers began treating the contractor as a partner rather than as a supplier.

2.17 ENTERPRISE PROJECT MANAGEMENT METHODOLOGIES

As stated previously, a methodology is a series of processes, activities, and tools that are part of a specific discipline, such as project management, and are designed to accomplish a specific objective. When the products, services, or customers have similar requirements and do not require significant customization, companies develop methodologies to provide

Enterprise Project Management Methodologies 87

Project management•

Total quality management

•

Concurrent engineering

•

Scope change management

•

Risk management•

Current Integrated Processes

Yrs: 1990–2000 Integrated Processes

Yrs: 2000–2012 Integrated Processes

Supply chain management

•

Business processes•

Feasibility studies•

Cost-benefit analyses (ROI)

•

Capital budgeting•

FIGURE 2–23. Integrated processes (past, present, and future).

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some degree of consistency in the way that projects are managed. These types of method- ologies are often based upon rigid policies and procedures but can be successful. Good methodologies allow us to:

● Shorten project schedules ● Reduce and/or better control costs ● Prevent unwanted scope changes ● Plan for better execution ● Predict results ● Improve customer relations during project execution ● Adjust the project during execution to fit changing customer requirements ● Provide senior management with better visibility of status ● Standardize execution ● Capture best practices

As companies become reasonably mature in project management, the policies and procedures are replaced by forms, guidelines, templates, and checklists. This provides more flexibility for the project manager in how to apply the methodology to satisfy a spe- cific customer’s requirements. This leads to a more informal application of the project management methodology.

Today, we refer to this as an informal project management approach which has been somewhat modified and called a framework. A framework is a basic conceptual structure that is used to address an issue, such as a project. It includes a set of assumptions, concepts, templates, values, and processes that provide the project manager with a means for viewing what is needed to satisfy a customer’s requirements. A framework is a skeleton support structure for building the project’s deliverables. Frameworks work well as long as the pro- ject’s requirements do not impose severe pressure upon the project manager. Unfortunately, in today’s chaotic environment, this pressure exists and appears to be increasing.

Both frameworks and enterprise project management methodologies can enhance the project planning process as well as provide some degree of standardization and consis- tency. The International Institute for Learning has created a framework-style methodology which they call a Unified Project Management Methodology (UPMMTM) with templates categorized according to the PMBOK® Guide Areas of Knowledge.5 The project manager will select whichever templates are appropriate for that project. In doing this, the resulting methodology is actually a framework designed specifically for a particular project or client. Some typical templates that are part of UPMMTM include:

Communication

Project Charter Project Procedures Document

88 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

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Project Change Requests Log Project Status Report PM Quality Assurance Report Procurement Management Summary Project Issues Log Project Management Plan Project Performance Report

Cost

Project Schedule Risk Response Plan and Register Work Breakdown Structure (WBS) Work Package Cost Estimates Document Project Budget Project Budget Checklist

Human Resources

Project Charter Work Breakdown Structure (WBS) Communications Management Plan Project Organization Chart Project Team Directory Responsibility Assignment Matrix (RAM) Project Management Plan Project Procedures Document Kick-Off Meeting Checklist Project Team Performance Assessment Project Manager Performance Assessment

Integration

Project Procedures Overview Project Proposal Communications Management Plan Procurement Plan Project Budget Project Procedures Document Project Schedule Responsibility Assignment Matrix (RAM) Risk Response Plan and Register Scope Statement Work Breakdown Structure (WBS) Project Management Plan Project Change Requests Log

Enterprise Project Management Methodologies 89

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90 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

Project Issues Log Project Management Plan Changes Log Project Performance Report Lessons Learned Document Project Performance Feedback Product Acceptance Document Project Charter Closing Process Assessment Checklist Project Archives Report

Procurement

Project Charter Scope Statement Work Breakdown Structure (WBS) Procurement Plan Procurement Planning Checklist Procurement Statement of Work (SOW) Request for Proposal Document Outline Project Change Requests Log Contract Formation Checklist Procurement Management Summary

Quality

Project Charter Project Procedures Overview Work Quality Plan Project Management Plan Work Breakdown Structure (WBS) PM Quality Assurance Report Lessons Learned Document Project Performance Feedback Project Team Performance Assessment PM Process Improvement Document

Risk

Procurement Plan Project Charter Project Procedures Document Work Breakdown Structure (WBS) Risk Response Plan and Register

Scope

Project Scope Statement Work Breakdown Structure (WBS)

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Work Package Project Charter

Time

Activity Duration Estimating Worksheet Cost Estimates Document Risk Response Plan and Register Medium Work Breakdown Structure (WBS) Work Package Project Schedule Project Schedule Review Checklist

2.18 METHODOLOGIES CAN FAIL

Most companies today seem to recognize the need for one or more project management methodologies but either create the wrong methodologies or misuse the methodologies that have been created. Many times, companies rush into the development or purchasing of a methodology without any understanding of the need for one other than the fact that their competitors have a methodology. Jason Charvat states6:

Using project management methodologies is a business strategy allowing companies to

maximize the project’s value to the organization. The methodologies must evolve and be

“tweaked” to accommodate a company’s changing focus or direction. It is almost a mind-

set, a way that reshapes entire organizational processes: sales and marketing, product

design, planning, deployment, recruitment, finance, and operations support. It presents a

radical cultural shift for many organizations. As industries and companies change, so must

their methodologies. If not, they’re losing the point.

Methodologies are a set of forms, guidelines, templates, and checklists that can be applied to a specific project or situation. It may not be possible to create a single enterprisewide methodology that can be applied to each and every project. Some compa- nies have been successful doing this, but there are still many companies that successfully maintain more than one methodology. Unless the project manager is capable of tailoring the enterprise project management methodology to his or her needs, perhaps by using a framework approach, more than one methodology may be necessary.

There are several reasons why good intentions often go astray. At the executive levels, methodologies can fail if the executives have a poor understanding of what a methodology is and believe that a methodology is:

● A quick fix ● A silver bullet

Methodologies Can Fail 91

6. J. Charvat, Project Management Methodologies (Wiley, Hoboken, NJ), 2003, p. 2.

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● A temporary solution ● A cookbook approach for project success7

At the working levels, methodologies can also fail if they:

● Are abstract and high level ● Contain insufficient narratives to support these methodologies ● Are not functional or do not address crucial areas ● Ignore the industry standards and best practices ● Look impressive but lack real integration into the business ● Use nonstandard project conventions and terminology ● Compete for similar resources without addressing this problem ● Don’t have any performance metrics ● Take too long to complete because of bureaucracy and administration8

Other reasons why methodologies can lead to project failure include:

● The methodology must be followed exactly even if the assumptions and environ- mental input factors have changed.

● The methodology focuses on linear thinking. ● The methodology does not allow for out-of-the-box thinking. ● The methodology does not allow for value-added changes that are not part of the

original requirements. ● The methodology does not fit the type of project. ● The methodology uses nonstandard terminology. ● The methodology is too abstract (rushing to design it). ● The methodology development team neglects to consider bottlenecks and concerns

of the user community. ● The methodology is too detailed. ● The methodology takes too long to use. ● The methodology is too complex for the market, clients, and stakeholders to

understand. ● The methodology does not have sufficient or correct metrics.

Deciding on what type of methodology is not an easy task. There are many factors to consider, such as:

● The overall company strategy—how competitive are we as a company? ● The size of the project team and/or scope to be managed

92 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

7. Note 6, p. 4. 8. Note 6, p. 5.

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Methodologies Can Fail 93

● The priority of the project ● How critical the project is to the company ● How flexible the methodology and its components are9

Project management methodologies are created around the project management maturity level of the company and the corporate culture. If the company is reasonably mature in project management and has a culture that fosters cooperation, effective com- munication, teamwork, and trust, then a highly flexible methodology can be created based upon guidelines, forms, checklists, and templates. Project managers can pick and choose the parts of the methodology that are appropriate for a particular client. Organizations that do not possess either of these two characteristics rely heavily upon methodologies constructed with rigid policies and procedures, thus creating significant paperwork requirements with accompanying cost increases and removing the flexibility that the project manager needs for adapting the methodology to the needs of a specific client.

Jason Charvat describes these two types as light methodologies and heavy methodologies10:

Light Methodologies

Ever-increasing technological complexities, project delays, and changing client require-

ments brought about a small revolution in the world of development methodologies. A

totally new breed of methodology—which is agile, adaptive, and involves the client every

part of the way—is starting to emerge. Many of the heavyweight methodologists were

resistant to the introduction of these “lightweight” or “agile” methodologies (Fowler

200111). These methodologies use an informal communication style. Unlike heavyweight

methodologies, lightweight projects have only a few rules, practices, and documents.

Projects are designed and built on face-to-face discussions, meetings, and the flow of

information to the clients. The immediate difference of using light methodologies is that

they are much less documentation-oriented, usually emphasizing a smaller amount of

documentation for the project.

Heavy Methodologies

The traditional project management methodologies (i.e., SDLC approach) are considered

bureaucratic or “predictive” in nature and have resulted in many unsuccessful projects.

These heavy methodologies are becoming less popular. These methodologies are so labo-

rious that the whole pace of design, development and deployment slows down—and noth-

ing gets done. Project managers tend to predict every milestone because they want to

foresee every technical detail (i.e., software code or engineering detail). This leads man-

agers to start demanding many types of specifications, plans, reports, checkpoints, and

schedules. Heavy methodologies attempt to plan a large part of a project in great detail

over a long span of time. This works well until things start changing, and the project man-

agers inherently try to resist change.

9. Note 6, p. 66. 10. Note 6, pp. 102–104. 11. M. Fowler, The New Methodology, Thought Works, 2001, available at www.martinfowler.com/articles.

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94 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

As organizations mature, the focus is on the development of a library of project man- agement forms. Rather than use light or heavy methodologies as described above, the pro- ject manager may select those forms that are applicable to his or her project. This approach allows the project manager to possibly custom design a methodology for a particular client. Cynthia Stackpole has prepared a book of forms that project managers can use, and her book is aligned with the PMBOK Guide.12

Rigid project management methodologies are frequently designed to be self-serving to benefit the parent company rather than the client. Robert Wysocki identifies six weak- nesses of linear project management life-cycle methodologies13:

● Does not accommodate change very well ● Costs too much ● Takes too long before any deliverables are produced ● Requires complete and detailed plans ● Must follow a rigid sequence of processes ● Is not focused on client value

These six weaknesses, the last one in particular, make it clear that clients may suffer from the use of a rigid methodology, especially if value-added opportunities cannot be discovered easily.

2.19 ORGANIZATIONAL CHANGE MANAGEMENT AND CORPORATE CULTURES

It has often been said that the most difficult projects to manage are those that involve the management of change. Figure 2–24 shows the four basic inputs needed to develop a project management methodology. Each has a “human” side that may require that people change.

Successful development and implementation of a project manage- ment methodology requires:

● Identification of the most common reasons for change in project management ● Identification of the ways to overcome the resistance to change ● Application of the principles of organizational change management to ensure

that the desired project management environment will be created and sustained

For simplicity’s sake, resistance can be classified as professional resistance and per- sonal resistance to change. Professional resistance occurs when each functional unit as a

12. C. Snyder Stackpole, A Project Manager’s Book of Forms (Wiley, Hoboken, NJ, 2009). 13. R. K. Wysocki, Effective Project Management, 5th ed. (Wiley, Hoboken, NJ, 2009), pp. 350–351.

PMBOK® Guide, 5th Edition Chapter 4 Integration Management

4.5 Integrated Change Control

2.1.1 Organizational Culture

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Organizational Change Management and Corporate Cultures 95

whole feels threatened by project management. This is shown in Figure 2–25. Examples include:

● Sales: The sales staff’s resistance to change arises from fear that project man- agement will take credit for corporate profits, thus reducing the year-end bonuses for the sales force. Sales personnel fear that project managers may become involved in the sales effort, thus diminishing the power of the sales force.

● Marketing: Marketing people fear that project managers will end up working so closely with customers that project managers may eventually be given some of the marketing and sales functions. This fear is not without merit because customers often want to communicate with the personnel managing the project rather than those who may disappear after the sale is closed.

● Finance (and Accounting): These departments fear that project management will require the development of a project accounting system (such as earned value mea- surement) that will increase the workload in accounting and finance, and that they will have to perform accounting both horizontally (i.e., in projects) and vertically (i.e., in line groups).

● Procurement: The fear in this group is that a project procurement system will be implemented in parallel with the corporate procurement system, and that the project managers will perform their own procurement, thus bypassing the pro- curement department.

● Human Resources Management: The HR department may fear that a project management career path ladder will be created, requiring new training programs. This will increase their workloads.

● Manufacturing: Little resistance is found here because, although the manufac- turing segment is not project-driven, there are numerous capital installation and maintenance projects which will have required the use of project management.

● Engineering, R&D, and Information Technology: These departments are almost entirely project-driven with very little resistance to project management.

Project Management Methodology

People

Organization

Tools Work

(Tasks)

FIGURE 2–24. Methodology inputs.

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Getting the support of and partnership with functional management can usually overcome the functional resistance. However, the individual resistance is usually more complex and more difficult to overcome. Individual resistance can stem from:

● Potential changes in work habits ● Potential changes in the social groups ● Embedded fears ● Potential changes in the wage and salary administration program

Tables 2–8 through 2–11 show the causes of resistance and possible solutions. Workers tend to seek constancy and often fear that new initiatives will push them outside their comfort zones. Most workers are already pressed for time in their current jobs and fear that new programs will require more time and energy.

Some companies feel compelled to continually undertake new initiatives, and people may become skeptical of these programs, especially if previous initiatives have not been successful. The worst case scenario is when employees are asked to undertake new initia- tives, procedures, and processes that they do not understand.

It is imperative that we understand resistance to change. If individuals are happy with

their current environment, there will be resistance to change. But what if people are unhappy? There will still be resistance to change unless (1) people believe that the change is possible, and (2) people believe that they will somehow benefit from the change.

Management is the architect of the change process and must develop the appropriate strategies so the organization can change. This is done best by developing a shared under- standing with employees by doing the following:

● Explaining the reasons for the change and soliciting feedback ● Explaining the desired outcomes and rationale

96 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

Marketing Procurement Manu. R&D

Sales

High

Neutral

Low Finance H.R. Eng. I.T.

FIGURE 2–25. Resistance to change.

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● Championing the change process ● Empowering the appropriate individuals to institutionalize the changes ● Investing in training necessary to support the changes

For most companies, the change management process will follow the pattern shown in Figure 2–26. Employees initially refuse to admit the need for change. As management begins pursuing the change, the support for the change diminishes and pockets of resistance

Organizational Change Management and Corporate Cultures 97

TABLE 2–8. RESISTANCE: WORK HABITS

Cause of Resistance Ways to Overcome

• New guidelines/processes • Dictate mandatory conformance from above • Need to share “power” information • Create new comfort zones at an acceptable pace • Creation of a fragmented work environment • Identify tangible/intangible individual benefits • Need to give up established work patterns

(learn new skills) • Change in comfort zones

TABLE 2–9. RESISTANCE: SOCIAL GROUPS

Cause of Resistance Ways to Overcome

• Unknown new relationships • Maintain existing relationships • Multiple bosses • Avoid cultural shock • Multiple, temporary assignments • Find an acceptable pace for rate of change • Severing of established ties

TABLE 2–10. RESISTANCE: EMBEDDED FEARS

Cause of Resistance Ways to Overcome

• Fear of failure • Educate workforce on benefits of changes to the • Fear of termination individual/corporation • Fear of added workload • Show willingness to admit/accept mistakes • Fear or dislike of uncertainty/unknowns • Show willingness to pitch in • Fear of embarrassment • Transform unknowns into opportunities • Fear of a “we/they” organization • Share information

TABLE 2–11. RESISTANCE: WAGE AND SALARY ADMINISTRATION

Causes of Resistance Ways to Overcome

• Shifts in authority and power • Link incentives to change • Lack of recognition after the changes • Identify future advancement opportunities/career path • Unknown rewards and punishment • Improper evaluation of personal performance • Multiple bosses

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crop up. Continuous support for the change by management encourages employees to explore the potential opportunities that will result from the change about to take place. Unfortunately, this exploration often causes additional negative information to surface, thus reinforcing the resistance to change. As pressure by management increases, and employees begin to recognize the benefits of the proposed change, support begins to grow.

The ideal purpose of change management is to create a superior culture. There are dif- ferent types of project management cultures based upon the nature of the business, the amount of trust and cooperation, and the competitive environment. Typical types of cultures include:

● Cooperative cultures: These are based upon trust and effective communications, internally and externally.

● Noncooperative cultures: In these cultures, mistrust prevails. Employees worry more about themselves and their personal interests than what’s best for the team, company, or customer.

● Competitive cultures: These cultures force project teams to compete with one another for valuable corporate resources. In these cultures, project managers often

demand that the employees demonstrate more loyalty to the project than to their line managers. This can be disastrous when employees are working on many projects at the same time.

● Isolated cultures: These occur when a large organization allows functional units to develop their own project management cultures and can result in a culture- within-a-culture environment.

● Fragmented cultures: These occur when part of the team is geographically sepa- rated from the rest of the team. Fragmented cultures also occur on multinational

98 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

S u p

p o rt

f o r

C h a n g

Denial

Resistance

Exploration

Resistance

Support

Time

FIGURE 2–26 Change process.

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projects, where the home office or corporate team may have a strong culture for pro- ject management but the foreign team has no sustainable project management culture.

Cooperative cultures thrive on effective communication, trust, and cooperation. Decisions are based upon the best interest of all of the stakeholders. Executive sponsorship is passive, and very few problems go to the executive levels for resolution. Projects are man- aged informally and with minimal documentation and few meetings. This culture takes years to achieve and functions well during favorable and unfavorable economic conditions.

Noncooperative cultures are reflections of senior management’s inability to cooperate among themselves and with the workforce. Respect is nonexistent. These cultures are not as successful as a cooperative culture.

Competitive cultures can be healthy in the short term, especially if there is abundant work. Long-term effects are usually not favorable. In one instance, an electronics firm reg- ularly bid on projects that required the cooperation of three departments. Management then implemented the unhealthy decision of allowing each of the three departments to bid on every job. The two “losing” departments would be treated as subcontractors.

Management believed that this competitiveness was healthy. Unfortunately, the long- term results were disastrous. The three departments refused to talk to one another and stopped sharing information. In order to get the job done for the price quoted, the depart- ments began outsourcing small amounts of work rather than using the other departments that were more expensive. As more work was outsourced, layoffs occurred. Management then realized the disadvantages of the competitive culture it had fostered.

Executives are the architects of the corporate culture. The culture often reflects the personal whims and aspirations of the seniormost levels of management and how they desire to have the company function. Good cultures can actively support project manage- ment whereas poor cultures can act as a hindrance.

As discussed previously, there are several different types of cultures. Some of the facets for an effective project management culture are shown in Figure 2–27.

The critical facets of a good culture are teamwork, trust communications, and cooperation. Some project management practitioners argue that communications and cooperation are the essential ingredients for teamwork and trust. In companies with excellent cultures, teamwork is exhibited by:

● Employees and managers sharing ideas with each other and establishing high levels of innovation and creativity in work groups

● Employees and managers trusting each other and demonstrating loyalty to each other and the company

● Employees and managers being committed to the work they do and the promises they make

● Employees and managers sharing information freely ● Employees and managers consistently being open and honest with each other

When teamwork exists, trust usually follows, and this includes trust among the work- ers within the company and trust in dealing with clients. When trust occurs between the buyer and the seller, both parties eventually benefit, as shown in Table 2–12.

Organizational Change Management and Corporate Cultures 99

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Willing to work in groups

Provide Support to team

Exchange of ideas

Have faith in workers

Allowed to make

decisions

Politics, culture,

economy and religion

Hang out with team after work Structure

and manage virtual teams

Within the team’s capability

Provide constructive support; i.e. sponsorship

CULTURE

Communication

T ru

CooperationTe am

wo rk

E m

p o

w er

E n

v iro

n m

en t

Socialization Organization

Tec hn

ol og

E xe

c. M

g t.

2.20 PROJECT MANAGEMENT INTELLECTUAL PROPERTY

We believe today that we are managing our business by projects. As such, project managers are expected to make business decisions as well as project decisions. This also implies that we must capture not only project-related best practices, but business best practices as well.

For the past decade, whenever we would capture project management best practices, they would be placed in a project management best practices library. But as we capture business best practices, we begin replacing the project management best practices library with a knowledge repository that includes both project management and business-related best practices. This is shown in Figure 2–28.

Another reason for the growth in intellectual property is because of the benchmarking activities that companies are performing, most likely using the project management office. Figure 2–29 shows typical benchmarking activities and the types of information being sought.

100 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

FIGURE 2–27 Facets of a project management culture.

TABLE 2–12. TRUST IN CUSTOMER–CONTRACTOR RELATIONSHIPS

Without Trust With Trust

Continuous competitive bidding Long-term contracts, repeat business, single- and sole-source contract awards

Massive project documentation Minimal documentation Excessive number of customer–contractor Minimal number of team meetings team meetings Team meeting with excessive Team meeting without documentation or minimal documentation documentation Sponsorship at the executive levels Sponsorship at lower and middle levels of management

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2.21 SYSTEMS THINKING

Ultimately, all decisions and policies are made on the basis of judgments; there is no other way, and there never will be. In the end, analysis is but an aid to the judgment and intuition of the decision maker. These principles hold true for project management as well as for systems management.

The systems approach may be defined as a logical and disciplined process of problem-solv- ing. The word process indicates an active ongoing system that is fed by input from its parts.

The systems approach:

● Forces review of the relationship of the various subsystems ● Is a dynamic process that integrates all activities into a meaningful total system

Systems Thinking 101

Integration of Business Processes into the EPM Methodology

Time

PM Best Practices

PM Best Practices Libraries

Knowledge Repositories

(PM and Business

Knowledge) Q

u a n tit

y o f In

fo rm

a tio

Project Knowledge Base (PKB) or Technical Knowledge Base (TKB)

World-Class Benchmarking Industry Benchmarking

Process Benchmarking

Types of Benchmarking

Customer and

Performance Surveys

Maturity Profiles

Strategic, Financial

and Business Objectives

CSFs KPIs

Quality Factors and

Strategic Integration

Strategic Goals and

Targets

Milestones Budgets, and

PM BP Library

BP Imple- mentation and KM

Repository

Change Management

Processes

PM Processes

Integrated Processes

PM Strategy and Structure

Basis for Comparison

S tr

a te

g ic

I ss

u e

PM Strategic Measurement

PM Interim Metrics

PM Establishment

and Implementation

Figure 2–28. Growth of knowledge management.

Figure 2–29. PM benchmarking and knowledge management (KM).

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● Systematically assembles and matches the parts of the system into a unified whole ● Seeks an optimal solution or strategy in solving a problem

The systems approach to problem-solving has phases of development similar to the life-cycle phases shown in Figure 2–21. These phases are defined as follows:

● Translation: Terminology, problem objective, and criteria and constraints are defined and accepted by all participants.

● Analysis: All possible approaches to or alternatives to the solution of the problem are stated.

● Trade-off: Selection criteria and constraints are applied to the alternatives to meet the objective.

● Synthesis: The best solution in reaching the objective of the system is the result of the combination of analysis and trade-off phases.

Other terms essential to the systems approach are:

● Objective: The function of the system or the strategy that must be achieved. ● Requirement: A partial need to satisfy the objective. ● Alternative: One of the selected ways to implement and satisfy a requirement. ● Selection criteria: Performance factors used in evaluating the alternatives to select

a preferable alternative. ● Constraint: An absolute factor that describes conditions that the alternatives

must meet.

A common error by potential decision makers (those dissatisfied individuals with authority to act) who base their thinking solely on subjective experience, judgment, and intuition is that they fail to recognize the existence of alternatives. Subjective thinking is inhibited or affected by personal bias.

Objective thinking, on the other hand, is a fundamental characteristic of the systems approach and is exhibited or characterized by emphasis on the tendency to view events, phenomena, and ideas as external and apart from self-consciousness. Objective thinking is unprejudiced.

The systems analysis process, as shown in Figure 2–30, begins with systematic exam- ination and comparison of those alternative actions that are related to the accomplishment of the desired objective. The alternatives are then compared on the basis of the resource costs and the associated benefits. The loop is then completed using feedback to determine how compatible each alternative is with the objectives of the organization.

The above analysis can be arranged in steps:

● Input data to mental process ● Analyze data ● Predict outcomes ● Evaluate outcomes and compare alternatives ● Choose the best alternative ● Take action ● Measure results and compare them with predictions

102 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

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T R A D E

O F F

ALTERNATIVE

REQUIREMENT

TRANS- LATION

ANALYSIS

FEEDBACK

TRADE-OFF SYNTHESIS

SYSTEM

SELECTION CRITERIA • PERFORMANCE • COST/BENEFIT • RESPONSE TIME • POLICY

CONSTRAINTS • LEGISLATIVE • FINANCIAL • TIMING • POLICY

O B J E C T

FIGURE 2–30. The systems approach.

103

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The systems approach is most effective if individuals can be trained to be ready with alternative actions that directly tie in with the prediction of outcomes. The basic tool is the outcome array, which represents the matrix of all possible circumstances. This outcome array can be developed only if the decision maker thinks in terms of the wide scope of pos- sible outcomes. Outcome descriptions force the decision maker to spell out clearly just what he is trying to achieve (i.e., his objectives).

Systems thinking is vital for the success of a project. Project management systems urgently need new ways of strategically viewing, questioning, and analyzing project needs for alternative nontechnical and technical solutions. The ability to analyze the total project, rather than the individual parts, is essential for successful project management.

2.22 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses:

● Integration Management ● Scope Management ● Closure

Understanding the following principles is beneficial if the reader is using this text to study for the PMP® Certification Exam:

● Brief historical background of project management ● That, early on, project managers were assigned from engineering ● Benefits of project management ● Barriers to project management implementation and how to overcome them ● Differences between a program and a project ● What is meant by informal project management ● How to identify success and failure in project management ● Project life-cycle phases ● What is meant by closure to a life-cycle phase or to the entire project ● What is meant by a project management methodology ● What is meant by critical success factors (CSFs) and key performance indicators (KPIs)

In Appendix C, the following Dorale Products mini–case studies are applicable:

● Dorale Products (A) [Integration and Scope Management] ● Dorale Products (B) [Integration and Scope Management] ● Dorale Products (C) [Integration and Scope Management] ● Dorale Products (D) [Integration and Scope Management] ● Dorale Products (E) [Integration and Scope Management] ● Dorale Products (F) [Integration and Scope Management]

104 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

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The following multiple-choice questions will be helpful in reviewing the principles of this chapter:

1. A structured process for managing a multitude of projects is most commonly referred to as: A. Project management policies B. Project management guidelines C. Industrywide templates D. A project management methodology

2. The most common terminology for a reusable project management methodology is: A. Template B. Concurrent scheduling technique C. Concurrent planning technique D. Skeleton framework document

3. The major behavioral issue in getting an organization to accept and use a project management methodology effectively is: A. Lack of executive sponsorship B. Multiple boss reporting C. Inadequate policies and procedures D. Limited project management applications

4. The major difference between a project and a program is usually: A. The role of the sponsor B. The role of the line manager C. The timeframe D. The specifications

5. Projects that remain almost entirely within one functional area are best managed by the: A. Project manager B. Project sponsor C. Functional manager D. Assigned functional employees

6. Large projects are managed by: A. The executive sponsor B. The project or program office for that project C. The manager of project managers D. The director of marketing

7. The most common threshold limits on when to use the project management methodology are: A. The importance of the customer and potential profitability B. The size of the project (i.e., $) and duration C. The reporting requirements and position of the sponsor D. The desires of management and functional boundaries crossed

8. A grouping of projects is called a: A. Program B. Project template C. Business template D. Business plan

Studying Tips for the PMI® Project Management Certification Exam 105

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9. Project management methodologies often work best if they are structured around: A. Rigid policies B. Rigid procedures C. Minimal forms and checklists D. Life-cycle phases

10. One way to validate the successful implementation of project management is by looking at the number and magnitude of the conflicts requiring: A. Executive involvement B. Customer involvement C. Line management involvement D. Project manager involvement

11. Standardization and control are benefits usually attributed to: A. Laissez-faire management B. Project management on R&D efforts C. Use of life cycle-phases D. An organization with weak executive sponsorship

12. The most difficult decision for an executive sponsor to make at the end-of-phase review meeting is to: A. Allow the project to proceed to the next phase based upon the original objective B. Allow the project to proceed to the next phase based upon a revised objective C. Postpone making a decision until more information is processed D. Cancel the project

13. Having too many life-cycle phases may be detrimental because: A. Executive sponsors will micromanage. B. Executive sponsors will become “invisible.” C. The project manager will spend too much time planning for gate review meetings rather

than managing the phases. D. The project manager will need to develop many different plans for each phase.

14. A project is terminated early because the technology cannot be developed, and the resources are applied to another project that ends up being successful. Which of the following is true concerning the first project? A. The first project is regarded as a failure. B. The first project is a success if the termination is done early enough before additional

resources are squandered. C. The first project is a success if the project manager gets promoted. D. The first project is a failure if the project manager gets reassigned to a less important

project.

15. Which of the following would not be regarded as a secondary definition of project success? A. The customer is unhappy with the deliverable, but follow-on business is awarded based

on effective customer relations. B. The deliverables are met but OSHA and EPA laws are violated. C. The customer is displeased with the performance, but you have developed a new

technology that could generate many new products. D. The project’s costs were overrun by 40 percent, but the customer funds an enhancement

project.

106 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

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ANSWERS

1. D

2. A

3. B

4. C

5. C

6. B

7. B

8. A

9. D

10. A

11. C

12. D

13. C

14. B

15. B

PROBLEMS

2–1 Can the organizational chart of a company be considered as a systems model? If so, what kind of systems model?

2–2 Do you think that someone could be a good systems manager but a poor project manager? What about the reverse situation? State any assumptions that you may have to make.

2–3 Can we consider R&D as a system? If so, under what circumstances?

2–4 For each of the following projects, state whether we are discussing an open, closed, or extended system:

a. A high-technology project b. New product R&D c. An on-line computer system for a bank d. Construction of a chemical plant e. Developing an in-house cost accounting reporting system

2–5 Can an entire organization be considered as a model? If so, what type?

2–6 Systems can be defined as a combination or interrelationship of subsystems. Does a project have subsystems?

2–7 If a system can, in fact, be broken down into subsystems, what problems can occur during integration?

2–8 How could suboptimization occur during systems thinking and analysis?

Problems 107

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CREATING A METHODOLOGY1

John Compton, The president of the company, expressed his feelings quite bluntly at the executive staff meeting;

We are no longer competitive in the marketplace. Almost all of the Requests for Proposal (RFP) that we want to bid on have a requirement that we must identify in the proposal the project management methodology we will use on the contract should

2–9 Would a cost-benefit analysis be easier or harder to perform in a traditional or project management organizational structure?

2–10 What impact could the product life cycle have on the selection of the project organiza- tional structure?

2–11 In the development of a system, what criteria should be used to determine where one phase begins and another ends and where overlap can occur?

2–12 Consider the following expression: “Damn the torpedoes: full-speed ahead.” Is it possi- ble that this military philosophy can be applied to project management and lead to project success?

2–13 Can a company be successful at project management without having or using a project management methodology?

2–14 Who determines how many life-cycle phases should be part of a project management methodology?

2–15 As project management matures, would you expect the number of life-cycle phases to increase or decrease?

2–16 Some people believe that the greatest resistance to the changes needed for the imple- mentation of project management occurs at the executives levels. Why is that?

2–17 What would you consider to be possibly the most important factor in reducing the cost of implementing project management?

2–18 Under what conditions can a project be considered as both a success and a failure at the same time?

2–19 Is the goal of a paperless project management system easier to achieve with formal or informal project management?

2–20 Is it possible to attain an informal project management approach without first going through formalized project management?

108 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

CASE STUDY

Background

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Case Study 109

we be awarded the contract. We have no project management methodology. We have just a few templates we use based upon the PMBOK® Guide. All of our competitors have methodologies, but not us.

I have been asking for a methodology to be developed for more than a year now, and all I get are excuses. Some of you are obviously afraid that you might lose power and authority once the methodology is up and running. That may be true, but losing some power and authority is obviously better than losing your job. In six months I want to see a methodology in use on all projects or I will handle the situation myself. I simply cannot believe that my executive staff is afraid to develop a project manage- ment methodology.

The executive staff knew this day was inevitable; they had to take the ini- tiative in the implementation of a project management methodology. Last

year, a consultant was brought in to conduct a morning three-hour session on the benefits of project management and the value of an enterprise project management methodology (EPM). As part of the session, the consultant explained that the time needed to develop and implement an EPM system can be shortened if the company has a project management office (PMO) in place to take the lead role. The consultant also explained that whichever executive gets control of the PMO may become more powerful than other executives because he or she now controls all of the project management intellectual property. The executive staff fully understood the implication of this and therefore became reluctant to visibly support project management until they could see how their organization would be affected. In the meantime, project management suffered.

Reluctantly, a PMO was formed reporting to the chief information officer. The PMO was comprised of a handful of experienced project managers that could hopefully take the lead in the development of a methodology. The PMO concluded that there were five steps that had to be done initially. After the five steps were done, the executive committee would receive a final briefing on what had been accomplished. The final briefing would be in addition to the monthly updates and progress reports. The PMO believed that getting executive support and sign-offs in a timely manner would be difficult.

The first step that needed to be done was the establishment of the number of life-cycle phases. Some people interviewed wanted ten to twelve life-cycle phases. That meant that there would be ten to twelve gate review meetings and the project managers would spend a great deal of time preparing paperwork for the gate review meetings rather than managing the project. The decision was then made to have no more than six life-cycle phases.

The second step was to decide whether the methodology should be designed around rigid policies and procedures or go the more informal route of using forms, guidelines, checklists, and templates. The PMO felt that project managers needed some degree of freedom in dealing with clients and therefore the more informal approach would work best. Also, clients were asking to have the methodology designed around the client’s business needs and the more informal approach would provide the flexibility to do this.

The third step was to see what could be salvaged from the existing templates and check- lists. The company had a few templates and checklists but not all of the project managers used them. The decision was made to develop a standardized set of documents in accordance with the information in the PMBOK

® Guide. The project managers could then select whatever forms, guidelines, templates, and checklists were appropriate for a particular project and client.

The fourth step would be to develop a means for capturing best practices using the EPM system. Clients were now requiring in their RFP that best practices on a project must be

Critical Issues

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captured and shared with the client prior to the closeout of the project. Most of the people in the PMO believed that this could be done using forms or checklists at the final project debrief- ing meeting.

The fifth step involved education and training. The project managers and functional organizations that would staff the projects would need to be trained in the use of the new methodology. The PMO believed that a one-day training program would suffice and the functional organizations could easily release their people for a one-day training session.

QUESTIONS

1. What can you determine about the corporate culture from the fact that they waited this long to consider the development of an EPM system?

2. Can a PMO accelerate the implementation process? 3. Is it acceptable for the PMO to report to the chief information officer or to someone

else? 4. Why is it best to have six or less life-cycle phases in an EPM system? 5. Is it best to design an EPM system around flexible or inflexible elements? Generally,

when first developing an EPM system, do companies prefer to use formality or informality in the design?

6. Should an EPM system have the capability of capturing best practices?

110 PROJECT MANAGEMENT GROWTH: CONCEPTS AND DEFINITIONS

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4th Edition) Study Guide, 11th Edition) Certification Exam

• Quasar • The Struggle with • Human Resource Communications, Inc. Implementation Management

• Jones and Shephard • Multiple Choice Exam Accountants, Inc.*

• Fargo Foods • Mohawk National Bank • Coronado Communications,

Inc.*

3.0 INTRODUCTION

During the past thirty years there has been a so-called hidden revolu- tion in the introduction and development of new organizational struc- tures. Management has come to realize that organizations must be dynamic in nature; that is, they must be capable of rapid restructuring

Organizational Structures

111

* Case Study also appears at end of chapter.

PMBOK® Guide, 5th Edition 2.1.3 Organizational Structure

Chapter 9 Human Resource

Management

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should environmental conditions so dictate. These environmental factors evolved from the increasing competitiveness of the market, changes in technology, and a requirement for better control of resources for multiproduct firms.

Much has been written about how to identify and interpret those signs that indicate that a new organi- zational form may be necessary. According to Grinnell and Apple, there are five general indications that the traditional structure may not be adequate for managing projects1:

● Management is satisfied with its technical skills, but projects are not meeting time, cost, and other project requirements.

● There is a high commitment to getting project work done, but great fluctuations in how well per- formance specifications are met.

● Highly talented specialists involved in the project feel exploited and misused. ● Particular technical groups or individuals constantly blame each other for failure to meet specifi-

cations or delivery dates. ● Projects are on time and to specifications, but groups and individuals aren’t satisfied with the

achievement.

Unfortunately, many companies do not realize the necessity for organizational change until it is too late. Management looks externally (i.e., to the environment) rather than internally for solutions to problems. A typical example would be that new product costs are rising while the product life cycle may be decreas- ing. Should emphasis be placed on lowering costs or developing new products?

If we assume that an organizational system is composed of both human and nonhuman resources, then we must analyze the sociotechnical subsystem whenever organizational changes are being considered. The social system is represented by the organization’s personnel and their group behavior. The technical sys- tem includes the technology, materials, and machines necessary to perform the required tasks.

Behavioralists contend that there is no one best structure to meet the challenges of tomorrow’s orga- nizations. The structure used, however, must be one that optimizes company performance by achieving a balance between the social and the technical requirements.

Organizations can be defined as groups of people who must coordinate their activities in order to meet organizational objectives. The coordination function requires strong communications and a clear understanding of the relationships and interdependencies among people. Organizational structures are dictated by such factors as technology and its rate of change, complexity, resource availability, products and/or services, competition, and decision-making requirements. The reader must keep in mind that there is no such thing as a good or bad organizational structure; there are only appropriate or inappropriate ones.

Even the simplest type of organizational change can induce major conflicts. The creation of a new position, the need for better planning, the lengthening or shortening of the span of control, the need for additional technology (knowledge), and centralization or decentralization can result in major changes in the sociotechnical subsystem.

112 ORGANIZATIONAL STRUCTURES

1. S. K. Grinnell and H. P. Apple, “When Two Bosses Are Better Than One,” Machine Design, January 1975, pp. 84–87.

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Organizational restructuring is a compromise between the traditional (classical) and the behavioral schools of thought; management must consider the needs of individuals as well as the needs of the com- pany. Is the organization structured to manage people or to manage work?

There is a wide variety of organizational forms for restructuring management. The exact method depends on the people in the organization, the company’s product lines, and management’s philosophy. A poorly restructured organization can sever communication channels that may have taken months or years to cultivate; cause a restructuring of the informal organization, thus creating new power, status, and polit- ical positions; and eliminate job satisfaction and motivational factors to such a degree that complete discontent results.

If the company’s position is very sensitive to the environment, then management may be most concerned with the control task. For an organization with multiple products, each requiring a high degree of engineering and technology, the integration task can become primary. Finally, for situations with strong labor unions and repetitive tasks, external relations can predominate, especially in strong technological and scientific environ- ments where strict government regulations must be adhered to.

In the sections that follow, a variety of organizational forms will be presented. Obviously, it is an impossible task to describe all possible organizational structures. Each form describes how the project man- agement organization evolved from the classical theories of management. Advantages and disadvantages are listed for technology and social systems.

The answers to these questions are not easy. For the most part, they are a matter of the judgment exer- cised by organizational and behavioral managers.

3.1 ORGANIZATIONAL WORK FLOW

Organizations are continually restructured to meet the demands imposed by the environ- ment. Restructuring can change the role of individuals in the formal and the informal orga- nization. Many researchers believe that the greatest usefulness of behavioralists lies in their ability to help the informal organization adapt to changes and resolve the resulting conflicts. Unfortunately, behavioralists cannot be totally effective unless they have input into the formal organization as well. Whatever organizational form is finally selected, for- mal channels must be developed so that each individual has a clear description of the authority, responsibility, and accountability necessary for the work to proceed.

In the discussion of organizational structures, the following definitions will be used:

● Authority is the power granted to individuals (possibly by their position) so that they can make final decisions.

● Responsibility is the obligation incurred by individuals in their roles in the formal organization to effectively perform assignments.

● Accountability is being answerable for the satisfactory completion of a specific assignment. (Accountability 5 authority 1 responsibility.)

Authority and responsibility can be delegated to lower levels in the organization, whereas

accountability usually rests with the individual. Yet many executives refuse to delegate and

argue that an individual can have total accountability just through responsibility.

Organizational Work Flow 113

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Even with these clearly definable divisions of authority, responsibility, and account-

ability, establishing good relationships between project and functional managers can take

a great deal of time, especially during the conversion from a traditional to a project orga-

nizational form. Trust is the key to success here. The normal progression in the growth of

trust is as follows:

● Even though a problem exists, both the project and functional managers deny that

any problem exists. ● When the problem finally surfaces, each manager blames the other. ● As trust develops, both managers readily admit responsibility for the problems. ● The project and functional managers meet face-to-face to work out the problem. ● The project and functional managers begin to formally and informally anticipate

problems.

For each of the organizational structures described in the following sections, advan-

tages and disadvantages are listed. Many of the disadvantages stem from possible conflicts

arising from problems in authority, responsibility, and accountability.

3.2 TRADITIONAL (CLASSICAL) ORGANIZATION

The traditional management structure has survived for more than two centuries. However,

recent business developments, such as the rapid rate of change in technology and increased

stockholder demands, have created strains on existing organizational forms. Fifty years

ago companies could survive with only one or two product lines. The classical manage-

ment organization, as shown in Figure 3–1, was satisfactory for control, and conflicts were

minimal.2

However, with the passing of time, companies found that survival depended on mul-

tiple product lines (i.e., diversification) and vigorous integration of technology into the

existing organization. As organizations grew and matured, managers found that company

activities were not being integrated effectively, and that new conflicts were arising in the

well-established formal and informal channels. Managers began searching for more inno-

vative organizational forms that would alleviate these problems. Before a valid comparison can be made with the newer forms, the advantages and

disadvantages of the traditional structure must be shown. Table 3–1 lists the advantages of the traditional organization. As seen in Figure 3–1, the general manager has all of the functional entities necessary to perform R&D or develop and manufacture a product. All activities are performed within the functional groups and are headed by a department

114 ORGANIZATIONAL STRUCTURES

2. Many authors refer to classical organizations as pure functional organizations. This can be seen from Figure 3–1. Also note that the department level is below the division level. In some organizations these titles are reversed.

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Traditional (Classical) Organization 115

(or, in some cases, a division) head. Each department maintains a strong concentration of technical expertise. Since all projects must flow through the functional departments, each project can benefit from the most advanced technology, thus making this organizational form well suited to mass production. Functional managers can hire a wide variety of spe- cialists and provide them with easily definable paths for career progression.

The functional managers maintain absolute control over the budget. They establish their own budgets, on approval from above, and specify requirements for additional personnel. Because the functional manager has manpower flexibility and a broad base from which to work, most projects are normally completed within cost.

EXECUTIVE OFFICE

DIVISION

DEPARTMENT

SECTION

FUNCTIONAL RESPONSIBILITY

ENGINEERING OPERATIONS FINANCIAL ADMIN-

ISTRATION MARKETING

FIGURE 3–1. The traditional management structure.

TABLE 3–1. ADVANTAGES OF THE TRADITIONAL (CLASSICAL) ORGANIZATION

• Easier budgeting and cost control are possible. • Better technical control is possible.

• Specialists can be grouped to share knowledge and responsibility. • Personnel can be used on many different projects. • All projects will benefit from the most advanced technology (better utilization of scarce personnel).

• Flexibility in the use of manpower. • A broad manpower base to work with. • Continuity in the functional disciplines; policies, procedures, and lines of responsibility are easily defined

and understandable.

• Admits mass production activities within established specifications. • Good control over personnel, since each employee has one and only one person to report to. • Communication channels are vertical and well established. • Quick reaction capability exists, but may be dependent upon the priorities of the functional managers.

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Both the formal and informal organizations are well established, and levels of authority and responsibility are clearly defined. Because each person reports to only one individual, communication channels are well structured. If a structure has this many advantages, then why are we looking for other structures?

For each advantage, there is almost always a corresponding disadvantage (see Table 3–2). The majority of these disadvantages are related to the absence of a strong central authority or individual responsible for the total project. As a result, integration of activities that cross functional lines becomes difficult, and top-level executives must get involved with the daily routine. Conflicts occur as each functional group struggles for power. Ideas may remain functionally oriented with very little regard for ongoing projects, and the deci- sion-making process will be slow and tedious.

Because there is no customer focal point, all communications must be channeled through upper-level management. Upper-level managers then act in a customer-relations capacity and refer all complex problems down through the vertical chain of command to the functional managers. The response to the customer’s needs therefore becomes a slow and aggravating process.

Projects have a tendency to fall behind schedule in the classical organizational struc- ture. Incredibly large lead times are required. Functional managers attend to those tasks that provide better benefits to themselves and their subordinates first.

With the growth of project management in the late 1960s, executives began to realize that many of the problems were the result of weaknesses in the traditional structure. William Goggin identified the problems that faced Dow Corning3:

Although Dow Corning was a healthy corporation in 1967, it showed difficulties that trou-

bled many of us in top management. These symptoms were, and still are, common ones in

116 ORGANIZATIONAL STRUCTURES

TABLE 3–2. DISADVANTAGES OF THE TRADITIONAL (CLASSICAL) ORGANIZATION

• No one individual is directly responsible for the total project (i.e., no formal authority; committee solutions).

• Does not provide the project-oriented emphasis necessary to accomplish the project tasks. • Coordination becomes complex, and additional lead time is required for approval of decisions. • Decisions normally favor the strongest functional groups. • No customer focal point. • Response to customer needs is slow. • Difficulty in pinpointing responsibility; this is the result of little or no direct project reporting, very little

project-oriented planning, and no project authority.

• Motivation and innovation are decreased. • Ideas tend to be functionally oriented with little regard for ongoing projects.

3. Reprinted by permission of Harvard Business Review. From William C. Goggin, “How the Multidimensional Structure Works at Dow Corning,” Harvard Business Review, January–February 1974, p. 54. Copyright © 1973 by the Harvard Business School Publishing Corporation; all rights reserved.

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Developing Work Integration Positions 117

U.S. business and have been described countless times in reports, audits, articles and

speeches. Our symptoms took such form as:

● Executives did not have adequate financial information and control of their operations.

Marketing managers, for example, did not know how much it cost to produce a prod-

uct. Prices and margins were set by division managers. ● Cumbersome communications channels existed between key functions, especially

manufacturing and marketing. ● In the face of stiffening competition, the corporation remained too internalized in its

thinking and organizational structure. It was insufficiently oriented to the outside

world. ● Lack of communications between divisions not only created the antithesis of a corpo-

rate team effort but also was wasteful of a precious resource—people. ● Long-range corporate planning was sporadic and superficial; this was leading to over-

staffing, duplicated effort and inefficiency.

3.3 DEVELOPING WORK INTEGRATION POSITIONS

As companies grew in size, more emphasis was placed on multiple ongoing programs with high-technology requirements. Organizational pitfalls soon appeared, especially in the integration of the flow of work. As management discovered that the critical point in any program is the interface between functional units, the new theories of “interface manage- ment” developed.

Because of the interfacing problems, management began searching for innovative methods to coordinate the flow of work between functional units without modification to the existing organizational structure. This coordination was achieved through several inte- grating mechanisms4:

● Rules and procedures ● Planning processes ● Hierarchical referral ● Direct contact

By specifying and documenting management policies and procedures, management attempted to eliminate conflicts between functional departments. Management felt that, even though many of the projects were different, the actions required by the functional per- sonnel were repetitive and predictable. The behavior of the individuals should therefore be easily integrated into the flow of work with minimum communication between individuals or functional groups.

4. Jay R. Galbraith, “Matrix Organization Designs.” Reprinted with permission from Business Horizons, February 1971, pp. 29–40. Copyright © 1971 by the Board of Trustees at Indiana University. Galbraith defines a fifth mechanism, liaison departments, that will be discussed later in this section.

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Another means of reducing conflicts and minimizing the need for communication was detailed planning. Functional representation would be present at all planning, scheduling, and budget meetings. This method worked best for nonrepetitive tasks and projects.

In the traditional organization, one of the most important responsibilities of upper- level management was the resolution of conflicts through “hierarchical referral.” The con- tinuous conflicts and struggle for power between the functional units consistently required that upper-level personnel resolve those problems resulting from situations that were either nonroutine or unpredictable and for which no policies or procedures existed.

The fourth method is direct contact and interactions by the functional managers. The rules and procedures, as well as the planning process method, were designed to minimize ongoing communications between functional groups. The quantity of conflicts that execu- tives had to resolve forced key personnel to spend a great percentage of their time as arbi- trators, rather than as managers. To alleviate problems of hierarchical referral, upper-level management requested that all conflicts be resolved at the lowest possible levels. This required that functional managers meet face-to-face to resolve conflicts.

In many organizations, these new methods proved ineffective, primarily because there still existed a need for a focal point for the project to ensure that all activities would be properly integrated.

When the need for project managers was acknowledged, the next logical question was where in the organization to place them. Executives preferred to keep project managers low in the organization. After all, if they reported to someone high up, they would have to be paid more and would pose a continuous threat to management.

The first attempt to resolve this problem was to develop project leaders or coordina- tors within each functional department, as shown in Figure 3–2. Section-level personnel were temporarily assigned as project leaders and would return to their former positions at project termination. This is why the term “project leader” is used rather than “project man- ager,” as the word “manager” implies a permanent relationship. This arrangement proved effective for coordinating and integrating work within one department, provided that the correct project leader was selected. Some employees considered this position an increase in power and status, and conflicts occurred about whether assignments should be based on experience, seniority, or capability. Furthermore, the project leaders had almost no author- ity, and section-level managers refused to take directions from them, fearing that the project leaders might be next in line for the department manager’s position.

When the activities required efforts that crossed more than one functional boundary, con- flicts arose. The project leader in one department did not have the authority to coordinate activ- ities in any other department. Furthermore, the creation of this new position caused internal conflicts within each department. As a result, many employees refused to become dedicated to project management and were anxious to return to their “secure” jobs. Quite often, especially when cross-functional integration was required, the division manager was forced to act as the project manager. If the employee enjoyed the assignment of project leader, he would try to “stretch out” the project as long as possible.

Even though we have criticized this organizational form, it does not mean that it can- not work. Any organizational form will work if the employees want it to work. As an example, a computer manufacturer has a midwestern division with three departments, as in Figure 3–2, and approximately fourteen people per department. When a project comes

118 ORGANIZATIONAL STRUCTURES

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Developing Work Integration Positions 119

in, the division manager determines which department will handle most of the work. Let us say that the work load is 60 percent department X, 30 percent department Y, and 10 per- cent department Z. Since most of the effort is in department X, the project leader is selected from that department. When the project leader goes into the other two depart- ments to get resources, he will almost always get the resources he wants. This organiza- tional form works in this case because:

● The other department managers know that they may have to supply the project leader on the next activity.

● There are only three functional boundaries or departments involved (i.e., a small organization).

The next step in the evolution of project management was the task force concept. The rationale behind the task force concept was that integration could be achieved if each func- tional unit placed a representative on the task force. The group could then jointly solve problems as they occurred, provided that budget limitations were still adhered to. Theoretically, decisions could now be made at the lowest possible levels, thus expediting information and reducing, or even eliminating, delay time.

The task force was composed of both part-time and full-time personnel from each department involved. Daily meetings were held to review activities and discuss potential problems. Functional managers soon found that their task force employees were spending

DIVISION MANAGER

DEPARTMENT X DEPARTMENT Y DEPARTMENT Z

PROJECT LEADERS PROJECT LEADERS PROJECT LEADERS

SECTION LEVEL SECTION LEVEL SECTION LEVEL

FIGURE 3–2. Departmental project management.

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more time in unproductive meetings than in performing functional activities. In addition, the nature of the task force position caused many individuals to shift membership within the informal organization. Many functional managers then placed nonqualified and inexperi- enced individuals on task forces. The result was that the group soon became ineffective because they either did not have the information necessary to make the decisions, or lacked the authority (delegated by the functional managers) to allocate resources and assign work.

Development of the task force concept was a giant step toward conflict resolution: Work was being accomplished on time, schedules were being maintained, and costs were usually within budget. But integration and coordination were still problems because there were no specified authority relationships or individuals to oversee the entire project through completion. Attempts were made to overcome this by placing various people in charge of the task force: Functional managers, division heads, and even upper-level man- agement had opportunities to direct task forces. However, without formal project author- ity relationships, task force members remained loyal to their functional organizations, and when conflicts came about between the project and functional organization, the project always suffered.

Although the task force concept was a step in the right direction, the disadvantages strongly outweighed the advantages. A strength of the approach was that it could be estab- lished very rapidly and with very little paperwork. Integration, however, was complicated; work flow was difficult to control; and functional support was difficult to obtain because it was almost always strictly controlled by the functional manager. In addition, task forces were found to be grossly ineffective on long-range projects.

The next step in the evolution of work integration was the establishment of liaison departments, particularly in engineering divisions that perform multiple projects involving a high level of technology (see Figure 3–3). The purpose of the liaison department was to

120 ORGANIZATIONAL STRUCTURES

LIAISON DEPT ELECTRONICS THERMODYNAMICS STRUCTURES R&D

LEGEND

FORMAL AUTHORITY FLOW

INFORMAL/REPORTING AUTHORITY FLOW

ENGINEERING DIVISION

FIGURE 3–3. Engineering division with liaison department (The Expeditor).

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Line-staff Organization (Project Coordinator) 121

handle transactions between functional units within the (engineering) division. The liaison personnel received their authority through the division head. The liaison department did not actually resolve conflicts. Their prime function was to assure that all departments worked toward the same requirements and goals. Liaison departments are still in existence in many large companies and typically handle engineering changes and design problems.

Unfortunately, the liaison department is simply a scaleup of the project coordinator within the department. The authority given to the liaison department extends only to the outer boundaries of the division. If a conflict arose between the manufacturing and engi- neering divisions, for example, it would still be referred to upper management for resolu- tion. Today, liaison departments are synonymous with project engineering and systems engineering departments, and the individuals in these departments have the authority to span the entire organization.

3.4 LINE–STAFF ORGANIZATION (PROJECT COORDINATOR)

It soon became obvious that control of a project must be given to personnel whose first loyalty is directed toward the completion of the project. Thus the project management position must not be controlled by the functional managers. Figure 3–4 shows a typical line–staff organization.

Two possible situations can exist with this form of line–staff project control. In the first, the project manager serves only as the focal point for activity control, that is, a cen- ter for information. The prime responsibility of the project manager is to keep the division manager informed of the status of the project and to “harass” or attempt to “influence” managers into completing activities on time. Referring to such early project managers, Galbraith stated, “Since these men had no formal authority, they had to resort to their tech- nical competence and their interpersonal skills in order to be effective.”5

The project manager in the first situation maintained monitoring authority only, despite the fact that both he and the functional manager reported to the same individual. Both work assignments and merit reviews were made by the functional managers. Department managers refused to take direction from the project managers because to do so would seem an admis- sion that the project manager was next in line to be the division manager.

The amount of authority given to the project manager posed serious problems. Almost all upper-level and division managers were from the classical management schools and therefore maintained serious reservations about how much authority to relinquish. Many of these managers considered it a demotion if they had to give up any of their long- established powers.

In the second situation, the project manager is given more authority; using the author- ity vested in him by the division manager, he can assign work to individuals in the func- tional organizations. The functional manager, however, still maintains the authority to

5. Jay R. Galbraith, “Matrix Organization Designs.” Business Horizons, February 1971, pp. 29–40.

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perform merit reviews, but cannot enforce both professional and organizational standards in the completion of an activity. The individual performing the work is now caught in a web of authority relationships, and additional conflicts develop because functional man- agers are forced to share their authority with the project manager.

Although this second situation did occur during the early stages of matrix project management, it did not last because:

● Upper-level management was not ready to cope with the problems arising from shared authority.

● Upper-level management was reluctant to relinquish any of its power and author- ity to project managers.

● Line–staff project managers who reported to a division head did not have any authority or control over those portions of a project in other divisions; that is, the project manager in the engineering division could not direct activities in the man- ufacturing division.

3.5 PURE PRODUCT (PROJECTIZED) ORGANIZATION

The pure product organization, as shown in Figure 3–5, develops as a division within a division. As long as there exists a continuous flow of projects, work is stable and conflicts are at a minimum. The major advantage of this organizational flow is that one individual, the program manager, maintains complete line authority over the entire project. Not only does he assign work, but he also conducts merit reviews. Because each individual reports

122 ORGANIZATIONAL STRUCTURES

LEGEND

FORMAL AUTHORITY

FORMAL OR INFORMAL AUTHORITY OR INFORMATION FLOW

DIVISION MANAGER

PROJECT MANAGER

DEPARTMENT MANAGER

FIGURE 3–4. Line–staff organization (Project Coordinator).

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Pure Product (Projectized) Organization 123

to only one person, strong communication channels develop that result in a very rapid reaction time.

In pure product organizations, long lead times became a thing of the past. Trade-off studies could be conducted as fast as time would permit without the need to look at the impact on other projects (unless, of course, identical facilities or equipment were required). Functional managers were able to maintain qualified staffs for new product development without sharing personnel with other programs and projects.

The responsibilities attributed to the project manager were entirely new. First, his authority was now granted by the vice president and general manager. The program man- ager handled all conflicts, both those within his organization and those involving other pro- jects. Interface management was conducted at the program manager level. Upper-level management was now able to spend more time on executive decision-making than on con- flict arbitration.

The major disadvantage with the pure project form is the cost of maintaining the orga- nization. There is no chance for sharing an individual with another project in order to reduce costs. Personnel are usually attached to these projects long after they are needed because once an employee is given up, the project manager might not be able to get him back. Motivating personnel becomes a problem. At project completion, functional person- nel do not “have a home” to return to. Many organizations place these individuals into an overhead labor pool from which selection can be made during new project development. People remaining in the labor pool may be laid off. As each project comes to a close,

GENERAL MANAGER

PRODUCT A MANAGER

ENG. MANU. ENG. MANU. ENG. MANU.

PRODUCT B MANAGER

PRODUCT C MANAGER

FIGURE 3–5. Pure product or projectized structure.

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people become uneasy and often strive to prove their worth to the company by over- achieving, a condition that is only temporary. It is very difficult for management to con- vince key functional personnel that they do, in fact, have career opportunities in this type of organization.

In pure functional (traditional) structures, technologies are well developed, but pro- ject schedules often fall behind. In the pure project structure, the fast reaction time keeps activities on schedule, but technology suffers because without strong functional groups, which maintain interactive technical communication, the company’s outlook for meeting the competition may be severely hampered. The engineering department for one project might not communicate with its counterpart on other projects, resulting in duplication of efforts.

The last major disadvantage of this organizational form lies in the control of facilities and equipment. The most frequent conflict occurs when two projects require use of the same piece of equipment or facilities at the same time. Upper-level management must then assign priorities to these projects. This is normally accomplished by defining certain projects as strategic, tactical, or operational—the same definitions usually given to plans.

Tables 3–3 and 3–4 summarize the advantages and disadvantages of this organiza- tional form.

124 ORGANIZATIONAL STRUCTURES

TABLE 3–3. ADVANTAGES OF THE PRODUCT ORGANIZATIONAL FORM

• Provides complete line authority over the project (i.e., strong control through a single project authority). • Participants work directly for the project manager. Unprofitable product lines are easily identified and can

be eliminated.

• Strong communications channels. • Staffs can maintain expertise on a given project without sharing key personnel. • Very rapid reaction time is provided. • Personnel demonstrate loyalty to the project; better morale with product identification. • A focal point develops for out-of-company customer relations. • Flexibility in determining time (schedule), cost, and performance trade-offs. • Interface management becomes easier as unit size is decreased. • Upper-level management maintains more free time for executive decision-making.

TABLE 3–4. DISADVANTAGES OF THE PRODUCT ORGANIZATIONAL FORM

• Cost of maintaining this form in a multiproduct company would be prohibitive due to duplication of effort, facilities, and personnel; inefficient usage.

• A tendency to retain personnel on a project long after they are needed. Upper-level management must balance workloads as projects start up and are phased out.

• Technology suffers because, without strong functional groups, outlook of the future to improve company’s capabilities for new programs would be hampered (i.e., no perpetuation of technology).

• Control of functional (i.e., organizational) specialists requires top-level coordination. • Lack of opportunities for technical interchange between projects. • Lack of career continuity and opportunities for project personnel.

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Matrix Organizational Form 125

3.6 MATRIX ORGANIZATIONAL FORM

The matrix organizational form is an attempt to combine the advantages of the pure functional structure and the product organizational structure. This form is ideally suited for companies, such as construction, that are “project-driven.” Figure 3–6 shows a typical matrix structure. Each proj-

ect manager reports directly to the vice president and general manager. Since each project represents a potential profit center, the power and authority used by the project manager come directly from the general manager. The project manager has total responsibility and accountability for project success. The functional departments, on the other hand, have functional responsibility to maintain technical excellence on the project. Each functional unit is headed by a department manager whose prime responsibility is to ensure that a uni- fied technical base is maintained and that all available information can be exchanged for each project. Department managers must also keep their people aware of the latest techni- cal accomplishments in the industry.

Project management is a “coordinative” function, whereas matrix management is a col- laborative function division of project management. In the coordinative or project organization, work is generally assigned to specific people or units who “do their own thing.” In the collab- orative or matrix organization, information sharing may be mandatory, and several people may be required for the same piece of work. In a project organization, authority for decision- making and direction rests with the project leader, whereas in a matrix it rests with the team.

Certain ground rules exist for matrix development:

● Participants must spend full time on the project; this ensures a degree of loyalty. ● Horizontal as well as vertical channels must exist for making commitments. ● There must be quick and effective methods for conflict resolution.

GENERAL MANAGER

ENGINEERING OPERATIONS FINANCIAL OTHERS

PROJECT MGR. X

PROJECT MGR. Y

PROJECT MGR. Z

PROJECT RESPONSIBILITY

F U

N C

T IO

N A

L R

E S

P O

N S

IB IL

IT Y

FIGURE 3–6. Typical matrix structure.

PMBOK® Guide, 5th Edition Matrix Organizational Structures

Figures 2–3, 2–4, 2–5

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● There must be good communication channels and free access between managers. ● All managers must have input into the planning process. ● Both horizontally and vertically oriented managers must be willing to negotiate for

resources. ● The horizontal line must be permitted to operate as a separate entity except for

administrative purposes.

Before describing the advantages and disadvantages of this structure, the organization concepts must be introduced. The basis for the matrix approach is an attempt to create syn- ergism through shared responsibility between project and functional management. Yet this is easier said than done. No two working environments are the same, and, therefore, no two companies will have the same matrix design. The following questions must be answered before a matrix structure can be successful:

● If each functional unit is responsible for one aspect of a project, and other parts are conducted elsewhere (possibly subcontracted to other companies), how can a syn- ergistic environment be created?

● Who decides which element of a project is most important? ● How can a functional unit (operating in a vertical structure) answer questions and

achieve project goals and objectives that are compatible with other projects?

The answers to these questions depend on mutual understanding between the project and functional managers. Since both individuals maintain some degree of authority, responsibility, and accountability on each project, they must continuously negotiate. Unfortunately, the program manager might only consider what is best for his project (dis- regarding all others), whereas the functional manager might consider his organization more important than each project.

In order to get the job done, project managers need organizational status and authority. A corporate executive contends that the organization chart shown in Figure 3–6 can be modi- fied to show that the project managers have adequate organizational authority by placing the department manager boxes at the tip of the functional responsibility arrowheads. With this approach, the project managers appear to be higher in the organization than their departmental counterparts but are actually equal in status. Executives who prefer this method must exercise caution because the line and project managers may not feel that there is still a balance of power.

Problem-solving in this environment is fragmented and diffused. The project manager acts as a unifying agent for project control of resources and technology. He must maintain open channels of communication to prevent suboptimization of individual projects.

In many situations, functional managers have the power to make a project manager look good, if they can be motivated to think about what is best for the project. Unfortunately, this is not always accomplished. As stated by Mantell6:

There exists an inevitable tendency for hierarchically arrayed units to seek solutions and

to identify problems in terms of scope of duties of particular units rather than looking

126 ORGANIZATIONAL STRUCTURES

6. Leroy H. Mantell, “The Systems Approach and Good Management.” Reprinted with permission from Business Horizons, October 1972 (p. 50). Copyright © 1972 by the Board of Trustees at Indiana University.

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Matrix Organizational Form 127

beyond them. This phenomenon exists without regard for the competence of the executive

concerned. It comes about because of authority delegation and functionalism.

The project environment and functional environment cannot be separated; they must interact. The location of the project and functional unit interface is the focal point for all activities.

The functional manager controls departmental resources (i.e., people). This poses a problem because, although the project manager maintains the maximum control (through the line managers) over all resources including cost and personnel, the functional manager must provide staff for the project’s requirements. It is therefore inevitable that conflicts occur between functional and project managers7:

These conflicts revolve about items such as project priority, manpower costs, and the assign-

ment of functional personnel to the project manager. Each project manager will, of course,

want the best functional operators assigned to his program. In addition to these problems, the

accountability for profit and loss is much more difficult in a matrix organization than in a

project organization. Project managers have a tendency to blame overruns on functional man-

agers, stating that the cost of the function was excessive. Whereas functional managers have

a tendency to blame excessive costs on project managers with the argument that there were

too many changes, more work required than defined initially and other such arguments.

The individual placed at the interface position has two bosses: He must take direction from both the project manager and the functional manager. The merit review and hiring and firing responsibilities still rest with the department manager. Merit reviews are normally made by the functional manager after discussions with the program manager. The func- tional manager may not have the time to measure the progress of this individual continu- ously. He must rely on the word of the program manager for merit review and promotion. The interface members generally give loyalty to the person signing their merit review. This poses a problem, especially if conflicting orders are given by the functional and project managers. The simplest solution is for the individual at the interface to ask the functional and project managers to communicate with each other to resolve the problem. This type of situation poses a problem for project managers:

● How does a project manager motivate an individual working on a project (either part-time or full-time) so that his loyalties are with the project?

● How does a project manager convince an individual to perform work according to project direction and specifications when these requests may be in conflict with department policy, especially if the individual feels that his functional boss may not regard him favorably?

There are many advantages to matrix structures, as shown in Table 3–5. Functional units exist primarily to support a project. Because of this, key people can be shared and

7. William P. Killian, “Project Management—Future Organizational Concepts,” Marquette Business Review, Vol. 2, 1971, pp. 90–107.

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costs can be minimized. People can be assigned to a variety of challenging problems. Each person, therefore, has a “home” after project completion and a career path. People in these organizations are especially responsive to motivation and end-item identification. Functional managers find it easy to develop and maintain a strong technical base and can, therefore, spend more time on complex problem-solving. Knowledge can be shared for all projects.

The matrix structure can provide a rapid response to changes, conflicts, and other project needs. Conflicts are normally minimal, but those requiring resolution are easily resolved using hierarchical referral.

This rapid response is a result of the project manager’s authority to commit company resources, provided that scheduling conflicts with other projects can be eliminated. Furthermore, the project manager has the authority independently to establish his own project policies and procedures, provided that they do not conflict with company poli- cies. This can do away with red tape and permit a better balance among time, cost, and performance.

The matrix structure provides us with the best of two worlds: the traditional structure and the matrix structure. The advantages of the matrix structure eliminate almost all of the disadvantages of the traditional structure. The word “matrix” often brings fear to the hearts of executives because it implies radical change, or at least they think that it does. If we take a close look at Figure 3–6, we can see that the traditional structure is still there. The matrix is simply horizontal lines superimposed over the traditional structure. The horizontal lines will come and go as projects start up and terminate, but the traditional structure will remain.

Matrix structures are not without their disadvantages, as shown in Table 3–6. The first three elements are due to the horizontal and vertical work flow requirements of a matrix. Actually the flow may even be multidimensional if the project manager has to report to

128 ORGANIZATIONAL STRUCTURES

TABLE 3–5. ADVANTAGES OF A PURE MATRIX ORGANIZATIONAL FORM

• The project manager maintains maximum project control (through the line managers) over all resources, including cost and personnel.

• Policies and procedures can be set up independently for each project, provided that they do not contradict company policies and procedures.

• The project manager has the authority to commit company resources, provided that scheduling does not cause conflicts with other projects.

• Rapid responses are possible to changes, conflict resolution, and project needs (as technology or schedule). • The functional organizations exist primarily as support for the project. • Each person has a “home” after project completion. People are susceptible to motivation and end-item

identification. Each person can be shown a career path.

• Because key people can be shared, the program cost is minimized. People can work on a variety of problems; that is, better people control is possible.

• A strong technical base can be developed, and much more time can be devoted to complex problem- solving. Knowledge is available for all projects on an equal basis.

• Conflicts are minimal, and those requiring hierarchical referrals are more easily resolved. • There is a better balance among time, cost, and performance. • Rapid development of specialists and generalists occurs. • Authority and responsibility are shared. • Stress is distributed among the team (and the functional managers).

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Matrix Organizational Form 129

customers or corporate or other personnel in addition to his superior and the functional line managers.

Most companies believe that if they have enough resources to staff all of the projects that come along, then the company is “overstaffed.” As a result of this philosophy, priori- ties may change continuously, perhaps even daily. Management’s goals for a project may be drastically different from the project’s goals, especially if executive involvement is lacking during the definition of a project’s requirements in the planning phase. In a matrix, conflicts and their resolution may be a continuous process, especially if priorities change continuously. Regardless of how mature an organization becomes, there will always exist difficulty in monitoring and control because of the complex, multidirectional work flow. Another disadvantage of the matrix organization is that more administrative personnel are needed to develop policies and procedures, and therefore both direct and indirect adminis- trative costs will increase. In addition, it is impossible to manage projects with a matrix if there are steep horizontal or vertical pyramids for supervision and reporting, because each manager in the pyramid will want to reduce the authority of the managers operating within the matrix. Each project organization operates independently. Duplication of effort can easily occur; for example, two projects might be developing the same cost accounting pro- cedure, or functional personnel may be doing similar R&D efforts on different projects. Both vertical and horizontal communication is a must in a project matrix organization.

One of the advantages of the matrix is a rapid response time for problem resolution. This rapid response generally applies to slow-moving projects where problems occur within each functional unit. On fast-moving projects, the reaction time can become quite slow, especially if the problem spans more than one functional unit. This slow reaction

TABLE 3–6. DISADVANTAGES OF A PURE MATRIX ORGANIZATIONAL FORM

• Multidimensional information flow. • Multidimensional work flow. • Dual reporting. • Continuously changing priorities. • Management goals different from project goals. • Potential for continuous conflict and conflict resolution. • Difficulty in monitoring and control. • Company-wide, the organizational structure is not cost-effective because more people than necessary are

required, primarily administrative.

• Each project organization operates independently. Care must be taken that duplication of efforts does not occur.

• More effort and time are needed initially to define policies and procedures, compared to traditional form. • Functional managers may be biased according to their own set of priorities. • Balance of power between functional and project organizations must be watched. • Balance of time, cost, and performance must be monitored. • Although rapid response time is possible for individual problem resolution, the reaction time can become

quite slow.

• Employees and managers are more susceptible to role ambiguity than in traditional form. • Conflicts and their resolution may be a continuous process (possibly requiring support of an organizational

development specialist).

• People do not feel that they have any control over their own destiny when continuously reporting to multi- ple managers.

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time exists because the functional employees assigned to the project do not have the authority to make decisions, allocate functional resources, or change schedules. Only the line managers have this authority. Therefore, in times of crisis, functional managers must be actively brought into the “big picture” and invited to team meetings.

Middleton has listed four additional undesirable results of matrix organizations, results that can affect company capabilities8:

● Project priorities and competition for talent may interrupt the stability of the orga- nization and interfere with its long-range interests by upsetting the traditional busi- ness of functional organizations.

● Long-range plans may suffer as the company gets more involved in meeting sched- ules and fulfilling the requirements of temporary projects.

● Shifting people from project to project may disrupt the training of employees and specialists, thereby hindering the growth and development within their fields of specialization.

● Lessons learned on one project may not be communicated to other projects.

Davis and Lawrence have identified nine additional matrix pathologies9:

● Power struggles: The horizontal versus vertical hierarchy. ● Anarchy: Formation of organizational islands during periods of stress. ● Groupitis: Confusing the matrix as being synonymous with group decision making. ● Collapse during economic crunch: Flourishing during periods of growth and col-

lapsing during lean times. ● Excessive overhead: How much matrix supervision is actually necessary? ● Decision strangulation: Too many people involved in decision-making. ● Sinking: Pushing the matrix down into the depths of the organization. ● Layering: A matrix within a matrix. ● Navel gazing: Becoming overly involved in the internal relationships of the

organization.

The matrix structure therefore becomes a compromise in an attempt to obtain the best of two worlds. In pure product management, technology suffered because there wasn’t a single group for planning and integration. In the pure functional organization, time and schedule were sacrificed. Matrix project management is an attempt to obtain maximum technology and performance in a cost-effective manner and within time and schedule constraints.

We should note that with proper executive-level planning and control, all of the disadvan- tages can be eliminated. This is the only organizational form where such control is possible. But companies must resist creating more positions in executive management than are

130 ORGANIZATIONAL STRUCTURES

8. Reprinted by permission of Harvard Business Review. From C. J. Middleton, “How to Set Up a Project Organization,” Harvard Business Review, March–April 1967. Copyright © 1967 by the Harvard Business School Publishing Corporation; all rights reserved.

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Matrix Organizational Form 131

actually necessary as this will drive up overhead rates. However, there is a point where the matrix will become mature and fewer people will be required at the top levels of management.

Previously we identified the necessity for the project manager to be able to establish his own policies, procedures, rules, and guidelines. Obviously, with personnel reporting in two directions and to multiple managers, conflicts over administration can easily occur.

Most practitioners consider the matrix to be a two-dimensional system where each project represents a potential profit center and each functional department represents a cost center. (This interpretation can also create conflict because functional departments may feel that they no longer have an input into corporate profits.) For large corporations with multiple divisions, the matrix is no longer two-dimensional, but multidimensional.

William C. Goggin has described geographical area and space and time as the third and fourth dimensions of the Dow Corning matrix10:

Geographical areas . . . business development varied widely from area to area, and the profit-

center and cost-center dimensions could not be carried out everywhere in the same manner.

. . . Dow Corning area organizations are patterned after our major U.S. organizations.

Although somewhat autonomous in their operation, they subscribe to the overall corporate

objectives, operating guidelines, and planning criteria. During the annual planning cycle, for

example, there is a mutual exchange of sales, expense, and profit projections between the

functional and business managers headquartered in the United States and the area managers

around the world.

Space and time. . . . A fourth dimension of the organization denotes fluidity and move-

ment through time. . . . The multidimensional organization is far from rigid; it is constantly

changing. Unlike centralized or decentralized systems that are too often rooted deep in the

past, the multidimensional organization is geared toward the future: Long-term planning is

an inherent part of its operation.

Goggin then went on to describe the advantages that Dow Corning expected to gain from the multidimensional organization:

● Higher profit generation even in an industry (silicones) price-squeezed by compe- tition. (Much of our favorable profit picture seems due to a better overall under- standing and practice of expense controls through the company.)

● Increased competitive ability based on technological innovation and product qual- ity without a sacrifice in profitability.

● Sound, fast decision-making at all levels in the organization, facilitated by strati- fied but open channels of communications, and by a totally participative working environment.

● A healthy and effective balance of authority among the businesses, functions, and areas.

● Progress in developing short- and long-range planning with the support of all employees.

10. Reprinted by permission of Harvard Business Review. From William C. Goggin, “How the Multidimensional Structure Works at Dow Corning,” Harvard Business Review, January–February 1974, pp. 56–57. Copyright © 1973 by the Harvard Business School Publishing Corporation; all rights reserved.

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● Resource allocations that are proportional to expected results. ● More stimulating and effective on-the-job training. ● Accountability that is more closely related to responsibility and authority. ● Results that are visible and measurable. ● More top-management time for long-range planning and less need to become

involved in day-to-day operations.

Obviously, the matrix structure is the most complex of all organizational forms. Grinnell and Apple define four situations where it is most practical to consider a matrix11:

● When complex, short-run products are the organization’s primary output. ● When a complicated design calls for both innovation and timely completion. ● When several kinds of sophisticated skills are needed in designing, building, and

testing the products—skills then need constant updating and development. ● When a rapidly changing marketplace calls for significant changes in products,

perhaps between the time they are conceived and delivered.

Matrix implementation requires:

● Training in matrix operations ● Training in how to maintain open communications ● Training in problem solving ● Compatible reward systems ● Role definitions

3.7 MODIFICATION OF MATRIX STRUCTURES

The matrix can take many forms, but there are basically three common varieties. Each type represents a different degree of authority attributed to the program manager and indirectly identifies the relative size of the company. As an example, in the matrix of Figure 3–6, all program managers report directly to the general manager. This type of arrangement works best for small companies that have few projects and assumes that the general manager has sufficient time to coordinate activities between his project managers. In this type of arrange- ment, all conflicts between projects are referred to the general manager for resolution.

As companies grow in size and the number of projects, the general manager will find it increasingly difficult to act as the focal point for all projects. A new position must be created, that of director of programs, or manager of programs or projects, who is respon- sible for all program management. See Figure 3–7.

Executives contend that an effective span of control is five to seven people. Does this apply to the director of project management as well? Consider a company that has fifteen

132 ORGANIZATIONAL STRUCTURES

11. S. K. Grinnell and H. P. Apple, “When Two Bosses Are Better Than One,” Machine Design, January 1975, pp. 84–87.

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Modification of Matrix Structures 133

projects going on at once. There are three projects over $5 million, seven are between $1 and $3 million, and five projects are under $700,000. Each project has a full-time project manager. Can all fifteen project managers report to the same person? The company solved this problem by creating a deputy director of project management. All projects over $1 million reported to the director, and all projects under $1 million went to the deputy director. The director’s rationale soon fell by the wayside when he found that the more severe problems that were occupying his time were occurring on projects with a smaller dollar volume, where flexibility in time, cost, and performance was nonexistent and trade- offs were almost impossible. If the project manager is actually a general manager, then the director of project management should be able to supervise effectively more than seven

project managers. The desired span of control, of course, will vary from company to com- pany and must take into account:

● The demands imposed on the organization by task complexity ● Available technology ● The external environment ● The needs of the organizational membership ● The types of customers and/or products

GENERAL MANAGER

DIRECTOR: PROJECT MGMT

DIRECTOR: ENGINEERING

DIRECTOR: OPERATIONS

OTHERS

PROJECT MGR. X

PROJECT MGR. Y

PROJECT MGR. Z

FIGURE 3–7. Development of a director of project management.

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As companies expand, it is inevitable that new and more complex conflicts arise. The control of the engineering functions poses such a problem:

Should the project manager have ultimate responsibility for the engineering func- tions of a project, or should there be a deputy project manager who reports to the director of engineering and controls all technical activity?

Although there are pros and cons for both arrangements, the problem resolved itself in the company mentioned above when projects grew so large that the project manager became unable to handle both the project management and project engineering functions. Then, as shown in Figure 3–8, a chief project engineer was assigned to each project as deputy project manager, but remained functionally assigned to the director of engineering. The project man- ager was now responsible for time and cost considerations, whereas the project engineer was concerned with technical performance. The project engineer can be either “solid” vertically and “dotted” horizontally, or vice versa. There are also situations where the project engineer may be “solid” in both directions. The decision usually rests with the director of engineering. Of course, in a project where the project engineer would be needed on a part-time basis only, he would be solid vertically and dotted horizontally.

Engineering directors usually demand that the project engineer be solid vertically in order to give technical direction. As one director of engineering stated, “Only engineers that report to me will have the authority to give technical direction to other engineers. After all, how else can I be responsible for the technical integrity of the product when direction comes from outside my organization?”

This subdivision of functions is necessary in order to control large projects adequately. However, for small projects, say $100,000 or less, it is quite common on R&D projects for

134 ORGANIZATIONAL STRUCTURES

GENERAL MANAGER

DIRECTOR: PROJECT MGT.

DIRECTOR: ENGINEERING

DIRECTOR: OPERATIONS

OTHERS

PROJECT ENGINEERING

OTHER UNITS

MANAGER X

MANAGER Y

MANAGER Z

PROJECT OFFICE CONTROL

FIGURE 3–8. Placing project engineering in the project office.

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Modification of Matrix Structures 135

an engineer to serve as the project manager as well as the project engineer. Here, the project manager must have technical expertise, not merely understanding. Furthermore, this individual can still be attached to a functional engineering support unit other than project engineering. As an example, a mechanical engineering department receives a government contract for $75,000 to perform tests on a new material. The proposal is written by an engi- neer attached to the department. When the contract is awarded, this individual, although not in the project engineering department, can fulfill the role of project manager and project engineer while still reporting to the manager of the mechanical engineering department. This arrangement works best (and is cost-effective) for short-duration projects that cross a mini- mum number of functional units.

Finally, we must discuss the characteristics of a project engineer. In Figure 3–9, most people would place the project manager to the right of center with stronger human skills than technical skills, and the project engineer to the left of center with stronger technical skills than human skills. How far from the center point will the project manager and project engineer be? Today, many companies are merging project management and project engi- neering into one position. This can be seen in Table 3–7. The project manager and project

JUNIOR CLERK

SENIOR CLERK

SUPERVISOR MIDDLE MANAGER

MANAGER SENIOR OFFICER

PRESIDENT

HIGH

LOW

TECHNICAL SKILLS

HUMAN SKILLS

FIGURE 3–9. Philosophy of management.

TABLE 3–7. PROJECT MANAGEMENT COMPARED TO PROJECT ENGINEERING

Project Management Project Engineering • Total project planning • Total project planning • Cost control • Cost control • Schedule control • Schedule control • System specifications • System specifications • Logistics support • Logistics support

• Contract control • Configuration control • Report preparation and distribution • Fabrication, testing, and production technical • Procurement leadership support • Identification of reliability and

maintainability requirements

• Staffing • Priority scheduling • Management information systems

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engineer have similar functions above the line but different ones below the line.12 The main reason for separating project management from project engineering is so that the project engineer will remain “solid” to the director of engineering in order to have the full author- ity to give technical direction to engineering.

3.8 THE STRONG, WEAK, OR BALANCED MATRIX

Matrix structures can be strong, weak, or balanced. The strength of the matrix is based upon who has more influence over the daily performance of the workers: project manager or line managers. If the project manager has more influence over the worker, then the matrix structure functions as

a strong matrix as seen through the eyes of the project manager. If the line manager has more influence than does the project manager, then the organization functions as a weak matrix as seen by the project manager.

The most common differentiator between a strong and weak matrix is where the com- mand of technology resides: project manager or line managers. If the project manager has a command of technology and is recognized by the line managers and the workers as being a technical expert, then the line managers will allow the workers to take technical direc- tion from the project manager. This will result in a strong matrix structure. Workers will seek solutions to their problems from the project manager first and the line managers sec- ond. The reverse is true for a weak matrix. Project managers in a strong matrix generally possess more authority than in a weak matrix.

When a company desires a strong matrix, the project manager is generally promoted from within the organization and may have had assignments in several line functions throughout the organization. In a weak matrix, the company may hire from outside the organization but should at least require that the person selected understand the technology and the industry.

3.9 CENTER FOR PROJECT MANAGEMENT EXPERTISE

In project-driven companies, the creation of a project management division is readily accepted as a necessity to conduct business. Organizational restruc- turing can quite often occur based on environmental changes and customer

needs. In non–project-driven organizations, employees are less tolerant of organizational change. Power, authority, and turf become important. The implementation of a separate divi-

sion for project management is extremely difficult. Resistance can become so strong that the entire project management process can suffer.

Recently, non–project-driven companies have created centers for project management expertise. These centers are not necessarily formal line organizations, but more informal

136 ORGANIZATIONAL STRUCTURES

12. Procurement, reliability, and maintainability may fall under the responsibility of the project engineer in some companies.

PMBOK® Guide, 5th Edition 1.4.4 Project Management Office

PMBOK® Guide, 5th Edition Matrix Organizational Structures

Figures 2–3, 2–4, 2–5

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Matrix Layering 137

committees whose membership may come from each functional unit of the company. The assignment to the center for expertise can be part-time or full-time; it may be only for six months to a year; and it may or may not require the individual to manage projects. Usually, the center for expertise has as its charter:

● To develop and update a methodology for project management. The methodology usually advocates informal project management.

● To act as a facilitator or trainer in conducting project management training programs. ● To provide project management assistance to any employee who is currently manag-

ing projects and requires support in planning, scheduling, and controlling projects. ● To develop or maintain files on “lessons learned” and to see that this information

is made available to all project managers.

Since these centers pose no threat to the power and authority of line managers, support is usually easy to obtain.

3.10 MATRIX LAYERING

Matrix layering can be defined as the creation of one matrix within a second matrix. For example, a company can have a total company matrix, and each division or department (i.e., project engineering) can have its own internalized matrix. In the situation of a matrix within a matrix, all matrices are formal operations.

Matrix layering can also be a mix of formal and informal organizations. The formal matrix exists for work flow, but there can also exist an informal matrix for information flow. There are also authority matrices, leadership matrices, reporting matrices, and informal technical direc- tion matrices.

An example of layering would be the multidimensional matrix, shown in Figure 3–10, where each slice represents either time, distance, or geographic area. For example, a New York

Tim e, d

ista nce

, or sp

ace

FIGURE 3–10. The multidimensional matrix.

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bank utilizes a multinational matrix to control operations in foreign countries. In this case, each foreign country would represent a different slice of the total matrix.

3.11 SELECTING THE ORGANIZATIONAL FORM

Project management has matured as an outgrowth of the need to develop and produce complex and/or large projects in the shortest possible time, within anticipated cost, with required reliability and performance, and (when applic-

able) to realize a profit. Granted that organizations have become so complex that traditional organizational structures and relationships no longer allow for effective management, how can executives determine which organizational form is best, especially since some projects last for only a few weeks or months while others may take years?

To answer this question, we must first determine whether the necessary characteristics exist to warrant a project management organizational form. Generally speaking, the project management approach can be effectively applied to a onetime undertaking that is13:

● Definable in terms of a specific goal ● Infrequent, unique, or unfamiliar to the present organization ● Complex with respect to interdependence of detailed tasks ● Critical to the company

Once a group of tasks is selected and considered to be a project, the next step is to define the kinds of projects, described in Section 2.5. These include individual, staff, spe- cial, and matrix or aggregate projects.

Unfortunately, many companies do not have a clear definition of what a project is. As a result, large project teams are often constructed for small projects when they could be handled more quickly and effectively by some other structural form. All structural forms have their advantages and disadvantages, but the project management approach appears to be the best possible alternative.

The basic factors that influence the selection of a project organizational form are:

● Project size ● Project length ● Experience with project management organization ● Philosophy and visibility of upper-level management ● Project location ● Available resources ● Unique aspects of the project

138 ORGANIZATIONAL STRUCTURES

PMBOK® Guide, 5th Edition 2.1 Organizational Influences

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Selecting the Organizational Form 139

This last item requires further comment. Project management (especially with a matrix) usually works best for the control of human resources and thus may be more appli- cable to labor-intensive projects rather than capital-intensive projects. Labor-intensive organizations have formal project management, whereas capital-intensive organizations may use informal project management. Figure 3–11 shows how matrix management was implemented by an electric equipment manufacturer. The company decided to use frag- mented matrix management for facility development projects. After observing the success of the fragmented matrix, the executives expanded matrix operations to include interim and ongoing capital equipment projects. The first three levels were easy to implement. The fourth level, ongoing business, was more difficult to convert to matrix because of func- tional management resistance and the fear of losing authority.

Four fundamental parameters must be analyzed when considering implementation of a project organizational form:

● Integrating devices ● Authority structure ● Influence distribution ● Information system

Project management is a means of integrating all company efforts, especially research and development, by selecting an appropriate organizational form. Two questions arise when we think of designing the organization to facilitate the work of the integrators14:

● Is it better to establish a formal integration department, or simply to set up inte-

grating positions independent of one another? ● If individual integrating positions are set up, how should they be related to the

larger structure?

Facilities Development

Interim Capital Equipment Projects

Ongoing Capital Equipment Projects

Ongoing Business

FIGURE 3–11. Matrix development in manufacturing.

14. William P. Killian, “Project Management—Future Organizational Concepts,” Marquette Business Review, Vol. 2, 1971, pp. 90–107.

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Informal integration works best if, and only if, effective collaboration can be achieved between conflicting units. Without any clearly defined authority, the role of the integrator is simply to act as an exchange medium across the interface of two functional units. As the size of the organization increases, formal integration positions must exist, especially in sit- uations where intense conflict can occur (e.g., research and development).

Not all organizations need a pure matrix structure to achieve this integration. Many problems can be solved simply through the chain of command, depending on the size of the organization and the nature of the project. The organization needed to achieve project control can vary in size from one person to several thousand people. The organizational structure needed for effective project control is governed by the desires of top management and project circumstances.

Top management must decide on the authority structure that will control the integra- tion mechanism. The authority structure can range from pure functional authority (tradi- tional management), to product authority (product management), and finally to dual authority (matrix management). This range is shown in Figure 3–12. From a management point of view, organizational forms are often selected based on how much authority top management wishes to delegate or surrender.

Integration of activities across functional boundaries can also be accomplished by

influence. Influence includes such factors as participation in budget planning and approval,

design changes, location and size of offices, salaries, and so on. Influence can also cut

administrative red tape and develop a much more unified informal organization.

Matrix structures are characterized as strong or weak based on the relative influence

that the project manager possesses over the assigned functional resources. When the

140 ORGANIZATIONAL STRUCTURES

FUNCTIONAL AUTHORITY STRUCTURE

FUNCTIONAL ORGANIZATION MATRIX ORGANIZATION PRODUCT ORGANIZATION

RELATIVE INFLUENCE

DUAL AUTHORITY

PRODUCT AUTHORITY STRUCTURE

PRODUCT TASK FORCES

PRODUCT TEAMS

PRODUCT MANAGERS

PRODUCT DEPARTMENTS

FUNCTIONAL REPORTING SYSTEM

DUAL INFORMATION AND REPORTING SYSTEM

PRODUCT REPORTING SYSTEM

FUNCTIONAL DEPARTMENTS

FUNCTIONAL MANAGERS

FUNCTIONAL TEAMS

FUNCTIONAL TASK FORCES

FUNCTIONAL INFLUENCE IN DECISION-MAKING

PRODUCT INFLUENCE IN DECISION-MAKING

1 2 3

FIGURE 3–12. The range of alternatives. Source: Jay R. Galbraith, “Matrix Organization Designs.” Reprinted with permission from Business Horizons, February 1971 (p. 37). Copyright © 1971 by the Board of Trustees at Indiana University.

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Selecting the Organizational Form 141

project manager has more “relative influence” over the performance of the assigned

resources than does the line manager, the matrix structure is a strong matrix. In this case,

the project manager usually has the knowledge to provide technical direction, assign

responsibilities, and may even have a strong input into the performance evaluation of the

assigned personnel. If the balance of influence tilts in favor of the line manager, then

the matrix is referred to as a weak matrix.

Information systems also play an important role. Previously we stated that one of the

advantages of several project management structures is the ability to make both rapid and

timely decisions with almost immediate response to environmental changes. Information

systems are designed to get the right information to the right person at the right time in a

cost-effective manner. Organizational functions must facilitate the flow of information

through the management network. Galbraith has described additional factors that can influence organizational selection.

These factors are15:

● Diversity of product lines ● Rate of change of the product lines ● Interdependencies among subunits ● Level of technology ● Presence of economies of scale ● Organizational size

A diversity of project lines requires both top-level and functional managers to maintain knowledge in all areas. Diversity makes it more difficult for managers to make realistic esti- mates concerning resource allocations and the control of time, cost, schedules, and technol- ogy. The systems approach to management requires sufficient information and alternatives to be available so that effective trade-offs can be established. For diversity in a high-technology environment, the organizational choice might, in fact, be a trade-off between the flow of work and the flow of information. Diversity tends toward strong product authority and control.

Many functional organizations consider themselves companies within a company and pride themselves on their independence. This attitude poses a severe problem in trying to develop a synergistic atmosphere. Successful project management requires that functional units recognize the interdependence that must exist in order for technology to be shared and schedule dates to be met. Interdependency is also required in order to develop strong communication channels and coordination.

The use of new technologies poses a serious problem in that technical expertise must be established in all specialties, including engineering, production, material control, and safety. Maintaining technical expertise works best in strong functional disciplines, provided the information is not purchased outside the organization. The main problem, however, is how to communicate this expertise across functional lines. Independent R&D units can be established, as opposed to integrating R&D into each functional department’s routine efforts. Organizational control requirements are much more difficult

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in high-technology industries with ongoing research and development than with pure production groups.

Economies of scale and size can also affect organizational selection. The economies of scale are most often controlled by the amount of physical resources that a company has available. For example, a company with limited facilities and resources might find it impossible to compete with other companies on production or competitive bidding for larger dollar-volume products. Such a company must rely heavily on maintaining multiple projects (or products), each of low cost or volume, whereas a larger organization may need only three or four projects large enough to sustain the organization. The larger the economies of scale, the more the organization tends to favor pure functional management.

The size of the organization is important in that it can limit the amount of technical expertise in the economies of scale. While size may have little effect on the organizational structure, it does have a severe impact on the economies of scale. Small companies, for example, cannot maintain large specialist staffs and, therefore, incur a larger cost for lost specialization and lost economies of scale.

Middleton conducted a mail survey of aerospace firms in an attempt to determine how well the companies using project management met their objectives. Forty-seven responses were received. Tables 3–8 and 3–9 identify the results. Middleton stated, “In evaluating the results of the survey, it appears that a company taking the project organization approach can be reasonably certain that it will improve controls and customer (out-of-company) relations, but internal operations will be more complex.”16

142 ORGANIZATIONAL STRUCTURES

16. Reprinted with permission of Harvard Business Review. From C. J. Middleton, “How to Set Up a Project Organization,” Harvard Business Review, March–April 1967, pp. 73–82. Copyright © 1967 by the Harvard Business School Publishing Corporation; all rights reserved.

TABLE 3–8. MAJOR COMPANY ADVANTAGES OF PROJECT MANAGEMENT

Advantages Percent of Respondents

• Better control of projects 92% • Better customer relations 80% • Shorter product development time 40% • Lower program costs 30% • Improved quality and reliability 26% • Higher profit margins 24% • Better control over program security 13%

Other Benefits

• Better project visibility and focus on results • Improved coordination among company divisions doing work on the project • Higher morale and better mission orientation for employees working on the project • Accelerated development of managers due to breadth of project responsibilities

Source: Reprinted by permission of Harvard Business Review. An exhibit from “How to Set Up a Project Organization,” by C. J. Middleton, March–April, 1967 (pp. 73–82). Copyright © 1967 by the Harvard Business School Publishing Corporation; all rights reserved.

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Structuring the Small Company 143

The way in which companies operate their project organization is bound to affect the organization, both during the operation of the project and after the project has been com- pleted and personnel have been disbanded. The overall effects on the company must be looked at from a personnel and cost control standpoint. This will be accomplished, in depth, in later chapters. Although project management is growing, the creation of a project organization does not necessarily ensure that an assigned objective will be accomplished successfully. Furthermore, weaknesses can develop in the areas of maintaining capability and structural changes.

Although the project organization is a specialized, task-oriented entity, it seldom, if ever, exists apart from the traditional structure of the organization. All project management structures overlap the traditional structure. Furthermore, companies can have more than one project organizational form in existence at one time. A major steel product, for exam- ple, has a matrix structure for R&D and a product structure elsewhere.

Accepting a project management structure is a giant step from which there may be no return. The company may have to create more management positions without changing the total employment levels. In addition, incorporation of a project organization is almost always accompanied by the upgrading of jobs. In any event, management must realize that whichever project management structure is selected, a dynamic state of equilibrium will be necessary.

3.12 STRUCTURING THE SMALL COMPANY

Small and medium companies generally prefer to have the project manager report fairly high up in the chain of command, even though the project manager may be working on a rela- tively low-priority project. Project managers are usually viewed as less of a threat in small organizations than in the larger ones, thus creating less of a problem if they report high up.

TABLE 3–9. MAJOR COMPANY DISADVANTAGES OF PROJECT MANAGEMENT

Disadvantages Percent of Respondents

• More complex internal operations 51% • Inconsistency in application of company policy 32% • Lower utilization of personnel 13% • Higher program costs 13% • More difficult to manage 13% • Lower profit margins 2%

Other Disadvantages

• Tendency for functional groups to neglect their job and let the project organization do everything • Too much shifting of personnel from project to project • Duplication of functional skills in project organization

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Organizing the small company for projects involves two major questions:

● Where should the project manager be placed within the organization? ● Are the majority of the projects internal or external to the organization?

These two questions are implicitly related. For either large, complex projects or those involving outside customers, project managers generally report to a high level in the orga- nization. For small or internal projects, the project manager reports to a middle- or lower- level manager.

Small and medium companies have been very successful in managing internal projects using departmental project management (see Figure 3–2), especially when only a few functional groups must interface with one another. Quite often, line managers are per- mitted to wear multiple hats and also act as project managers, thereby reducing the need for hiring additional project managers.

Customers external to the organization are usually favorably impressed if a small company identifies a project manager who is dedicated and committed to their project, even if only on a part-time basis. Thus outside customers, particularly through a competi- tive bidding environment, respond favorably to a matrix structure, even if the matrix struc- ture is simply eyewash for the customer. For example, consider the matrix structure shown in Figure 3–13. Both large and small companies that operate on a matrix usually develop a separate organizational chart for each customer. Figure 3–13 represents the organiza-

144 ORGANIZATIONAL STRUCTURES

PRESIDENT

V.P. MARKETING V.P. ENGINEERING V.P. PRODUCTION V.P. ADMINISTRATION

ALPHA CO. BOB RAY

IBM

BETA CO.

GAMMA CO.

DELTA CO.

FIGURE 3–13. Matrix for a small company.

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tional chart that would be presented to Alpha Company. The Alpha Company project would be identified with bold lines and would be placed immediately below the vice pres- ident, regardless of the priority of the project. After all, if you were the Alpha Company customer, would you want your project to appear at the bottom of the list?

Figure 3–13 also identifies two other key points that are important to small companies. First, only the name of the Alpha Company project manager, Bob Ray, need be identified. The reason for this is that Bob Ray may also be the project manager for one or more of the other projects, and it is usually not a good practice to let the customer know that Bob Ray will have loyalties split among several projects. Actually, the organization chart shown in Figure 3–13 is for a machine tool company employing 280 people, with five major and thirty minor projects. The company has only two full-time project managers. Bob Ray manages the projects for Alpha, Gamma, and Delta Companies; the Beta Company project has the second full-time project manager; and the IBM project is being managed person- ally by the vice president of engineering, who happens to be wearing two hats.

The second key point is that small companies generally should not identify the names of functional employees because:

● The functional employees are probably part-time. ● It is usually best in small companies for all communications to be transmitted

through the project manager.

Another example of how a simple matrix structure can be used to impress customers is shown in Figure 3–14. The company identified here actually employs only thirty-eight

Structuring the Small Company 145

PRESIDENT

ESTIMATING ACCOUNTING

V.P. ENGINEERING V.P. PRODUCTION

DRAFTING START UP DESIGN

ENGINEERING

SENIOR ENGINEER

PLANT MANAGER PANELS

PLANT MANAGER METALS

FIGURE 3–14. Matrix for a small company.

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people. Very small companies normally assign the estimating department to report directly to the president, as shown in Figure 3–14. In addition, the senior engineers, who appear to be acting in the role of project managers, may simply be the department managers for drafting, startup, and/or design engineering. Yet, from an outside customer’s perspective, the company has a dedicated and committed project manager for the project.

3.13 STRATEGIC BUSINESS UNIT (SBU) PROJECT MANAGEMENT

During the past ten years, large companies have restructured into strategic business units (SBUs). An SBU is a grouping of functional units that have the responsibility for profit (or loss) of part of the organization’s core businesses. Figure 3–15 shows how one of the auto- motive suppliers restructured into three SBUs; one each for Ford, Chrysler, and General Motors. Each strategic business unit is large enough to maintain its own project and pro- gram managers. The executive in charge of the strategic business unit may act as the spon- sor for all of the program and project managers within the SBU. The major benefit of these types of project management SBUs is that it allows the SBU to work more closely with the customer. It is a customer-focused organizational structure.

It is possible for some resources to be shared across several SBUs. Manufacturing plants can end up supporting more than one SBU. Also, corporate may provide the resources for cost accounting, human resource management, and training.

A more recent organizational structure, and a more complex one, is shown in Figure 3–16. In this structure, each SBU may end up using the same platform (i.e., powertrain, chassis, and other underneath components). The platform managers are responsible for the design and enhancements of each platform, whereas the SBU program managers must adapt this platform to a new model car. This type of matrix is multidimensional inasmuch

146 ORGANIZATIONAL STRUCTURES

SBU Ford

Programs

SBU GM

Programs

SBU Chrysler Programs

Program Managers

FIGURE 3–15. Strategic business unit project management.

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as each SBU could already have an internal matrix. Also, each manufacturing plant could be located outside of the continental United States, making this structure a multinational, multidimensional matrix.

3.14 TRANSITIONAL MANAGEMENT

Organizational redesign is occurring at a rapid rate because of shorter product life cycles, rapidly changing environments, accelerated development of sophisticated information sys- tems, and increased marketplace competitiveness. Because of these factors, more compa- nies are considering project management organizations as a solution.

Why have some companies been able to implement this change in a short period of time while other companies require years? The answer is that successful implementation requires good transitional management.

Transitional management is the art and science of managing the conversion period from one organizational design to another. Transitional management necessitates an under- standing of the new goals, objectives, roles, expectations, and employees’ fears.

A survey was conducted of executives, managers, and employees in thirty-eight com-

panies that had implemented matrix management. Almost all executives felt that the great- est success could be achieved through proper training and education, both during and after transition. In addition to training, executives stated that the following fifteen challenges must be accounted for during transition:

● Transfer of power. Some line managers will find it extremely difficult to accept someone else managing their projects, whereas some project managers will find it difficult to give orders to workers who belong to someone else.

Transitional Management 147

Platform Project Management

SBU Program Managers

Platform

SBU SBU SBU

FIGURE 3–16. SBU project management using platform management.

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● Trust. The secret to a successful transition without formal executive authority will be trust between line managers, between project managers, and between project and line managers. It takes time for trust to develop. Senior management should encour- age it throughout the transition life cycle.

● Policies and procedures. The establishment of well-accepted policies and procedures is a slow and tedious process. Trying to establish rigid policies and procedures at project initiation will lead to difficulties.

● Hierarchical consideration. During transition, every attempt should be made to minimize hierarchical considerations that could affect successful organizational maturity.

● Priority scheduling. Priorities should be established only when needed, not on a con- tinual basis. If priority shifting is continual, confusion and disenchantment will occur.

● Personnel problems. During transition there will be personnel problems brought on by moving to new locations, status changes, and new informal organizations. These problems should be addressed on a continual basis.

● Communications. During transition, new channels of communications should be built but not at the expense of old ones. Transition phases should show employees that communication can be multidirectional, for example, a project manager talk- ing directly to functional employees.

● Project manager acceptance. Resistance to the project manager position can be con- trolled through proper training. People tend to resist what they do not understand.

● Competition. Although some competition is healthy within an organization, it can be detrimental during transition. Competition should not be encouraged at the expense of the total organization.

● Tools. It is common practice for each line organization to establish its own tools and techniques. During transition, no attempt should be made to force the line organi- zations to depart from their current practices. Rather, it is better for the project man- agers to develop tools and techniques that can be integrated with those in the functional groups.

● Contradicting demands. During transition and after maturity, contradicting demands will be a way of life. When they first occur during transition, they should be handled in a “working atmosphere” rather than a crisis mode.

● Reporting. If any type of standardization is to be developed, it should be for project status reporting, regardless of the size of the project.

● Teamwork. Systematic planning with strong functional input will produce team- work. Using planning groups during transition will not obtain the necessary func- tional and project commitments.

● Theory X–Theory Y. During transition, functional employees may soon find them- selves managed under either Theory X or Theory Y approaches. People must real- ize (through training) that this is a way of life in project management, especially during crises.

● Overmanagement costs. A mistake often made by executives is thinking that projects can be managed with fewer resources. This usually leads to disaster because undermanagement costs may be an order of magnitude greater than over- management costs.

148 ORGANIZATIONAL STRUCTURES

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Transition to a project-driven matrix organization is not easy. Managers and profes- sionals contemplating such a move should know:

● Proper planning and organization of the transition on a life-cycle basis will facili- tate a successful change.

● Training of the executives, line managers, and employees in project management knowledge, skills, and attitudes is critical to a successful transition and probably will shorten the transition time.

● Employee involvement and acceptance may be the single most important function during transition.

● The strongest driving force of success during transition is a demonstration of com- mitment to and involvement in project management by senior executives.

● Organizational behavior becomes important during transition. ● Commitments made by senior executives prior to transition must be preserved dur-

ing and following transition. ● Major concessions by senior management will come slowly. ● Schedule or performance compromises are not acceptable during transition; cost

overruns may be acceptable. ● Conflict among participants increases during transition. ● If project managers are willing to manage with only implied authority during tran-

sition, then the total transition time may be drastically reduced. ● It is not clear how long transition will take.

Transition from a classical or product organization to a project-driven organization is not easy. With proper understanding, training, demonstrated commitment, and patience, transition will have a good chance for success.

3.15 BARRIERS TO IMPLEMENTING PROJECT MANAGEMENT IN EMERGING MARKETS

Growth in computer technology and virtual teams has made the world smaller. First world nations are flocking to emerging market nations to get access to the abundance of highly qualified human capital that is relatively inexpensive and want to participate in virtual project management teams. There is no question that there exists an ample supply of talent in these emerging market nations. These talented folks have a reasonable under- standing of project management and some consider it an honor to work on virtual project teams.

But working on virtual project management teams may come with headaches. While the relative acceptance of project management appears at the working levels where the team members operate, further up in the hierarchy there might be resistance to the imple- mentation and acceptance of project management. Because of the growth of project man- agement worldwide, many executives openly provide “lip service” to its acceptance yet,

Barriers to Implementing Project Management in Emerging Markets 149

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behind the scenes, create significant barriers to prevent it from working properly. This cre- ates significant hardships for those portions of the virtual teams in first world nations that must rely upon their other team members for support. The ultimate result might be frus- trations stemming from poor information flow, extremely long decision-making processes, poor cost control, and an abundance of external dependencies that elongate schedules beyond the buyer’s contractual dates. In this section, we will typically use the United States as an example of the first world nations.

Barriers to effective project management implementation exist worldwide, not merely in emerging market nations. But in emerging market nations, the barriers are more apparent. For simplicity’s sake, the barriers can be classified into four categories:

● Cultural barriers ● Status and political barriers ● Project management barriers ● Other barriers

A culture is a set of beliefs that people follow. Every company could have its own culture. Some companies may even have multiple cul-

tures. Some cultures are strong while others are weak. In some emerging market nations, there exist national cultures that can be so strong that they dictate the corporate cultures. There are numerous factors that can influence the culture of an organization. Only those factors that can have an impact on the implementation and acceptance of project man- agement are discussed here and include:

● Bureaucratic centralization of authority in the hands of a few ● Lack of meaningful or real executive sponsorship ● Importance of the organizational hierarchy ● Improper legal laws ● The potential for corruption

CENTRALIZATION OF AUTHORITY Many countries maintain a culture where very few people have the authority to make deci- sions. Decision-making rests in the hands of a few and it serves as a source of vast power. This factor exists in both privately held companies and governmental organizations. Project management advocates decentralization of authority and decision-making. In many coun- tries, the seniormost level of management will never surrender their authority, power, or right to make decisions to project managers. In these countries an appointment to the senior levels of management is not necessarily based upon performance. Instead, it is based upon age, belonging to the right political party, and personal contacts within the government. The result can be executives that possess little knowledge of their own business and possibly lack the leadership capacity.

150 ORGANIZATIONAL STRUCTURES

Culture

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EXECUTIVE SPONSORSHIP Project sponsorship might exist somewhere in the company but most certainly not at the executive levels. There are two reasons for this. First, senior management knows their lim- itations and may have absolutely no knowledge about the project. Therefore, they could be prone to making serious blunders that could become visible to the people that put them into these power positions. Second, and possibly most important, acting as an executive sponsor on a project that might fail could signal the end of the executive’s political career. Therefore, sponsorship, if it exists at all, may be at a low level in the organizational hier- archy and at a level where people are expendable if the project fails. The result is that pro- ject managers end up with sponsors who either cannot or will not help them in time of trouble.

ORGANIZATIONAL HIERARCHY In the United States, project managers generally have the right to talk to anyone in the company to get information relative to the project. The intent is to get work to flow hori- zontally as well as vertically. In some emerging market nations, the project manager must follow the chain of command. The organizational hierarchy is sacred. Following the chain of command certainly elongates the decision-making process to the point where the pro- ject manager has no idea how long it will take to get access to needed information or for a decision to be made even though a sponsor exists. There is no mature infrastructure in place to support project management. The infrastructure exists to filter bad news from the executive levels and to justify the existence of each functional manager.

In the United States, the “buck” stops at the sponsor. Sponsors have ultimate decision- making authority and are expected to assist the project managers during a crisis. The role of the sponsor is clearly defined and may be described in detail in the enterprise project management methodology. But in some emerging market countries, even the sponsor might not be authorized to make a decision. Some decisions may need to go as high as a govern- ment minister. Simply stated, one does not know where and when the decision needs to be made and where it will be made. Also, in the United States reporting bad news ends up in the hands of the project sponsor. In some nations, the news may go as high as government ministers. Therefore, you cannot be sure where project information will end up.

IMPROPER LEGAL LAWS Not all laws in emerging market nations are viewed by other nations as being legal laws. Yet American project managers, partnering with these nations, must abide by these laws. As an example, procurement contracts may be awarded not to the most qualified supplier or to the lowest bidder but instead to any bidder that resides in a city that has a high unem- ployment level. As another example, some nations have laws that imply that bribes are an acceptable practice when awarding contracts. Some contracts might also be awarded to rel- atives and friends rather than the best qualified supplier.

POTENTIAL FOR CORRUPTION Corruption can and does exist in some countries and plays havoc on project managers that focus on the competing constraints. Project managers traditionally lay out a plan to meet the objectives and the competing constraints. Project managers also assume that everything will

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be done systematically and in an orderly manner, which assumes no corruption. But in some nations there are potentially corrupt individuals or organizations that will do everything pos- sible to stop or slow down the project until they can benefit personally.

Status and politics are prevalent everywhere and can have a negative impact on project management. In some emerging market nations, sta-

tus and politics actually sabotage project management and prevent it from working cor- rectly. Factors that can affect project management include:

● Legal formalities and government constraints ● Insecurity at the executive levels ● Status consciousness ● Social obligations ● Internal politics ● Unemployment and poverty ● Attitude toward workers ● Inefficiencies ● Lack of dedication at all levels ● Lack of honesty

LEGAL FORMALITIES AND GOVERNMENT CONSTRAINTS Here in the United States we believe that employees that perform poorly can be removed from the project or even be fired. But in some emerging market nations, employees have the right to hold a job even if their performance is substandard. Having a job and a regu- lar paycheck is a luxury. There may be laws that clearly state under what conditions a worker can be fired, if at all.

There are also laws on the use of overtime. Overtime may not be allowed because pay- ing someone to work overtime could eventually end up creating a new social class. Therefore, overtime may not be used as a means to maintain or accelerate a schedule that is in trouble.

INSECURITY Executives often feel insecurity more so than the managers beneath them because their positions may be the result of political appointments. As such project managers may be seen as the stars of the future and may be viewed as a threat to executives. Allowing pro- ject managers who are working on highly successful projects to make presentations to the seniormost levels of management in the government could be mired. If the project is in trouble, then the project manager may be forced to make the presentation. Executives are afraid of project managers.

STATUS CONSCIOUSNESS Corporate officers in emerging market nations are highly status conscious. They have a very real fear that the implementation of project management may force them to lose their

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status, yet they refuse to function as active project sponsors. Status often is accompanied by fringe benefits such as a company car and other special privileges.

SOCIAL OBLIGATIONS In emerging market nations, social obligations due to religious beliefs (and possibly super- stitious beliefs) and politics may be more important than in first world nations. Social obligations are ways of maintaining alliances with those people that have put an executive or a project manager in power. As such, project managers may not be allowed to interface socially with certain groups. This could also be viewed as a threat to project management implementation.

INTERNAL POLITICS Internal politics exist in every company in the world. Before executives consider throwing their support behind a new approach such as project management, they worry about whether they will become stronger or weaker, have more or less authority, and have a greater or lesser chance for advancement. This is one of the reasons why only a small per- centage of emerging market companies have project management offices (PMOs). Whichever executive gets control of the PMO could become more powerful than other executives. In the United States, we have solved this problem by allowing several execu- tives to have their own PMO. But in the emerging markets, this is viewed as excessive headcount.

UNEMPLOYMENT AND GOVERNMENT CONSTRAINTS Virtually all executives understand project management and the accompanying benefits, yet they remain silent rather than visibly showing their support. One of the benefits of pro- ject management implementation is that it can make organizations more efficient to the point where fewer resources are needed to perform the required work. This can be a threat to executives because, unless additional business can be found, efficiency can result in downsizing the company, reducing the executive’s power and authority, increasing the unemployment level, and possibly increasing poverty in the community. Therefore, the increased efficiencies of project management may not be looked upon favorably.

ATTITUDE TOWARD EMPLOYEES In some nations, employees might be viewed as steppingstones to building an empire. Hiring three below-average workers to do the same work as two average workers is better for empire-building, yet possibly at the expense of the project’s budget and schedule. It is true however that finding adequate human resources may be difficult, but sometimes com- panies simply do not put forth a good effort in their search. Friends and family members may be hired first regardless of their qualifications. The problem is further complicated when one must find people with project management expertise.

INEFFICIENCIES Previously, we stated that companies might find it difficult to hire highly efficient people in project management. Not all people are efficient. Some people simply are not commit- ted to their work even though they understand project management. Other people may get

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frustrated when they realize that they do not have the power, authority, or responsibility of their colleagues in first world countries. Sometimes, new hirers that want to be efficient workers are pressured by the culture to remain inefficient or else the individual’s col- leagues will be identified as poor workers. Peer pressure exists and can prevent people from demonstrating their true potential.

LACK OF DEDICATION It is hard to get people motivated when they believe they cannot lose their job. People are simply not dedicated to the competing constraints. Some people prefer to see schedules slip because it provides some degree of security for a longer period of time. There is also a lack of dedication for project closure. As a project begins to wind down, employees will begin looking for a home on some other project. They might even leave their current pro- ject prematurely, before the work is finished, to guarantee employment elsewhere.

HONESTY People working in emerging market countries have a tendency to hide things from fellow workers and project managers, especially bad news, either to keep their prestige or to retain their power and authority. This creates a huge barrier for project managers that rely upon timely information, whether good or bad, in order to manage the project successfully. Delays in reporting could waste valuable time when corrective action could have been taken.

While culture, status, and politics can create barriers for any new management philosophy, there are other barriers that are directly

related to project management. These project management implementation barriers include:

● Cost of project management implementation ● Risks of implementation failure ● Cost of training and training limitations ● Need for sophistication ● Lack of closure on projects ● Work ethic ● Poor planning

COST OF IMPLEMENTATION There is a cost associated with the implementation of project management. The company must purchase hardware and software, create a project management methodology, and develop project performance reporting techniques. This requires a significant financial expenditure, which the company might not be able to afford, and also requires signifi- cant resources to be tied up in implementation for an extended period of time. With limited resources and the fact that the better resources would be required for implemen- tation and removed from ongoing work, companies shy away from project management even though they know the benefits.

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RISK OF FAILURE Even if a company is willing to invest the time and money for project management imple- mentation, there is a significant risk that implementation will fail. And even if implementa- tion is successful but projects begin to fail for any number of reasons, blame will be placed upon faulty implementation. Executives may find that their position in the hierarchy is now insecure once they have to explain the time and money expended for no real results. This is why some executives either refuse to accept or visibly support project management.

TRAINING LIMITATIONS Implementation of project management is difficult without training programs for the workers. This creates three additional problems. First, how much money must be allocated for training? Second, who will provide the training and what are the credentials of the trainers? Third, can I release people from project work to attend training classes? It is time-consuming and expen- sive to train people in project management, whether it is project managers or team members that need to be trained. Adding together the cost of implementation and the cost of training might frighten executives from accepting project management.

NEED FOR SOPHISTICATION Project management requires sophistication, not only with the limited technology or tools that may be available but also in the ability of people to work together. This teamwork sophistication is generally lacking in emerging market countries. People may see no ben- efit in teamwork because others may be able to recognize their lack of competencies and mistakes. They have not been trained to work properly in teams and are not rewarded for their contribution to the team.

LACK OF CLOSURE ON PROJECTS Employees are often afraid to be attached to the project at closure when lessons learned and best practices are captured. Lessons learned and best practices can be based upon what we did well and what we did poorly. Employees may not want to see anything in writing that indicates that best practices were discovered from their mistakes.

WORK ETHIC In some nations, the inability to fire people creates a relatively poor work ethic which is contrary to effective project management practices. There is a lack of punctuality in com- ing to work and attending meetings. When people do show up at meetings, only good news is discussed in a group whereas bad news is discussed one-on-one. Communication skills are weak as is report writing. There is a lack of accountability because accountability means explaining your actions if things go bad.

POOR PLANNING Poor planning is paramount in emerging market nations. There exists a lack of commit- ment to the planning process. Because of a lack of standards, perhaps attributed to the poor work ethic, estimating duration, effort, and cost is very difficult. The ultimate result of poor planning is an elongation of the schedule. For workers that are unsure about their next assignment, this can be viewed as job security at least for the short term.

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There are other barriers that are too numerous to mention. However, some of the more important ones are shown below. These barriers are

not necessarily universal in emerging market nations, and many of these barriers can be overcome.

● Currency conversion inefficiencies ● Inability to receive timely payments ● Superstitious beliefs ● Laws against importing and exporting intellectual property ● Lack of tolerance for the religious beliefs of virtual team partners ● Risk of sanctions by partners’ governments ● Use of poor or outdated technologies

Although we have painted a rather bleak picture, there are great future opportunities in these nations. Emerging market nations have an abun-

dance of talent that is yet to be fully harvested. The true capabilities of these workers are still unknown. Virtual project management teams might be the starting point for the full implementation of project management.

As project management begins to grow, senior officers will recognize and accept the benefits of project management and see their business base increase. Partnerships and joint ventures using virtual teams will become more prevalent. The barriers that impede suc- cessful project management implementation will still exist, but we will begin to excel in how to live and work within the barriers and constraints imposed on the continually emerg- ing virtual teams.

Greater opportunities are seen for the big emerging market economies. They are beginning to see more of the value of project management and have taken strides to expand its use. Some of the rapidly developing economies are even much more aggressive in pro- viding the support needed for breaking many of the barriers addressed above. As more suc- cess stories emerge, the various economies will strengthen, become more connected, and start to fully utilize project management for what it really is.

3.16 SEVEN FALLACIES THAT DELAY PROJECT MANAGEMENT MATURITY

All too often, companies embark upon a journey to implement project management only to discover that the path they thought was clear and straightforward is actually filled with obsta- cles and fallacies. Without sufficient understanding of the looming roadblocks and how to overcome them, an organization may never reach a high level of project management matu- rity. Their competitors, on the other hand, may require only a few years to implement an organizationwide strategy that predictably and consistently delivers successful projects.

One key obstacle to project management maturity is that implementation activities are often spearheaded by people in positions of authority within an organization. These people

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Recommendations

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often have a poor understanding of project management yet are unwilling to attend training programs, even short ones, to capture a basic understanding of what is required to success- fully bring project management implementation to maturity. A second key obstacle is that these same people often make implementation decisions based upon personal interests or hidden agendas. Both obstacles cause project management implementation to suffer.

The fallacies affecting the maturity of a project management implementation do not necessarily prevent project management from occurring. Instead, these mistaken beliefs elongate the implementation time frame and create significant frustration in the project management ranks. The seven most common fallacies are explained below.

Fallacy 1: Our ultimate goal is to implement project management. Wrong goal! The ultimate goal must be the progressive development of project management systems and processes that consistently and predictably result in a continuous stream of successful projects. A successful implementation occurs in the shortest amount of time and causes no disruption to the existing work flow. Anyone can purchase a software package and imple- ment project management piecemeal. But effective project management systems and processes do not necessarily result. And successfully completing one or two projects does not mean that only successfully managed projects will continue.

Additionally, purchasing the greatest project management software in the world cannot and will not replace the necessity of people having to work together in a project management environment. Project management software is not:

● A panacea or quick fix to project management issues ● An alternative for the human side of project management ● A replacement for the knowledge, skills, and experiences needed to manage projects ● A substitute for human decision-making ● A replacement for management attention when needed

The right goal is essential to achieving project management maturity in the shortest time possible.

Fallacy 2: We need to establish a mandatory number of forms, templates, guide- lines, and checklists by a certain point in time. Wrong criteria! Project management maturity can be evaluated only by establishing time-based levels of maturity and by using assessment instruments for measurement. While it is true that forms, guidelines, templates, and checklists are necessities, maximizing their number or putting them in place does not equal project management maturity. Many project management practitioners—me included—believe that project management maturity can be accelerated if the focus is on the development of an organizationwide project management methodology that everyone buys into and supports.

Methodologies should be designed to streamline the way the organization handles projects. For example, when a project is completed, the team should be debriefed to capture lessons learned and best practices. The debriefing session often uncovers ways to minimize or combine processes and improve efficiency and effectiveness without increasing costs.

Fallacy 3: We need to purchase project management software to accelerate the maturity process. Wrong approach! Purchasing software just for the sake of having

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project management software is a bad idea. Too often, decision-makers purchase project management software based upon the bells and whistles that are packaged with it, believ- ing that a larger project management software package can accelerate maturity. Perhaps a $200,000 software package is beneficial for a company building nuclear power plants, but what percentage of projects require elaborate features? Project managers in my seminars readily admit that they use less than 20 percent of the capability of their project manage- ment software. They seem to view the software as a scheduling tool rather than as a tool to proactively manage projects.

The goal of software selection must be the benefits to the project and the organization, such as cost reductions through efficiency, effectiveness, standardization, and consistency. A $500 software package can, more often than not, reduce project costs just as effectively as a $200,000 package. What is unfortunate is that the people who order the software focus more on the number of packaged features than on how much money will be saved by using the software.

Fallacy 4: We need to implement project management in small steps with a small breakthrough project that everyone can track. Wrong method! This works if time is not a constraint. The best bet is to use a large project as the breakthrough project. A success- fully managed large project implies that the same processes can work on small projects, whereas the reverse is not necessarily true.

On small breakthrough projects, some people will always argue against the imple- mentation of project management and find numerous examples why it will not work. Using a large project generally comes with less resistance, especially if project execution proceeds smoothly.

There are risks with using a large project as the breakthrough project. If the project gets into trouble or fails because of poorly implemented project management, significant damage to the company can occur. There is a valid argument for starting with small pro- jects, but the author’s preference is larger projects.

Fallacy 5: We need to track and broadcast the results of the breakthrough pro- ject. Wrong course of action! Expounding a project’s success benefits only that project rather than the entire company. Illuminating how project management caused a project to succeed benefits the entire organization. People then understand that project management can be used on a multitude of projects.

Fallacy 6: We need executive support. Almost true! We need visible executive support. People can easily differentiate between genuine support and lip service. Executives must walk the talk. They must hold meetings to demonstrate their support of project management and attend various project team meetings. They must maintain an open-door policy for problems that occur during project management implementation.

Fallacy 7: We need a project management course so our workers can become Project Management Professionals (PMPs). Once again, almost true! What we really need is lifelong education in project management. Becoming a PMP is just the starting point. There is life beyond the PMBOK® Guide. Continuous organizationwide project management education is the fastest way to accelerate maturity in project management.

Needless to say, significantly more fallacies than discussed here are out there waiting to block your project management implementation and delay its maturity. What is critical is that your organization implements project management through a well-thought-out plan

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that receives organizationwide buy-in and support. Fallacies create unnecessary delays. Identifying and overcoming faulty thinking can help fast-track your organization’s project management maturity.

3.17 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses:

● Human Resources Management ● Planning

Understanding the following principles is beneficial if the reader is using this text to study for the PMP® Certification Exam:

● Different types of organizational structures ● Advantages and disadvantages of each structure ● In which structure the project manager possesses the greatest amount of authority ● In which structure the project manager possesses the least amount of authority ● Three types of matrix structures

In Appendix C, the following Dorale Products mini–case studies are applicable:

● Dorale Products (G) [Human Resources Management] ● Dorale Products (H) [Human Resources Management] ● Dorale Products (J) [Human Resources Management] ● Dorale Products (K) [Human Resources Management]

The following multiple-choice questions will be helpful in reviewing the principles of this chapter:

1. In which organizational form is it most difficult to integrate project activities? A. Classical/traditional B. Projectized C. Strong matrix D. Weak matrix

2. In which organization form would the project manager possess the greatest amount of authority? A. Classical/traditional B. Projectized

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C. Strong matrix D. Weak matrix

3. In which organizational form does the project manager often have the least amount of authority? A. Classical/traditional B. Projectized C. Strong matrix D. Weak matrix

4. In which organizational form is the project manager least likely to share resources with other projects? A. Classical/traditional B. Projectized C. Strong matrix D. Weak matrix

5. In which organizational form do project managers have the greatest likelihood of possess- ing reward power and have a wage-and-salary administration function? (The project and line manager are the same person.) A. Classical/traditional B. Projectized C. Strong matrix D. Weak matrix

6. In which organizational form is the worker in the greatest jeopardy of losing his or her job if the project gets canceled? A. Classical/traditional B. Projectized C. Strong matrix D. Weak matrix

7. In which type of matrix structure would a project manager most likely have a command of technology? A. Strong matrix B. Balanced matrix C. Weak matrix D. Cross-cultural matrix

ANSWERS

1. A

2. B

3. D

4. B

5. A

6. B

7. A

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PROBLEMS

3–1 Much has been written about how to identify and interpret signs that indicate that a new organizational form is needed. Grinnell and Apple have identified five signs in addition to those previously described in Section 3.617:

● Management is satisfied with its technical skills, but projects are not meeting time, cost, and other project requirements.

● There is a high commitment to getting project work done, but great fluctuation in how well performance specifications are met.

● Highly talented specialists involved in the project feel exploited and misused. ● Particular technical groups or individuals constantly blame each other for failure to

meet specifications or delivery dates. ● Projects are on time and to specification, but groups and individuals aren’t satisfied

with the achievement.

Grinnell and Apple state that there is a good chance that a matrix structure will eliminate or alleviate these problems. Do you agree or disagree? Does your answer depend on the type of project? Give examples or counterexamples to defend your answers.

3–2 One of the most difficult problems facing management is that of how to minimize the transition time between changeover from a purely traditional organizational form to a project organizational form. Managing the changeover is difficult in that management must consis- tently “provide individual training on teamwork and group problem solving; also, provide the project and functional groups with assignments to help build teamwork.”

3–3 Do you think that personnel working in a project organizational structure should undergo “therapy” sessions or seminars on a regular basis so as to better understand their working envi- ronment? If yes, how frequently? Does the frequency depend upon the project organizational form selected, or should they all be treated equally?

3–4 Which organizational form would be best for the following corporate strategies?

a. Developing, manufacturing, and marketing many diverse but interrelated technologi- cal products and materials

b. Having market interests that span virtually every major industry c. Becoming multinational with a rapidly expanding global business d. Working in a business environment of rapid and drastic change, together with strong

competition

3–5 Do you think that documenting relationships is necessary in order to operate effectively in any project organizational structure? How would you relate your answer to a statement made in the previous chapter that each project can set up its own policies, procedures, rules, and directives as long as they conform to company guidelines?

3–6 In general, how could each of the following parameters influence your choice for an organizational structure? Explain your answers in as much depth as possible.

a. The project cost b. The project schedule

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17. See note 11.

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c. The project duration d. The technology requirements e. The geographical locations f. The required working relationships with the customer

3–7 In general, what are the overall advantages and disadvantages of superimposing one organizational form over another?

3–8 In deciding to go to a new organizational form, what impact should the capabilities of the following groups have on your decision?

a. Top management b. Middle management c. Lower-level management

3–9 Should a company be willing to accept a project that requires immediate organizational restructuring? If so, what factors should it consider?

3–10 Table 2–6 identifies the different life cycles of programs, projects, systems, and products. For each of the life cycles’ phases, select a project organizational form that you feel would work best. Defend your answer with examples, advantages, and disadvantages.

3–11 A major steel producer in the United States uses a matrix structure for R&D. Once the product is developed, the product organizational structure is used. Are there any advantages to this setup?

3–12 A major American manufacturer of automobile parts has a division that has successfully existed for the past ten years with multiple products, a highly sophisticated R&D section, and a pure traditional structure. The growth rate for the past five years has been 12 percent. Almost all middle and upper-level managers who have worked in this division have received promo- tions and transfers to either another division or corporate headquarters. According to “the book,” this division has all the prerequisites signifying that they should have a project organi- zational form of some sort, and yet they are extremely successful without it. Just from the amount of informa-tion presented, how can you account for their continued success? What do you think would be the major obstacles in convincing the personnel that a new organizational form would be better? Do you think that continued success can be achieved under the present structure?

3–13 Several authors contend that technology suffers in a pure product organizational form because there is no one group responsible for long-range planning, whereas the pure functional organization tends to sacrifice time and schedule. Do you agree or disagree with this statement? Defend your choice with examples.

3–14 Below are three statements that are often used to describe the environment of a matrix. Do you agree or disagree? Defend your answer.

a. Project management in a matrix allows for fuller utilization of personnel. b. The project manager and functional manager must agree on priorities. c. Decision-making in a matrix requires continual trade-offs on time, cost, technical risk,

and uncertainty.

3–15 Assume that you have to select a project organizational form for a small company. For each form described in this chapter, discuss the applicability and state the advantages and

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disadvantages as they apply to this small company. (You may find it necessary to first deter- mine the business base of the small company.)

3–16 How would each person identified below respond to the question, “How many bosses do you have?”

a. Project manager b. Functional team member c. Functional manager

(Repeat for each organizational form discussed in this chapter.)

3–17 If a project were large enough to contain its own resources, would a matrix organizational form be acceptable?

3–18 One of the most common reasons for not wanting to adopt a matrix is the excessive administrative costs and accompanying overhead rates. Would you expect the overhead rates to decrease as the matrix matures? (Disregard other factors that can influence the overhead rates, such as business base, growth rate, etc.)

3–19 Which type of organizational structure is best for R&D personnel to keep in touch with other researchers?

3–20 Which type of organizational form fosters teamwork in the best manner?

3–21 Canadian bankers have been using the matrix organizational structure to create “banking general managers” for all levels of a bank. Does the matrix structure readily admit itself to a banking environment in order to create future managers? Can we consider a branch manager as a matrix project manager?

3–22 A major utility company in Cleveland has what is commonly called “fragmented” project management, where each department maintains project managers through staff posi- tions. The project managers occasionally have to integrate activities that involve departments other than their own. Each project normally requires involvement of several people. The com- pany also has product managers operating out of a rather crude project (product) organizational structure. Recently, the product managers and project managers were competing for resources within the same departments.

To complicate matters further, management has put a freeze on hiring. Last week top management identified 120 different projects that could be undertaken. Unfortunately, under the current structure there are not enough staff project managers available to handle these projects. Also, management would like to make better use of the scarce functional resources.

Staff personnel contend that the solution to the above problems is the establishment of a project management division under which there will be a project management department and a product management department. The staff people feel that under this arrangement better utilization of line personnel will be made, and that each project can be run with fewer staff peo- ple, thus providing the opportunity for more projects. Do you agree or disagree, and what prob- lems do you foresee?

3–23 Some organizational structures are considered to be “project-driven.” Define what is meant by “project-driven.” Which organizational forms described in this chapter would fall under your definition?

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3–24 Are there any advantages to having a single project engineer as opposed to having a com- mittee of key functional employees who report to the director of engineering?

3–25 The major difficulty in the selection of a project organizational form involves placement of the project manager. In the evolutionary process, the project manager started out reporting to a department head and ultimately ended up reporting to a senior executive. In general, what were the major reasons for having the project manager report higher and higher in the organi- zational structure?

3–26 Ralph is a department manager who is quite concerned about the performance of the peo- ple beneath him. After several months of analysis, Ralph has won the acceptance of his superi- ors for setting up a project management structure in his department. Out of the twenty-three departments in the company, his will be the only one with formalized project management. Can this situation be successful even though several projects require interfacing with other departments?

3–27 A large electronics corporation has a multimillion dollar project in which 90 percent of the work stays within one division. The division manager wants to be the project manager. Should this be allowed even though there exists a project management division?

3–28 The internal functioning of an organization must consider:

● The demands imposed on the organization by task complexity ● Available technology ● The external environment ● The needs of the organizational membership

Considering these facts, should an organization search for the one best way to organize under all conditions? Should managers examine the functioning of an organization relative to its needs, or vice versa?

3–29 Project managers, in order to get the job accomplished, need adequate organizational status and authority. One corporate executive contends that an organizational chart such as that in Figure 3–6 can be modified to show that the project managers have adequate authority by placing the department managers in boxes at the top of the functional respon- sibility arrowheads. The executive further contends that, with this approach, the project managers appear to be higher in the organization than their departmental counterparts but are actually equal in status. Do you agree or disagree with the executive’s idea? Will there be a proper balance of power between project and department managers with this organiza- tional structure?

3–30 Defend or attack the following two statements concerning the operation of a matrix:

● There should be no disruption due to dual accountability. ● A difference in judgment should not delay work in progress.

3–31 A company has fifteen projects going on at once. Three projects are over $5 million, seven projects are between $1 million and $3 million, and five projects are between $500,000 and $700,000. Each project has a full-time project manager. Just based upon this information, which organizational form would be best? Can all the project managers report to the same person?

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3–32 A major insurance company is considering the implementation of project management. The majority of the projects in the company are two weeks in duration, with very few existing beyond one month. Can project management work here?

3–33 The definition of project management in Section 1.9 identifies project teams and task forces. How would you distinguish between a project team and a task force, and what indus- tries and/or projects would be applicable to each?

3–34 Can informal project management work in a structured environment at the same time as formal project management and share the same resources?

3–35 Several people believe that the matrix structure can be multidimensional (as shown in Figure 3–12). Explain the usefulness of such a structure.

3–36 Many companies have informal project management where work flows horizontally, but in an informal manner. What are the characteristics of informal project management? Which types of companies can operate effectively with informal project management?

3–37 Some companies have tried to develop a matrix within a matrix. Is it possible to have a matrix for formal project control and an internal authority matrix, communication matrix, responsibility matrix, or a combination of several of these?

3–38 Is it possible for a matrix to get out of control because of too many small projects, each competing for the same shared resources? If so, how many projects are too many? How can management control the number of projects? Does your answer depend on whether the organi- zation is project-driven or non–project-driven?

3–39 A government subcontractor operates with a pure specialized product management orga- nizational structure and has four product lines. All employees are required to have a top secret security clearance. The subcontractor’s plant is structured such that each of the four product lines occupies a secured area in the building. Employees wear security badges that give them access to the different areas. Most of the employees are authorized to have access only to their area. Only the executives have access to all four areas. For security reasons, functional employ- ees are not permitted to discuss the product lines with each other.

Many of the projects performed in each of the product lines are identical, and severe dupli- cation of efforts exist. Management is interested in converting over to a matrix structure to min- imize the duplication of effort. What problems must be overcome before and during matrix implementation?

3–40 A company has decided to go to full project management utilizing a matrix structure. Can the implementation be done in stages? Can the matrix be partially implemented, say, in one por- tion of the organization, and then gradually expanded across the rest of the company?

3–41 A company has two major divisions, both housed under the same roof. One division is the aerospace group, where all activities are performed within a formal matrix. The second divi- sion is the industrial group, which operates with pure product management, except for the MIS department, which has an informal matrix. If both divisions have to share common corporate resources, what problems can occur?

3–42 Several Fortune 100 corporations have a corporate engineering group that assumes the responsibility of the project management–project engineering function for all major capital projects in all divisions worldwide. Explain how the corporate engineering function should work, as well as its advantages and disadvantages.

Problems 165

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JONES AND SHEPHARD ACCOUNTANTS, INC.*

By 1990, Jones and Shephard Accountants, Inc. (J&S) was a midsized company and ranked 38th in size by the American Association of Accountants. In order to compete with the larger firms, J&S formed an Information Services Division designed primarily for studies and analyses. By 1995, the Information Services Division (ISD) had fifteen employees.

In 1997, the ISD purchased three largecomputers. With this increased capacity, J&S expanded its services to help satisfy the needs of outside customers. By September 1998, the internal and external workloads had increased to a point where the ISD now employed over fifty people.

The director of the division was very disappointed in the way that activities were being handled. There was no single person assigned to push through a project, and outside customers did not know whom to call to get answers regarding project status. The director found that most of his time was being spent on day-to-day activities such as conflict resolution instead of strate- gic planning and policy formulation.

The biggest problems facing the director were the two continuous internal projects (called Project X and Project Y, for simplicity) that required month-end data collation and reporting. The director felt that these two projects were important enough to require a full-time project manager on each effort.

In October 1998, corporate management announced that the ISD director would be reassigned on February 1, 1999, and that the announcement of his replacement would not be made until the middle of January. The same week that the announcement was made, two individuals were hired from outside the company to take charge of Project X and Project Y. Exhibit 3–1 shows the organizational structure of the ISD.

Within the next thirty days, rumors spread throughout the organization about who would become the new director. Most people felt that the position would be filled from within the divi- sion and that the most likely candidates would be the two new project managers. In addition, the associate director was due to retire in December, thus creating two openings.

On January 3, 1999, a confidential meeting was held between the ISD director and the systems manager.

ISD Director: “Corporate has approved my request to promote you to division director. Unfortunately, your job will not be an easy one. You’re going to have to restructure the organi- zation somehow so that our employees will not have as many conflicts as they are now faced with. My secretary is typing up a confidential memo for you explaining my observations on the problems within our division.

“Remember, your promotion should be held in the strictest confidence until the final announcement later this month. I’m telling you this now so that you can begin planning the restructuring. My memo should help you.” (See Exhibit 3–2 for the memo.)

The systems manager read the memo and, after due consideration, decided that some form of matrix would be best. To help him structure the organization properly, an outside consultant

166 ORGANIZATIONAL STRUCTURES

CASE STUDIES

* Revised 2007.

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Case Studies 167

Exhibit 3–1. ISD organizational chart

*DENOTES THE NUMBER OF ADDITIONAL FUNCTIONAL EMPLOYEES

DIRECTOR, ISD

ASSOCIATE DIRECTOR

SECRETARY

SUP., TECH. WRITING

SUPERVISOR, PROCEDURES SECRETARY

SECRETARY POOL

PROJECT X

PROJECT Y

MANAGER, OPERATIONS

MGR., ADMIN. SERVICES

MGR., COMP. SYSTEMS

SUP., INTERNAL AUDIT

SUP., ACCT. SERVICES

SUP., GEN. LEDGER

SUP., COST ACCOUNTING

2* 2

6 8 7

Exhibit 3–2. Confidential memo

From: ISD Director To: Systems Manager Date: January 3, 1999

Congratulations on your promotion to division director. I sincerely hope that your tenure will be productive both personally and for corporate. I have prepared a short list of the major obstacles that you will have to consider when you take over the controls.

1. Both Project X and Project Y managers are highly competent individuals. In the last four or five days, however, they have appeared to create more conflicts for us than we had previously. This could be my fault for not dele- gating them sufficient authority, or could be a result of the fact that several of our people consider these two individuals as prime candidates for my position. In addition, the operations manager does not like other managers coming into his “empire” and giving direction

2. I’m not sure that we even need an associate director. That decision will be up to you.

3. Corporate has been very displeased with our inability to work with outside customers. You must consider this problem with any organizational structure you choose.

4. The corporate strategic plan for our division contains an increased emphasis on special, internal MIS projects. Corporate wants to limit our external activities for a while until we get our internal affairs in order.

5. I made the mistake of changing our organizational structure on a day-to-day basis. Perhaps it would have been better to design a structure that could satisfy advanced needs, especially one that we can grow into.

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was hired to help identify the potential problems with changing over to a matrix. The follow- ing problem areas were identified by the consultant:

1. The operations manager controls more than 50 percent of the people resources. You might want to break up his empire. This will have to be done very carefully.

2. The secretary pool is placed too high in the organization. 3. The supervisors who now report to the associate director will have to be reassigned

lower in the organization if the associate director’s position is abolished. 4. One of the major problem areas will be trying to convince corporate management

that their change will be beneficial. You’ll have to convince them that this change can be accomplished without having to increase division manpower.

5. You might wish to set up a separate department or a separate project for customer relations.

6. Introducing your employees to the matrix will be a problem. Each employee will look at the change differently. Most people have the tendency of looking first at the shift in the balance of power—have I gained or have I lost power and status?

The systems manager evaluated the consultant’s comments and then prepared a list of questions to ask the consultant at their next meeting:

1. What should the new organizational structure look like? Where should I put each per- son, specifically the managers?

2. When should I announce the new organizational change? Should it be at the same time as my appointment or at a later date?

3. Should I invite any of my people to provide input to the organizational restructuring? Can this be used as a technique to ease power plays?

4. Should I provide inside or outside seminars to train my people for the new organiza- tional structure? How soon should they be held?

CORONADO COMMUNICATIONS1

Coronado Communications, Inc. (CCI) was a midsized consulting com- pany with corporate headquarters in New York City and satellite divisions

in more than twenty-five of the largest cities in the United States. CCI was primarily a con- sulting company for large and small firms that wished to improve their communication systems, including computer hardware and networking systems. Each of the twenty-five divisions ser- viced its own geographical areas. Whenever a request for proposal was sent to CCI, corporate decided which satellite office would bid on the job.

In 2009, Fred Morse took over as president and CEO of CCI. Although CCI was success- ful and won a good portion of its contracts through competitive bidding, Morse felt that CCI could win more contracts if he created a climate of internal competition. Prior to Morse com- ing on board as the CEO, CCI corporate would decide which satellite office would bid on the job. Morse decided that any and all CCI branches could bid on each and every contract. This process meant that each satellite office would be competing with other satellite offices.

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Background

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In the past, CCI encouraged the satellite office that would be bidding on the job to use internal resources whenever possible. If the office in

Chicago were bidding on a contract and were awarded the contract, then the Chicago office could use resources from the Boston office to fulfill the contract. The workers in the Boston office would then bill the Chicago office a fully loaded or fully burdened hourly rate, but excluding profits. All profits would be shown on the financial statement of the office that won the contract. This technique fostered cooperation between the satellite offices because the Chicago office would get credit for all profits and the Boston office would be able to keep some of its employees on direct charges against contracts rather than on overhead account if they were between jobs.

With the new competitive system, Boston would have the right to charge Chicago a profit for each hour worked, and the profit on these hours would be credited to Boston’s financial statement. In effect, Chicago would be treating Boston as though it were a contractor hired by Chicago. If Chicago felt that it could get resources at a cheaper rate by hiring resources from outside CCI, then it was allowed to do so.

The bonus system also changed. In the past, bonuses were paid out equally to each satel- lite office based upon the total profitability to CCI. Now, the bonuses paid to each satellite office would be based entirely upon the profitability of each satellite office. Salary increases would also be heavily biased toward individual satellite office profitability.

Over the years, the company had developed an outstanding enterprise project management methodology with a proven record of success. Now, each satellite office was still asked to use the methodology but could make its own modifications to satisfy its customer base.

The following facts appeared after using the new competitive system for two years:

● The gross revenue to the corporation had increased by 40 percent but the profit margin was only 9 percent, down from the 15 percent prior to the implementation of the new competitive system.

● Satellite offices were lowering their profit margins in order to win new business. ● Most satellite offices were outsourcing some of their work to low-cost suppliers rather

than using available resources from other satellite offices. ● Some of the satellite offices had to lay off some of their talented people because of lack

of work. ● Employees were asking for transfers to those satellite offices where greater opportuni-

ties existed. ● The cooperative working relationships that once existed between satellite offices was now

a competitive relationship with hoarding of information and lack of communications. ● There was no longer a uniform process in place for promotions and awards; everything

was based upon yearly satellite office profitability. ● Each satellite office created its own project management methodology. The modifica-

tions were designed to reduce paperwork and lower the overall cost of using the methodology.

● Clients that had become accustomed to seeing the old methodology were somewhat unhappy with the changes because less information was being presented to the clients during status review meetings. The clients were also unhappy that updates and changes to the methodology were not being made as fast as necessary, and CCI appeared to be getting further behind in project management capability.

Case Studies 169

Competitive System

Two Years Later

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QUESTIONS

1. Could you have anticipated that these results would have occurred? 2. What happened to the corporate culture? 3. Can project management practices be improved with a major repair to the corporate

culture? 4. Is it realistic to expect each satellite office to have its own project management

methodology? What happens when two or more satellite offices must work together? 5. Can CCI be fixed? If so, what would you do and how long do you estimate it would

take to make the repairs?

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Organizing and Staffing the Project Office and Team

171

4th Edition) Study Guide, 11th Edition) Certification Exam

• Government Project • The Bad Apple • Human Resource Management • Multiple Choice Exam Management

• Falls Engineering • White Manufacturing • Martig Construction

Company • Ducor Chemical • The Carlson Project

4.0 INTRODUCTION

Successful project management, regardless of the organizational structure, is

only as good as the individuals and leaders who are managing the key func-

tions. Project management is not a one-person operation; it requires a group

of individuals dedicated to the achievement of a specific goal. Project man-

agement includes:

● A project manager ● An assistant project manager

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● A project (home) office ● A project team

Generally, project office personnel are assigned full-time to the project and work out of the project office,

whereas the project team members work out of the functional units and may spend only a small percentage

of their time on the project. Normally, project office personnel report directly to the project manager, but they

may still be solid to their line function just for administrative control. A project office usually is not required

on small projects, and sometimes the project can be accomplished by just one person who may fill all of the

project office positions.

Before the staffing function begins, five basic questions are usually considered:

● What are the requirements for an individual to become a successful project manager? ● Who should be a member of the project team? ● Who should be a member of the project office? ● What problems can occur during recruiting activities? ● What can happen downstream to cause the loss of key team members?

On the surface, these questions may not seem especially complex. But when we apply them to a project environment (which is by definition a “temporary” situation) where a constant stream of projects is necessary for corporate growth, the staffing problems become complex, especially if the organization is understaffed.

4.1 THE STAFFING ENVIRONMENT

To understand the problems that occur during staffing, we must first inves- tigate the characteristics of project management, including the project environment, the project management process, and the project manager.

Two major kinds of problems are related to the project environment: personnel performance problems and personnel policy problems. Performance is difficult for many individuals in the project environment because it represents a change in the way of doing business. Individuals, regardless of how competent they are, find it difficult to adapt continually to a changing situation in which they report to multiple managers.

On the other hand, many individuals thrive on temporary assignments because it gives them a “chance for glory.” Unfortunately, some employees might consider the chance for glory more important than the project. For example, an employee may pay no attention to the instructions of the project manager and instead perform the task his own way. In this situation, the employee wants only to be recognized as an achiever and really does not care if the project is a success or failure, as long as he still has a functional home to return to where he will be identified as an achiever with good ideas.

The second major performance problem lies in the project–functional interface, where an individual suddenly finds himself reporting to two bosses, the functional manager and the project manager. If the functional manager and the project manager are in agreement about the work to be accomplished, then performance may not be hampered. But if conflicting

172 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

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directions are received, then the individual may let his performance suffer because of his compromising position. In this case, the employee will “bend” in the direction of the man- ager who controls his purse strings.

Personnel policy problems can create havoc in an organization, especially if the “grass is greener” in a project environment than in the functional environment. Functional organiza- tions normally specify grades and salaries for employees. Project offices, on the other hand, have no such requirements and can promote and pay according to achievement. The difficulty here is that one can distinguish between employees in grades 7, 8, 9, 10, and 11 in a line orga- nization, whereas for a project manager the distinction might appear only in the size of the project or the amount of responsibility. Bonuses are also easier to obtain in the project office but may create conflict and jealousy between the horizontal and vertical elements.

Because each project is different, the project management process allows each project to have its own policies, procedures, rules, and standards, provided they fall within broad company guidelines. Each project must be recognized as a project by top management so that the project manager has the delegated authority necessary to enforce the policies, pro- cedures, rules, and standards.

Project management is successful only if the project manager and his team are totally dedicated to the successful completion of the project. This requires each team member of the project team and office to have a good understanding of the fundamental project requirements, which include:

● Customer liaison ● Project direction ● Project planning ● Project control ● Project evaluation ● Project reporting

Ultimately, the person with the greatest influence during the staffing phase is the project manager. The personal attributes and abilities of project managers will either attract or deter highly desirable individuals. Basic characteristics include:

● Honesty and integrity ● Understanding of personnel problems ● Understanding of project technology ● Business management competence

● Management principles ● Communications

● Alertness and quickness ● Versatility ● Energy and toughness ● Decision-making ability ● Ability to evaluate risk and uncertainty

Project managers must exhibit honesty and integrity to foster an atmosphere of trust. They should not make impossible promises, such as immediate promotions for everyone if a follow-on contract is received. Also, on temporarily assigned activities, such as a

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project, managers cannot wait for personnel to iron out their own problems because time, cost, and performance requirements will not be satisfied.

Project managers should have both business management and technical expertise. They must understand the fundamental principles of management, especially those involv- ing the rapid development of temporary communication channels. Project managers must understand the technical implications of a problem, since they are ultimately responsible for all decision-making. However, many good technically oriented managers have failed because they have become too involved with the technical side of the project rather than the management side. There are strong arguments for having a project manager who has more than just an understanding of the necessary technology.

Because a project has a relatively short time duration, decision-making must be rapid and effective. Managers must be alert and quick in their ability to perceive “red flags” that can eventually lead to serious problems. They must demonstrate their versatility and toughness in order to keep subordinates dedicated to goal accomplishment. Executives must realize that the project manager’s objectives during staffing are to:

● Acquire the best available assets and try to improve them ● Provide a good working environment for all personnel ● Make sure that all resources are applied effectively and efficiently so that all

constraints are met, if possible

4.2 SELECTING THE PROJECT MANAGER: AN EXECUTIVE DECISION

Probably the most difficult decision facing upper-level management is the selection of project managers. Some managers work best on long-duration projects where decision-making can be slow; others may thrive on short- duration projects that can result in a constant-pressure environment.

A director was asked whom he would choose for a key project manager position—an individual who had been a project manager on previous programs in which there were severe problems and cost overruns, or a new aggressive individual who might have the capability to be a good project manager but had never had the opportunity. The director responded that he would go with the seasoned veteran assuming that the previous mistakes would not be made again. The argument here is that the project manager must learn from his own mistakes so they will not be made again. The new individual is apt to make the same mistakes the veteran made. However, this may limit career path opportunities for younger personnel. Stewart has commented on the importance of experience1:

Though the project manager’s previous experience is apt to have been confined to a single

functional area of business, he must be able to function on the project as a kind of general

174 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

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9.3.2.1 Interpersonal Skills

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manager in miniature. He must not only keep track of what is happening but also play the

crucial role of advocate for the project. Even for a seasoned manager, this task is not likely

to be easy. Hence, it is important to assign an individual whose administrative abilities and

skills in personal relations have been convincingly demonstrated under fire.

The selection process for project managers is not easy. Five basic questions must be considered:

● What are the internal and external sources? ● How do we select? ● How do we provide career development in project management? ● How can we develop project management skills? ● How do we evaluate project management performance?

Project management cannot succeed unless a good project manager is at the controls. It is far more likely that project managers will succeed if it is obvious to the subordinates that the general manager has appointed them. Usually, a brief memo to the line managers will suf- fice. The major responsibilities of the project manager include:

● To produce the end-item with the available resources and within the constraints of time, cost, and performance/technology

● To meet contractual profit objectives ● To make all required decisions whether they be for alternatives or termination ● To act as the customer (external) and upper-level and functional management

(internal) communications focal point ● To “negotiate” with all functional disciplines for accomplishment of the necessary

work packages within the constraints of time, cost, and performance/technology ● To resolve all conflicts

If these responsibilities were applied to the total organization, they might reflect the job description of the general manager. This analogy between project and general managers is one of the reasons why future general managers are asked to perform functions that are implied, rather than spelled out, in the job description. As an example, you are the project manager on a high-technology project. As the project winds down, an executive asks you to write a paper so that he can present it at a technical meeting in Tokyo. His name will appear first on the paper. Should this be a part of your job? As this author sees it, you really don’t have much of a choice.

In order for project managers to fulfill their responsibilities successfully, they are con- stantly required to demonstrate their skills in interface, resource, and planning and control management. These implicit responsibilities are shown below:

● Interface Management ● Product interfaces

● Performance of parts or subsections ● Physical connection of parts or subsections

● Project interfaces ● Customer ● Management (functional and upper-level)

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● Change of responsibilities ● Information flow ● Material interfaces (inventory control)

● Resource Management ● Time (schedule) ● Manpower ● Money ● Facilities ● Equipment ● Material ● Information/technology

● Planning and Control Management ● Increased equipment utilization ● Increased performance efficiency ● Reduced risks ● Identification of alternatives to problems ● Identification of alternative resolutions to conflicts

Consider the following advertisement for a facilities planning and development project manager (adapted from The New York Times, January 2, 1972):

Personable, well-educated, literate individual with college degree in Engineering to work

for a small firm. Long hours, no fringe benefits, no security, little chance for advancement

are among the inducements offered. Job requires wide knowledge and experience in man-

ufacturing, materials, construction techniques, economics, management and mathematics.

Competence in the use of the spoken and written English is required. Must be willing to

suffer personal indignities from clients, professional derision from peers in the more con-

ventional jobs, and slanderous insults from colleagues.

Job involves frequent extended trips to inaccessible locations throughout the world,

manual labor and extreme frustration from the lack of data on which to base decisions.

Applicant must be willing to risk personal and professional future on decisions based upon

inadequate information and complete lack of control over acceptance of recommendations

by clients. Responsibilities for the work are unclear and little or no guidance is offered.

Authority commensurate with responsibility is not provided either by the firm or its clients.

Applicant should send resume, list of publications, references and other supporting doc-

umentation to. . . .

Fortunately, these types of job descriptions are very rare today. Finding the person with the right qualifications is not an easy task because the selection

of project managers is based more on personal characteristics than on the job description. In Section 4.1 a brief outline of desired characteristics was presented. Russell Archibald defines a broader range of desired personal characteristics2:

● Flexibility and adaptability ● Preference for significant initiative and leadership

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● Aggressiveness, confidence, persuasiveness, verbal fluency ● Ambition, activity, forcefulness ● Effectiveness as a communicator and integrator

● Broad scope of personal interests ● Poise, enthusiasm, imagination, spontaneity ● Able to balance technical solutions with time, cost, and human factors ● Well organized and disciplined ● A generalist rather than a specialist ● Able and willing to devote most of his time to planning and controlling ● Able to identify problems ● Willing to make decisions ● Able to maintain proper balance in the use of time

This ideal project manager would probably have doctorates in engineering, business, and psychology, and experience with ten different companies in a variety of project office positions, and would be about twenty-five years old. Good project managers in industry today would probably be lucky to have 70 to 80 percent of these characteristics. The best project managers are willing and able to identify their own shortcomings and know when to ask for help.

The difficulty in staffing, especially for project managers or assistant project man- agers, is in determining what questions to ask during an interview to see if an individual has the necessary or desired characteristics. Individuals may be qualified to be promoted vertically but not horizontally. An individual with poor communication skills and interper- sonal skills can be promoted to a line management slot because of his technical expertise, but this same individual is not qualified for project management promotion.

One of the best ways to interview is to read each element of the job description to the potential candidate. Many individuals want a career path in project management but are totally unaware of what the project manager’s duties are.

So far we have discussed the personal characteristics of the project manager. There are also job-related questions to consider, such as:

● Are feasibility and economic analyses necessary? ● Is complex technical expertise required? If so, is it within the individual’s

capabilities? ● If the individual is lacking expertise, will there be sufficient backup strength in the

line organizations? ● Is this the company’s or the individual’s first exposure to this type of project and/or

client? If so, what are the risks to be considered? ● What is the priority for this project, and what are the risks? ● With whom must the project manager interface, both inside and outside the

organization?

Most good project managers know how to perform feasibility studies and cost- benefit analyses. Sometimes these studies create organizational conflict. A major utility

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company begins each computer project with a feasibility study in which a cost-benefit analysis is performed. The project managers, all of whom report to a project management division, perform the study themselves without any direct functional support. The func- tional managers argue that the results are grossly inaccurate because the functional experts are not involved. The project managers, on the other hand, argue that they never have suf- ficient time or money to perform a complete analysis. Some companies resolve this by having a special group perform these studies.

Most companies would prefer to find project managers from within. Unfortunately, this is easier said than done.

There are also good reasons for recruiting from outside the company. A new project manager hired from the outside would be less likely to have strong informal ties to any one line organization and thus could be impartial. Some companies further require that the individual spend an apprenticeship period of twelve to eighteen months in a line organiza- tion to find out how the company functions, to become acquainted with the people, and to understand the company’s policies and procedures.

One of the most important but often least understood characteristics of good project managers is the ability to know their own strengths and weaknesses and those of their employees. Managers must understand that in order for employees to perform efficiently:

● They must know what they are supposed to do. ● They must have a clear understanding of authority and its limits. ● They must know what their relationship with other people is. ● They should know what constitutes a job well done in terms of specific results. ● They should know where and when they are falling short. ● They must be made aware of what can and should be done to correct unsatisfac-

tory results. ● They must feel that their superior has an interest in them as individuals. ● They must feel that their superior believes in them and wants them to succeed.

4.3 SKILL REQUIREMENTS FOR PROJECT AND PROGRAM MANAGERS

Managing complex programs represents a challenge requiring skills in team building, leadership, conflict resolution, technical expertise, plan- ning, organization, entrepreneurship, administration, management sup- port, and the allocation of resources. This section examines these skills relative to program management effectiveness. A key factor to good pro- gram performance is the program manager’s ability to integrate personnel

from many disciplines into an effective work team. To get results, the program manager must relate to (1) the people to be managed,

(2) the task to be done, (3) the tools available, (4) the organizational structure, and (5) the organizational environment, including the customer community.

With an understanding of the interaction of corporate organization and behavior ele- ments, the manager can build an environment conducive to the working team’s needs. The

178 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

PMBOK® Guide, 5th Edition Chapter 9 Human Resources

Management

9.3.2.1 Interpersonal Skills

1.4.1 Program Management

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internal and external forces that impinge on the organization of the project must be recon- ciled to mutual goals. Thus the program manager must be both socially and technically aware to understand how the organization functions and how these functions will affect the program organization of the particular job to be done. In addition, the program manager must understand the culture and value system of the organization he is working with. Effective program management is directly related to proficiency in these ten skills:

● Team building ● Leadership ● Conflict resolution ● Technical expertise ● Planning ● Organization ● Entrepreneurship ● Administration ● Management support ● Resource allocation

It is important that the personal management style underlying these skills facilitate the integration of multidisciplinary program resources for synergistic operation. The days of the manager who gets by with technical expertise alone or pure administrative skills are gone.

Building the program team is one of the prime responsibilities of the program manager. Team building involves a whole spectrum of man-

agement skills required to identify, commit, and integrate the various task groups from the traditional functional organization into a single program management system.

To be effective, the program manager must provide an atmosphere conducive to team- work. He must nurture a climate with the following characteristics:

● Team members committed to the program ● Good interpersonal relations and team spirit ● The necessary expertise and resources ● Clearly defined goals and program objectives ● Involved and supportive top management ● Good program leadership ● Open communication among team members and support organizations ● A low degree of detrimental interpersonal and intergroup conflict

Three major considerations are involved in all of the above factors: (1) effective communications, (2) sincere interest in the professional growth of team members, and (3) commitment to the project.

A prerequisite for program success is the program manager’s ability to lead the team within a relatively unstructured environment. It involves

Skill Requirements for Project and Program Managers 179

Team-Building Skills

Leadership Skills

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dealing effectively with managers and supporting personnel across functional lines and the ability to collect and filter relevant data for decision-making in a dynamic environment. It involves the ability to integrate individual demands, requirements, and limitations into decisions and to resolve intergroup conflicts.

As with a general manager, quality leadership depends heavily on the program man- ager’s personal experience and credibility within the organization. An effective manage- ment style might be characterized this way:

● Clear project leadership and direction ● Assistance in problem-solving ● Facilitating the integration of new members into the team ● Ability to handle interpersonal conflict ● Facilitating group decisions ● Capability to plan and elicit commitments ● Ability to communicate clearly ● Presentation of the team to higher management ● Ability to balance technical solutions against economic and human factors

The personal traits desirable and supportive of the above skills are:

● Project management experience ● Flexibility and change orientation ● Innovative thinking ● Initiative and enthusiasm ● Charisma and persuasiveness ● Organization and discipline

Conflict is fundamental to complex task management. Understanding the determinants of conflicts is important to the program manager’s abil-

ity to deal with conflicts effectively. When conflict becomes dysfunctional, it often results in poor program decision-making, lengthy delays over issues, and a disruption of the team’s efforts, all negative influences to program performance. However, conflict can be beneficial when it produces involvement and new information and enhances the competitive spirit.

To successfully resolve conflict and improve overall program performance, program managers must:

● Understand interaction of the organizational and behavioral elements in order to build an environment conducive to their team’s motivational needs. This will enhance active participation and minimize unproductive conflict.

● Communicate effectively with all organizational levels regarding both project objectives and decisions. Regularly scheduled status review meetings can be an important communication vehicle.

● Recognize the determinants of conflict and their timing in the project life cycle. Effective project planning, contingency planning, securing of commitments, and

180 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

Conflict Resolution Skills

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involving top management can help to avoid or minimize many conflicts before they impede project performance.

The accomplished manager needs a “sixth sense” to indicate when conflict is desir- able, what kind of conflict will be useful, and how much conflict is optimal for a given situation. In the final analysis, he has the sole responsibility for his program and how con- flict will contribute to its success or failure.

The program manager rarely has all the technical, administrative, and marketing expertise needed to direct the program single-handedly. It is

essential, however, for the program manager to understand the technology, the markets, and the environment of the business. Without this understanding, the consequences of local decisions on the total program, the potential growth ramifications, and relationships to other business opportunities cannot be foreseen by the manager. Further technical exper- tise is necessary to evaluate technical concepts and solutions, to communicate effectively in technical terms with the project team, and to assess risks and make trade-offs between cost, schedule, and technical issues. This is why in complex problem-solving situations so many project managers must have an engineering background.

Technical expertise is composed of an understanding of the:

● Technology involved ● Engineering tools and techniques employed ● Specific markets, their customers, and requirements ● Product applications ● Technological trends and evolutions ● Relationship among supporting technologies ● People who are part of the technical community

The technical expertise required for effective management of engineering programs is nor- mally developed through progressive growth in engineering or supportive project assign- ments in a specific technology area. Frequently, the project begins with an exploratory phase leading into a proposal. This is normally an excellent testing ground for the future program manager. It also allows top management to judge the new candidate’s capacity for managing the technological innovations and integration of solutions.

Planning skills are helpful for any undertaking; they are absolutely essential for the successful management of large complex programs.

The project plan is the road map that defines how to get from the start to the final results. Program planning is an ongoing activity at all organizational levels. However, the

preparation of a project summary plan, prior to project start, is the responsibility of the pro- gram manager. Effective project planning requires particular skills far beyond writing a doc- ument with schedules and budgets. It requires communication and information processing skills to define the actual resource requirements and administrative support

Skill Requirements for Project and Program Managers 181

Technical Skills

Planning Skills

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necessary. It requires the ability to negotiate the necessary resources and commitments from key personnel in various support organizations with little or no formal authority.

Effective planning requires skills in the areas of:

● Information processing ● Communication ● Resource negotiations ● Securing commitments ● Incremental and modular planning ● Assuring measurable milestones ● Facilitating top management involvement

In addition, the program manager must assure that the plan remains a viable docu- ment. Changes in project scope and depth are inevitable. The plan should reflect necessary changes through formal revisions and should be the guiding document throughout the life cycle of the program. An obsolete or irrelevant plan is useless.

Finally, program managers need to be aware that planning can be overdone. If not con- trolled, planning can become an end in itself and a poor substitute for innovative work. It is the responsibility of the program manager to build flexibility into the plan and police it against misuse.

The program manager must be a social architect; that is, he must understand how the organization works and how to work with the orga-

nization. Organizational skills are particularly important during project formation and startup when the program manager is integrating people from many different disciplines into an effective work team. It requires defining the reporting relationships, responsibili- ties, lines of control, and information needs. A good program plan and a task matrix are useful organizational tools. In addition, the organizational effort is facilitated by clearly defined program objectives, open communication channels, good program leadership, and senior management support.

The program manager also needs a general management perspective. For example, economic considerations affect the organization’s finan-

cial performance, but objectives often are much broader than profits. Customer satisfac- tion, future growth, cultivation of related market activities, and minimum organizational disruptions of other programs might be equally important goals. The effective program manager is concerned with all these issues.

Entrepreneurial skills are developed through actual experience. However, formal MBA-type training, special seminars, and cross-functional training programs can help to develop the entrepreneurial skills needed by program managers.

Administrative skills are essential. The program manager must be experienced in planning, staffing, budgeting, scheduling, and other control

182 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

Organizational Skills

Entrepreneurial Skills

Administrative Skills

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techniques. In dealing with technical personnel, the problem is seldom to make people understand administrative techniques such as budgeting and scheduling, but to impress on them that costs and schedules are just as important as elegant technical solutions.

Particularly on larger programs, managers rarely have all the administrative skills required. While it is important that program managers understand the company’s operat- ing procedures and available tools, it is often necessary for the program manager to free himself from administrative details regardless of his ability to handle them. He has to del- egate considerable administrative tasks to support groups or hire a project administrator.

Some helpful tools for the manager in the administration of his program include: (1) the meeting, (2) the report, (3) the review, and (4) budget and schedule controls. Program managers must be thoroughly familiar with these available tools and know how to use them effectively.

The program manager is surrounded by a myriad of organizations that either support him or control his activities. An understanding of these interfaces is important to program managers as it enhances their ability

to build favorable relationships with senior management. Project organizations are shared- power systems with personnel of many diverse interests and “ways of doing things.” Only a strong leader backed by senior management can prevent the development of unfavorable biases.

Four key variables influence the project manager’s ability to create favorable rela- tionships with senior management: (1) his ongoing credibility, (2) the visibility of his program, (3) the priority of his program relative to other organizational undertakings, and (4) his own accessibility.

A program organization has many bosses. Functional lines often shield support organizations from direct financial control by the project office.

Once a task has been authorized, it is often impossible to control the personnel assignments, priorities, and indirect manpower costs. In addition, profit accountability is difficult owing to the interdependencies of various support departments and the often changing work scope and contents.

Effective and detailed program planning may facilitate commitment and reinforce control. Part of the plan is the “Statement of Work,” which establishes a basis for resource allocation. It is also important to work out specific agreements with all key contributors and their superiors on the tasks to be performed and the associated budgets and schedules. Measurable milestones are not only important for hardware components, but also for the “invisible” program components such as systems and software tasks. Ideally, these com- mitments on specs, schedules, and budgets should be established through involvement by key personnel in the early phases of project formation, such as the proposal phase. This is the time when requirements are still flexible, and trade-offs among performance, schedule, and budget parameters are possible. Further, this is normally the time when the competi- tive spirit among potential contributors is highest, often leading to a more cohesive and challenging work plan.

Skill Requirements for Project and Program Managers 183

Management Support Building Skills

Resource Allocation Skills

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4.4 SPECIAL CASES IN PROJECT MANAGER SELECTION

Thus far we have assumed that the project is large enough for a full-time project manager to be appointed. This is not always the case. There are four major problem areas in staffing projects:

● Part-time versus full-time assignments ● Several projects assigned to one project manager ● Projects assigned to functional managers ● The project manager role retained by the general manager

The first problem is generally related to the size of the project. If the project is small (in time duration or cost), a part-time project manager may be selected. Many executives have fallen into the trap of letting line personnel act as part-time project managers while still performing line functions. If the employee has a conflict between what is best for the project and what is best for his line organization, the project will suffer. It is only natural that the employee will favor the place the salary increases come from.

It is a common practice for one project manager to control several projects, especially if they are either related or similar. Problems come about when the projects have drastically different priorities. The low-priority efforts will be neglected.

If the project is a high-technology effort that requires specialization and can be per- formed by one department, then it is not unusual for the line manager to take on a dual role and act as project manager as well. This can be difficult to do, especially if the project man- ager is required to establish the priorities for the work under his supervision. The line manager may keep the best resources for the project, regardless of the priority. Then that project will be a success at the expense of every other project he must supply resources to.

Probably the worst situation is that in which an executive fills the role of project manager for a particular effort. The executive may not have the time necessary for total dedication to the achievement of the project. He cannot make effective decisions as a project manager while still discharging normal duties. Additionally, the executive may hoard the best resources for his project.

4.5 SELECTING THE WRONG PROJECT MANAGER

Even though executives know the personal characteristics and traits that project managers should possess, and even though job descriptions are often clearly defined, management may still select the wrong person because they base their decision on the following criteria.

Some executives consider gray hair to be a sure indication of maturity, but this is not the type of maturity needed for project management.

Maturity in project management generally comes from exposure to several types of projects

184 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

Maturity

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in a variety of project office positions. In aerospace and defense, it is possible for a project manager to manage the same type of project for ten years or more. When placed on a new project, the individual may try to force personnel and project requirements to adhere to the same policies and procedures that existed on the ten-year project. The project manager may know only one way of managing projects.

Applying hard-nosed tactics to subordinates can be very demoralizing. Project managers must give people sufficient freedom to get the job

done, without providing continuous supervision and direction. A line employee who is given “freedom” by his line manager but suddenly finds himself closely supervised by the project manager will be very unhappy.

Line managers, because of their ability to control an employee’s salary, need only one leadership style and can force the employees to adapt. The project manager, on the other hand, cannot control salaries and must have a wide variety of leadership styles. The project manager must adapt a leadership style to the project employees, whereas the reverse is true in the line organization.

Executives should not assign individuals as project managers simply because of availability. People have a tendency to cringe when you sug-

gest that project managers be switched halfway through a project. For example, manager X is halfway through his project. Manager Y is waiting for an assignment. A new project comes up, and the executive switches managers X and Y. There are several reasons for this. The most important phase of a project is planning, and, if it is accomplished correctly, the project could conceivably run itself. Therefore, manager Y should be able to handle manager X’s project.

There are several other reasons why this switch may be necessary. The new project may have a higher priority and require a more experienced manager. Second, not all project managers are equal, especially when it comes to planning. When an executive finds a project manager who demonstrates extraordinary talents at planning, there is a natural tendency for the executive to want this project manager to plan all projects.

Executives quite often promote technical line managers without real- izing the consequences. Technical specialists may not be able to

divorce themselves from the technical side of the house and become project managers rather than project doers. There are also strong reasons to promote technical specialists to project managers. These people often:

● Have better relationships with fellow researchers ● Can prevent duplication of effort ● Can foster teamwork ● Have progressed up through the technical ranks ● Are knowledgeable in many technical fields ● Understand the meaning of profitability and general management philosophy

Selecting the Wrong Project Manager 185

Hard-Nosed Tactics

Availability

Technical Expertise

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● Are interested in training and teaching ● Understand how to work with perfectionists

Promoting an employee to project management because of his technical expertise may be acceptable if, and only if, the project requires this expertise and technical direction, as in R&D efforts. For projects in which a “generalist” is acceptable as a project manager, there may be a great danger in assigning highly technical personnel. According to Wilemon and Cicero3:

● The greater the project manager’s technical expertise, the higher the propensity that he will overly involve himself in the technical details of the project.

● The greater the project manager’s difficulty in delegating technical task responsi- bilities, the more likely it is that he will overinvolve himself in the technical details of the project. (Depending upon his expertise to do so.)

● The greater the project manager’s interest in the technical details of the project, the more likely it is that he will defend the project manager’s role as one of a techni- cal specialist.

● The lower the project manager’s technical expertise, the more likely it is that he will overstress the nontechnical project functions (administrative functions).

Executives quite often place individuals as project managers simply to satisfy a customer request. Being able to communicate with the customer

does not guarantee project success, however. If the choice of project manager is simply a con- cession to the customer, then the executive must insist on providing a strong supporting team.

Executives run the risk of project failure if an individual is appointed project manager simply to gain exposure to project management.

An executive of a utility company wanted to rotate his line personnel into project manage- ment for twelve to eighteen months and then return them to the line organization where they would be more well-rounded individuals and better understand the working relation- ship between project management and line management. There are two major problems with this. First, the individual may become technically obsolete after eighteen months in proj-ect management. Second, and more important, individuals who get a taste of project management will generally not want to return to the line organization.

The mere fact that individuals have worked in a variety of divisions does not guarantee that they will make good project managers. Their

working in a variety of divisions may indicate that they couldn’t hold any one job. In that case, they have reached their true level of incompetency, and putting them into project

186 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

3. D. L. Wilemon and J. P. Cicero, “The Project Manager—Anomalies and Ambiguities,” Academy of Management Journal, Vol. 13, 1970, pp. 269–282.

Customer Orientation

New Exposure

Company Exposure

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management will only maximize the damage they can do to the company. Some executives contend that the best way to train a project manager is by rotation through the various func- tional disciplines for two weeks to a month in each organization. Other executives maintain that this is useless because the individual cannot learn anything in so short a period of time.

Tables 4–1 and 4–2 identify current thinking on methods for training project managers.

Finally, there are three special points to consider:

● Individuals should not be promoted to project management simply because they are at the top of their pay grade.

● Project managers should be promoted and paid based on performance, not on the number of people supervised.

● It is not necessary for the project manager to be the highest ranking or salaried individual on the project team with the rationale that sufficient “clout” is needed.

Selecting the Wrong Project Manager 187

TABLE 4–1. METHODS AND TECHNIQUES FOR DEVELOPING PROJECT MANAGERS

I. Experiential training/on-the-job Working with experienced professional leader Working with project team member Assigning a variety of project management responsibilities, consecutively Job rotation Formal on-the-job training Supporting multifunctional activities Customer liaison activities

II. Conceptual training/schooling Courses, seminars, workshops Simulations, games, cases Group exercises Hands-on exercises in using project management techniques Professional meetings Conventions, symposia Readings, books, trade journals, professional magazines

III. Organizational development Formally established and recognized project management function Proper project organization Project support systems Project charter Project management directives, policies, and procedures

TABLE 4–2. HOW TO TRAIN PROJECT MANAGERS

Company Management Say Project Managers Can Be Trained in a Combination of Ways:

Experiential learning, on-the-job 60% Formal education and special courses 20% Professional activities, seminars 10% Readings 10%

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4.6 NEXT GENERATION PROJECT MANAGERS

The skills needed to be an effective, twenty-first century project manager have changed from those needed during the 1980s. Historically, only engineers were given the opportunity to become project managers. The belief was that the project manager had to have a command of technology in order to make all of the technical decisions. As projects became larger and more complex, it became obvious that project managers might need simply an understanding rather than a command of technology. The true technical expertise would reside with the line man- agers, except for special situations such as R&D project management.

As project management began to grow and mature, the project manager was converted from a technical manager to a business manager. The primary skills needed to be an effec- tive project manager in the twenty-first century are:

● Knowledge of the business ● Risk management ● Integration skills

The critical skill is risk management. However, to perform risk management effec- tively, a sound knowledge of the business is required. Figure 4–1 shows the changes in project management skills needed between 1985 and 2010.

As projects become larger, the complexities of integration management become more pronounced. Figure 4–2 illustrates the importance of integration management. In 1985, project managers spent most of their time planning and replanning with their team. This was necessary because the project manager was the technical expert. Today, line managers are the technical experts and perform the majority of the planning and replanning within their line. The project manager’s efforts are now heavily oriented toward integration of the

188 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

Technical Skills

Quantitative Skills

Prob. Solv. Skills

Behav- ioral Skills

Bus. Con-

ceptual Skills

Tech- nical Skills

Quantitative Skills

Prob. Solv. Skills

Behav- ioral Skills

Business Conceptual

Skills

Year

1985

2012

FIGURE 4–1. Project management skills.

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function plans into a total project plan. Some people contend that, with the increased risks and complexities of integration management, the project manager of the future will become an expert in damage control.

4.7 DUTIES AND JOB DESCRIPTIONS

Since projects, environments, and organizations differ from company to company as well as project to project, it is not unusual for companies to struggle to provide reasonable job descrip- tions of the project manager and associated personnel. Below is a simple list identifying the duties of a project manager in the construction industry4:

● Planning ● Become completely familiar with all contract documents ● Develop the basic plan for executing and controlling the project ● Direct the preparation of project procedures ● Direct the preparation of the project budget ● Direct the preparation of the project schedule ● Direct the preparation of basic project design criteria and general specifications ● Direct the preparation of the plan for organizing, executing, and controlling

field construction activities ● Review plans and procedures periodically and institute changes if necessary

Duties and Job Descriptions 189

Planning and Replanning with Team

Integration Management

1985 2010 Year

Magnitude of

Time

FIGURE 4–2. How do project managers spend their time?

4. Source unknown.

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● Organizing ● Develop organization chart for project ● Review project position descriptions, outlining duties, responsibilities, and

restrictions for key project supervisors ● Participate in the selection of key project supervisors ● Develop project manpower requirements ● Continually review project organization and recommend changes in organiza-

tional structure and personnel, if necessary ● Directing

● Direct all work on the project that is required to meet contract obligations ● Develop and maintain a system for decision-making within the project team

whereby decisions are made at the proper level ● Promote the growth of key project supervisors ● Establish objectives for project manager and performance goals for key project

supervisors ● Foster and develop a spirit of project team effort ● Assist in resolution of differences or problems between departments or groups

on assigned projects ● Anticipate and avoid or minimize potential problems by maintaining current

knowledge of overall project status ● Develop clear written strategy guidelines for all major problems with clear

definitions of responsibilities and restraints ● Controlling

● Monitor project activities for compliance with company purpose and philoso- phy and general corporate policies

● Interpret, communicate, and require compliance with the contract, the approved plan, project procedures, and directives of the client

● Maintain personal control of adherence to contract warranty and guarantee pro- visions

● Closely monitor project activities for conformity to contract scope provisions. Establish change notice procedure to evaluate and communicate scope changes

● See that the plans for controlling and reporting on costs, schedule, and quality are effectively utilized

● Maintain effective communications with the client and all groups performing project work

A more detailed job description of a construction project manager (for a utility com- pany) appears below:

Duties

Under minimum supervision establishes the priorities for and directs the efforts of

personnel (including their consultants or contractors) involved or to be involved on

190 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

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project controlled tasks to provide required achievement of an integrated approved set of

technical, manpower, cost, and schedule requirements.

1. Directs the development of initial and revised detailed task descriptions and fore-

casts of their associated technical, manpower, cost, and schedule requirements for

tasks assigned to the Division.

2. Directs the regular integration of initial and revised task forecasts into Divisional tech-

nical, manpower, cost, and schedule reports and initiates the approval cycle for the reports.

3. Reviews conflicting inter- and extra-divisional task recommendations or actions that

may occur from initial task description and forecast development until final task

completion and directs uniform methods for their resolution.

4. Evaluates available and planned additions to Division manpower resources, including

their tasks applications, against integrated technical and manpower reports and

initiates actions to assure that Division manpower resources needs are met by the

most economical mix of available qualified consultant and contractor personnel.

5. Evaluates Divisional cost and schedule reports in light of new tasks and changes in

existing tasks and initiates actions to assure that increases or decreases in task cost and

schedule are acceptable and are appropriately approved.

6. Prioritizes, adjusts, and directs the efforts of Division personnel (including their

consultants and contractors) resource allocations as necessary to both assure the

scheduled achievement of state and federal regulatory commitments and maintain

Divisional adherence to integrated manpower, cost, and schedule reports.

7. Regularly reports the results of Divisional manpower, cost, and schedule evaluations

to higher management.

8. Regularly directs the development and issue of individual task and integrated Project

programs reports.

9. Recommends new or revised Division strategies, goals, and objectives in light of

anticipated long-term manpower and budget needs.

10. Directly supervises project personnel in the regular preparation and issue of individual

task descriptions and their associated forecasts, integrated Division manpower, cost,

and schedule reports, and both task and Project progress reports.

11. Establishes basic organizational and personnel qualification requirements for

Division (including their consultants or contractors) performance on tasks.

12. Establishes the requirements for, directs the development of, and approves control

programs to standardize methods used for controlling similar types of activities in

the Project and in other Division Departments.

13. Establishes the requirements for, directs the development of, and approves adminis-

trative and technical training programs for Divisional personnel.

14. Approves recommendations for the placement of services or material purchase

orders by Division personnel and assures that the cost and schedule data associated

with such orders is consistent with approved integrated cost and schedule reports.

15. Promotes harmonious relations among Division organizations involved with Project

tasks.

16. Exercises other duties related to Divisional project controls as assigned by the

project manager.

Duties and Job Descriptions 191

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192 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

TABLE 4–3. PROJECT MANAGEMENT POSITIONS AND RESPONSIBILITIES

Project Management Position Typical Responsibility Skill Requirements

• Project Administrator Coordinating and integrating of • Planning • Project Coordinator subsystem tasks. Assisting in • Coordinating • Technical Assistant determining technical and • Analyzing

manpower requirements, • Understanding the organization schedules, and budgets. Measuring and analyzing project performance regarding technical progress, schedules, and budgets.

• Task Manager Same as above, but stronger role in • Technical expertise • Project Engineer establishing and maintaining • Assessing trade-offs • Assistant Project project requirements. Conducting • Managing task implementation

Manager trade-offs. Directing the technical • Leading task specialists implementation according to established schedules and budgets.

• Project Manager Same as above, but stronger role in • Overall program leadership • Program Manager project planning and controlling. • Team building

Coordinating and negotiating • Resolving conflict requirements between sponsor and • Managing multidisciplinary tasks performing organizations. Bid • Planning and allocating resources proposal development and pricing. • Interfacing with customers/ Establishing project organization sponsors and staffing. Overall leadership toward implementing project plan. Project profit. New business development.

• Executive Program Title reserved for very large • Business leadership Manager programs relative to host • Managing overall program

organization. Responsibilities same businesses as above. Focus is on directing • Building program organizations overall program toward desired • Developing personnel business results. Customer liaison. • Developing new business Profit performance. New business development. Organizational development.

• Director of Programs Responsible for managing • Leadership • V.P. Program multiprogram businesses via • Strategic planning

Development various project organizations, each • Directing and managing program led by a project manager. Focus is businesses on business planning and • Building organizations development, profit performance, • Selecting and developing key technology development, personnel establishing policies and • Identifying and developing new procedures, program management business guidelines, personnel development, organizational development.

PMBOK® Guide, 5th Edition Chapter 9 Human Resources

Management

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Qualifications

1. A Bachelor of Science Degree in Engineering or a Business Degree with a minor in

Engineering or Science from an accredited four (4) year college or university.

2. a) (For Engineering Graduate) Ten (10) or more years of Engineering and

Construction experience including a minimum of five (5) years of supervisory

experience and two (2) years of management and electric utility experience.

b) (For Business Graduate) Ten (10) or more years of management experience

including a minimum of five (5) years of supervisory experience in an engineering

and construction related management area and two (2) years of experience as the

manager or assistant manager of major engineering and construction related projects

and two (2) recent years of electric utility experience.

3. Working knowledge of state and federal regulations and requirements that apply to

major design and construction projects such as fossil and nuclear power stations.

4. Demonstrated ability to develop high level management control programs.

5. Experience related to computer processing of cost and schedule information.

6. Registered Professional Engineer and membership in appropriate management and

technical societies is desirable (but not necessary).

7.5 At least four (4) years of experience as a staff management member in an operating

nuclear power station or in an engineering support on- or off-site capacity.

8.5 Detailed knowledge of federal licensing requirement for nuclear power stations.

9.5 Reasonably effective public speaker.

Because of the potential overlapping nature of job descriptions in a project manage-

ment environment, some companies try to define responsibilities for each project man-

agement position, as shown in Table 4–3.

4.8 THE ORGANIZATIONAL STAFFING PROCESS

Staffing the project organization can become a long and tedious effort, especially on large and complex engineering projects. Three major ques- tions must be answered:

● What people resources are required? ● Where will the people come from? ● What type of project organizational structure will be best?

To determine the people resources required, the types of individuals (possibly job descriptions) must be decided on, as well as how many individuals from each job category are necessary and when these individuals will be needed.

The Organizational Staffing Process 193

5. Qualifications 7 through 9 apply only for Nuclear Project Directors.

PMBOK® Guide, 5th Edition Chapter 9 Human Resources

Management

9.2 Acquire Project Team

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Consider the following situation: As a project manager, you have an activity that requires three separate tasks, all performed within the same line organization. The line manager promises you the best available resources right now for the first task but cannot make any commitments beyond that. The line manager may have only below-average workers available for the second and third tasks. However, the line manager is willing to make a deal with you. He can give you an employee who can do the work but will only give an average performance. If you accept the average employee, the line manager will guarantee that the employee will be available to you for all three tasks. How important is continuity to you? There is no clearly definable answer to this question. Some people will always want the best resources and are willing to fight for them, whereas others prefer continuity and dislike seeing new people coming and going. The author prefers continu- ity, provided that the assigned employee has the ability to do the up-front planning needed during the first task. The danger in selecting the best employee is that a higher-priority project may come along, and you will lose the employee; or if the employee is an excep- tional worker, he may simply be promoted off your project.

Sometimes, a project manager may have to make concessions to get the right people. For example, during the seventh, eighth, and ninth months of your project you need two individuals with special qualifications. The functional manager says that they will be avail- able two months earlier, and that if you don’t pick them up then, there will be no guaran- tee of their availability during the seventh month. Obviously, the line manager is pressuring you, and you may have to give in. There is also the situation in which the line manager says that he’ll have to borrow people from another department in order to fulfill his commitments for your project. You may have to live with this situation, but be very careful—these employees will be working at a low level on the learning curve, and over- time will not necessarily resolve the problem. You must expect mistakes here.

Line managers often place new employees on projects so they can be upgraded. Project managers often resent this and immediately go to top management for help. If a line manager says that he can do the work with lower-level people, then the project manager must believe the line manager. After all, the line manager, not the assigned employ- ees, makes the commitment to do the work, and it is the line manager’s neck that is stuck out.

Mutual trust between project and line managers is crucial, especially during staffing sessions. Once a project manager has developed a good working relationship with employ- ees, the project manager would like to keep those individuals assigned to his activities. There is nothing wrong with a project manager requesting the same administrative and/or technical staff as before. Line managers realize this and usually agree to it.

There must also be mutual trust between the project managers themselves. Project managers must work as a team, recognize each other’s needs, and be willing to make deci- sions that are in the best interest of the company.

Once the resources are defined, the next question must be whether staffing will be from within the existing organization or from outside sources, such as new hires or con- sultants. Outside consultants are advisable if, and only if, internal manpower resources are being fully utilized on other programs, or if the company does not possess the required project skills. The answer to this question will indicate which organizational form is best for achievement of the objectives. The form might be a matrix, product, or staff project management structure.

194 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

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Not all companies permit a variety of project organizational forms to exist within the main company structure. Those that do, however, consider the basic questions of classical management before making a decision. These include:

● How is labor specialized? ● What should the span of management be?

● How much planning is required? ● Are authority relationships delegated and understood? ● Are there established performance standards? ● What is the rate of change of the job requirements?

● Should we have a horizontal or vertical organization? ● What are the economics? ● What are the morale implications?

● Do we need a unity-of-command position?

As in any organization, the subordinates can make the superior look good in the per- formance of his duties. Unfortunately, the project environment is symbolized by temporary assignments in which the main effort put forth by the project manager is to motivate his (temporary) subordinates toward project dedication and to make them fully understand that:

● Teamwork is vital for success. ● Esprit de corps contributes to success. ● Conflicts can occur between project and functional tiers. ● Communication is essential for success. ● Conflicting orders may be given by the:

● Project manager ● Functional manager ● Upper-level manager

● Unsuccessful performance may result in transfer or dismissal from the project as well as disciplinary action.

Earlier we stated that a project operates as a separate entity but remains attached to the company through company administration policies and procedures. Although project managers can establish their own policies, procedures, and rules, the criteria for promotion must be based on company standards. Project managers should be careful about making commitments they can’t keep. After unkept promises on previous projects, a project man- ager will find it very difficult to get top-quality personnel to volunteer for another project. Even if top management orders key individuals to be assigned to his project, they will always be skeptical about any promises that he may make.

Selecting the project manager is only one-third of the staffing problem. The next step, selecting the project office personnel and team members, can be a time-consuming chore. The project office consists of personnel who are usually assigned as full-time members of the pro- ject. The evaluation process should include active project team members, functional team members available for promotion or transfer, and outside applicants.

The Organizational Staffing Process 195

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Upon completion of the evaluation process, the project manager meets with upper- level management. This coordination is required to assure that:

● All assignments fall within current policies on rank, salary, and promotion. ● The individuals selected can work well with both the project manager (formal

reporting) and upper-level management (informal reporting). ● The individuals selected have good working relationships with the functional

personnel.

Good project office personnel usually have experience with several types of projects and are self-disciplined.

The third and final step in the staffing of the project office is a meeting between the pro- ject manager, upper-level management, and the project manager on whose project the requested individuals are currently assigned. Project managers are very reluctant to give up qualified personnel to other projects, but unfortunately, this procedure is a way of life in a project environment. Upper-level management attends these meetings to show all negotiat- ing parties that top management is concerned with maintaining the best possible mix of indi- viduals from available resources and to help resolve staffing conflicts. Staffing from within is a negotiation process in which upper-level management establishes the ground rules and priorities.

The selected individuals are then notified of the anticipated change and asked their opinions. If individuals have strong resentment to being transferred or reassigned, alternate personnel may be selected to avoid potential problems.

Figure 4–3 shows the typical staffing pattern as a function of time. There is a man- power buildup in the early phases and a manpower decline in the later stages. This means

196 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

TO OTHER PROJECTS OR FUNCTIONAL GROUPS

FROM OTHER PROJECTS

OR FUNCTIONAL GROUPS

S TA

F F

IN G

PROJECT PHASE

TIME

I II III IV V VI

FIGURE 4–3. Staffing pattern versus time.

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that the project manager should bring people on board as needed and release them as early as possible.

There are several psychological approaches that the project manager can use during the recruitment and staffing process. Consider the following:

● Line managers often receive no visibility or credit for a job well done. Be willing to introduce line managers to the customer.

● Be sure to show people how they can benefit by working for you or on your project. ● Any promises made during recruitment should be documented. The functional

organization will remember them long after your project terminates. ● As strange as it may seem, the project manager should encourage conflicts to take

place during recruiting and staffing. These conflicts should be brought to the sur- face and resolved. It is better for conflicts to be resolved during the initial planning stages than to have major confrontations later.

It is unfortunate that recruiting and retaining good personnel are more difficult in a project organizational structure than in a purely traditional one. Clayton Reeser identifies nine potential problems that can exist in project organizations6:

● Personnel connected with project forms of organization suffer more anxieties about possible loss of employment than members of functional organizations.

● Individuals temporarily assigned to matrix organizations are more frustrated by authority ambiguity than permanent members of functional organizations.

● Personnel connected with project forms of organization that are nearing their phase-out are more frustrated by what they perceive to be “make work” assign- ments than members of functional organizations.

● Personnel connected with project forms of organization feel more frustrated because of lack of formal procedures and role definitions than members of func- tional organizations.

● Personnel connected with project forms of organization worry more about being set back in their careers than members of functional organizations.

● Personnel connected with project forms of organization feel less loyal to their organization than members of functional organizations.

● Personnel connected with project forms of organization have more anxieties in feeling that there is no one concerned about their personal development than mem- bers of functional organizations.

● Permanent members of project forms of organization are more frustrated by mul- tiple levels of management than members of functional organizations.

● Frustrations caused by conflict are perceived more seriously by personnel connected with project forms of organization than members of functional organizations.

The Organizational Staffing Process 197

6. Clayton Reeser, “Some Potential Human Problems of the Project Form of Organization,” Academy of Management Journal, Vol. XII, 1969, pp. 462–466.

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Employees are more likely to be motivated to working on a project if the employee had been given the right to accept or refuse the assignment. Although employees usually do not refuse assignments, there is still the question of how much permissiveness should be given to the worker. The following would be a listing or possible degrees of permissiveness:

● The line manager (or project manager) explains the project to the worker and the worker has the right to refuse the assignment. The worker does not need to explain the reason for refusing the assignment and the refusal does not limit the worker’s opportunity for advancement or assignment to other project teams.

● With this degree of permissiveness, the worker has the right to refuse the assign- ment but must provide a reason for the refusal. The reason could be due to per- sonal or career preference considerations such as having to travel, relocation, health reasons, possibly too much overtime involved, simply not an assignment that is viewed as enhancing the individual’s career, or the employee wants an assignment on some other project.

● With this degree of permissiveness, the worker has no choice but to accept the assignment. Only an emergency would be considered as a valid reason for refus- ing the assignment. In this case, refusing the assignment might be damaging to the employee’s career.

Grinnell and Apple have identified four additional major problems associated with staffing7:

● People trained in single line-of-command organizations find it hard to serve more than one boss.

● People may give lip service to teamwork, but not really know how to develop and maintain a good working team.

● Project and functional managers sometimes tend to compete rather than cooperate with each other.

● Individuals must learn to do more “managing” of themselves.

Thus far we have discussed staffing the project. Unfortunately, there are also situa- tions in which employees must be terminated from the project because of:

● Nonacceptance of rules, policies, and procedures ● Nonacceptance of established formal authority ● Professionalism being more important to them than company loyalty ● Focusing on technical aspects at the expense of the budget and schedule ● Incompetence

There are three possible solutions for working with incompetent personnel. First, the project manager can provide an on-the-spot appraisal of the employee. This includes identification of weaknesses, corrective action to be taken, and threat of punishment if the situation continues. A second solution is reassignment of the employee to less critical activities. This solution is usually not preferred by project managers. The third and most frequent solution is the removal of the employee.

198 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

7. S. K. Grinnell and H. P. Apple, “When Two Bosses Are Better Than One,” Machine Design, January 1975, pp. 84–87.

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Although project managers can get project office people (who report to the project manager) removed directly, the removal of a line employee is an indirect process and must be accomplished through the line manager. The removal of the line employee should be made to look like a transfer; otherwise the project manager will be branded as an individ- ual who fires people.

Executives must be ready to cope with the staffing problems that can occur in a project environment. C. Ray Gullett has summarized these major problems8:

● Staffing levels are more variable in a project environment. ● Performance evaluation is more complex and more subject to error in a matrix

form of organization. ● Wage and salary grades are more difficult to maintain under a matrix form of

organization. Job descriptions are often of less value. ● Training and development are more complex and at the same time more necessary

under a project form of organization. ● Morale problems are potentially greater in a matrix organization.

4.9 THE PROJECT OFFICE

The project team is a combination of the project office and functional employ- ees as shown in Figure 4–4. Although the figure identifies the project office personnel as assistant project managers, some employees may not have any

such title. The advantage of such a title is that it entitles the employee to speak directly to the customer. For example, the project engineer might also be called the assistant project manager for engineering. The title is important because when the assistant project manager speaks to the customer, he represents the company, whereas the functional employee represents himself.

The project office is an organization developed to support the project manager in car- rying out his duties. Project office personnel must have the same dedication toward the pro- ject as the project manager and must have good working relationships with both the project and functional managers. The responsibilities of the project office include:

● Acting as the focal point of information for both in-house control and customer reporting

● Controlling time, cost, and performance to adhere to contractual requirements ● Ensuring that all work required is documented and distributed to all key personnel ● Ensuring that all work performed is both authorized and funded by contractual

documentation

The major responsibility of the project manager and the project office personnel is the integration of work across the functional lines of the organization. Functional units, such as engineering, R&D, and manufacturing, together with extra-company subcontractors, must work toward the same specifications, designs, and even objectives. The lack of proper

The Project Office 199

8. C. Ray Gullett, “Personnel Management in the Project Organization,” Personnel Administration/Public Personnel Review, November–December 1972, pp. 17–22.

PMBOK® Guide, 5th Edition 1.4.4 Project Management Office

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integration of these functional units is the most common cause of project failure. The team members must be dedicated to all activities required for project success, not just their own functional responsibilities. The problems resulting from lack of integration can best be solved by full-time membership and participation of project office personnel. Not all team members are part of the project office. Functional representatives, performing at the inter- face position, also act as integrators but at a closer position to where the work is finally accomplished (i.e., the line organization).

One of the biggest challenges facing project managers is determining the size of the pro- ject office. The optimal size is determined by a trade-off between the maximum number of members necessary to assure compliance with requirements and the maximum number for keeping the total administrative costs under control. Membership is determined by factors such as project size, internal support requirements, type of project (i.e., R&D, qualification, production), level of technical competency required, and customer support requirements. Membership size is also influenced by how strategic management views the project to be. There is a tendency to enlarge project offices if the project is considered strategic, especially if follow-on work is possible.

On large projects, and even on some smaller efforts, it is often impossible to achieve project success without permanently assigned personnel. The four major activities of the project office, shown below, indicate the need for using full-time people:

● Integration of activities ● In-house and out-of-house communication ● Scheduling with risk and uncertainty ● Effective control

These four activities require continuous monitoring by trained project personnel. The training of good project office members may take weeks or even months, and can extend beyond the time allocated for a project. Because key personnel are always in demand, project managers should ask themselves and upper-level management one pivotal question when attempting to staff the project office:

Are there any projects downstream that could cause me to lose key members of my team?

200 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

PROJECT MANAGER

ASSISTANT PROJECT MANAGERS

PROJECT OFFICE

PROJECT TEAM

FUNCTIONAL MANAGERS

FUNCTIONAL EMPLOYEES

FIGURE 4–4. Project organization.

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If the answer to this question is yes, then it might benefit the project to have the second- or third-choice person selected for the position or even to staff the position on a part-time basis. Another alternative, of course, would be to assign the key members to activities that are not so important and that can be readily performed by replacement personnel. This, however, is impractical because such personnel will not be employed efficiently.

Program managers would like nothing better than to have all of their key personnel assigned full-time for the duration of the program. Unfortunately, this is undesirable, if not impossible, for many projects because9:

● Skills required by the project vary considerably as the project matures through each of its life-cycle phases.

● Building up large permanently assigned project offices for each project inevitably causes duplication of certain skills (often those in short supply), carrying of peo- ple who are not needed on a full-time basis or for a long period, and personnel dif- ficulties in reassignment.

● The project manager may be diverted from his primary task and become the project engineer, for example, in addition to his duties of supervision, administra- tion, and dealing with the personnel problems of a large office rather than concen- trating on managing all aspects of the project itself.

● Professionally trained people often prefer to work within a group devoted to their professional area, with permanent management having qualifications in the same field, rather than becoming isolated from their specialty peers by being assigned to a project staff.

● Projects are subject to sudden shifts in priority or even to cancellation, and full- time members of a project office are thus exposed to potentially serious threats to their job security; this often causes a reluctance on the part of some people to accept a project assignment.

All of these factors favor keeping the full-time project office as small as possible and dependent on established functional departments and specialized staffs. The approach places great emphasis on the planning and control procedures used on the project. On the other hand, there are valid reasons for assigning particular people of various specialties to the project office. These specialties usually include:

● Systems analysis and engineering (or equivalent technical discipline) and product quality and configuration control, if the product requires such an effort

● Project planning, scheduling, control, and administrative support

Many times a project office is staffed by promotion of functional specialists. This sit- uation is quite common to engineering firms with a high percentage of technical employ- ees, but is not without problems.

The Project Office 201

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In professional firms, personnel are generally promoted to management on the basis of their

professional or technical competence rather than their managerial ability. While this practice

may be unavoidable, it does tend to promote men with insufficient knowledge of manage-

ment techniques and creates a frustrating environment for the professional down the line.10

There is an unfortunate tendency for executives to create an environment where line employees feel that the “grass is greener” in project management and project engineering than in the line organization. How should an executive handle a situation where line spe- cialists continually apply for transfer to project management? One solution is the develop- ment of a dual ladder system, with a pay scale called “consultant.” This particular company created the consultant position because:

● There were several technical specialists who were worth more money to the com- pany but who refused to accept a management position to get it.

● Technical specialists could not be paid more money than line managers.

Promoting technical specialists to a management slot simply to give them more money can:

● Create a poor line manager ● Turn a specialist into a generalist ● Leave a large technical gap in the line organization

Line managers often argue that they cannot perform their managerial duties and con- trol these “prima donnas” who earn more money and have a higher pay grade than the line managers. That is faulty reasoning. Every time the consultants do something well, it reflects on the entire line organization, not merely on themselves.

The concept of having functional employees with a higher pay grade than the line man- ager can also be applied to the horizontal project. It is possible for a junior project manager suddenly to find that the line managers have a higher pay grade than the project manager. It is also possible for assistant project managers (as project engineers) to have a higher pay grade than the project manager. Project management is designed to put together the best mix of people to achieve the objective. If this best mix requires that a grade 7 report to a grade 9 (on a “temporary” project), then so be it. Executives should not let salaries, and pay grades, stand in the way of constructing a good project organization.

Another major concern is the relationship that exists between project office personnel and functional managers. In many organizations, membership in the project office is consid- ered to be more important than in the functional department. Functional members have a ten- dency to resent an individual who has just been promoted out of a functional department and into project management. Killian has described ways of resolving potential conflicts11:

It must be kept in mind that veteran functional managers cannot be expected to accept

direction readily from some lesser executive who is suddenly labelled a Project Manager.

Management can avoid this problem by:

● Selecting a man who already has a high position of responsibility or placing him high

enough in the organization.

202 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

10. William P. Killian, “Project Management—Future Organizational Concept,” Marquette Business Review, 1971, pp. 90–107. 11. William P. Killian, “Project Management—Future Organizational Concept,” Marquette Business Review, 1971, pp. 90–107.

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The Project Office 203

● Assigning him a title as important-sounding as those of functional managers. ● Supporting him in his dealings with functional managers.

If the Project Manager is expected to exercise project control over the functional depart-

ments, then he must report to the same level as the departments, or higher.

Executives can severely hinder project managers by limiting their authority to select and organize (when necessary) a project office and team. According to Cleland12:

His [project manager’s] staff should be qualified to provide personal administrative and

technical support. He should have sufficient authority to increase or decrease his staff as

necessary throughout the life of the project. The authorization should include selective

augmentation for varying periods of time from the supporting functional areas.

Many executives have a misconception concerning the makeup and usefulness of the project office. People who work in the project office should be individuals whose first con- cern is project management, not the enhancement of their technical expertise. It is almost impossible for individuals to perform for any extended period of time in the project office without becoming cross-trained in a second or third project office function. For example, the project manager for cost could acquire enough expertise eventually to act as the assis- tant to the assistant project manager for procurement. This technique of project office cross-training is an excellent mechanism for creating good project managers.

We have mentioned two important facts concerning the project management staffing process:

● The individual who aspires to become a project manager must be willing to give up technical expertise and become a generalist.

● Individuals can be qualified to be promoted vertically but not horizontally.

Once an employee has demonstrated the necessary attributes to be a good project man- ager, there are three ways the individual can become a project manager or part of the project office. The executive can:

● Promote the individual in salary and grade and transfer him into project manage- ment.

● Laterally transfer the individual into project management without any salary or grade increase. If, after three to six months, the employee demonstrates that he can perform, he will receive an appropriate salary and grade increase.

● Give the employee a small salary increase without any grade increase or a grade increase without any salary increase, with the stipulation that additional awards will be forthcoming after the observation period, assuming that the employee can handle the position.

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204 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

Many executives believe in the philosophy that once an individual enters the world of project management, there are only two places to go: up in the organization or out the door. If an individual is given a promotion and pay increase and is placed in project management and fails, his salary may not be compatible with that of his previous line organization, and now there is no place for him to go. Most executives, and employees, prefer the second method because it actually provides some protection for the employee.

Many companies don’t realize until it is too late that promotions to project manage- ment may be based on a different set of criteria from promotions to line management. Promotions on the horizontal line are strongly based on communicative skills, whereas line management promotions are based on technical skills.

4.10 THE FUNCTIONAL TEAM

The project team consists of the project manager, the project office

(whose members may or may not report directly to the project manager),

and the functional or interface members (who must report horizontally as

well as vertically for information flow). Functional team members are

often shown on organizational charts as project office team members. This

is normally done to satisfy customer requirements.

Upper-level management can have an input into the selection process for functional

team members but should not take an active role unless the project and functional man-

agers cannot agree. Functional management must be represented at all staffing meetings

because functional staffing is directly dependent on project requirements and because:

● Functional managers generally have more expertise and can identify high-risk

areas. ● Functional managers must develop a positive attitude toward project success. This

is best achieved by inviting their participation in the early activities of the planning

phase.

Functional team members are not always full-time. They can be full-time or part-time

for either the duration of the project or only specific phases.

The selection process for both the functional team member and the project office must

include evaluation of any special requirements. The most common special requirements

develop from:

● Changes in technical specifications ● Special customer requests ● Organizational restructuring because of deviations from existing policies ● Compatibility with the customer’s project office

A typical project office may include between ten and thirty members, whereas the

total project team may be in excess of a hundred people, causing information to be shared

slowly. For large projects, it is desirable to have a full-time functional representative from

PMBOK® Guide, 5th Edition Chapter 9 Human Resources

Management

2.3 Project Team Definition

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The Project Organizational Chart 205

each major division or department assigned permanently to the project, and perhaps even

to the project office. Such representation might include:

● Program management ● Project engineering ● Engineering operations ● Manufacturing operations ● Procurement ● Quality control ● Cost accounting ● Publications ● Marketing ● Sales

Both the project manager and team members must understand fully the responsibilities and functions of each other team member so that total integration can be achieved rapidly and effectively. On high-technology programs the chief project engineer assumes the role of deputy project manager. Project managers must understand the problems that the line managers have when selecting and assigning the project staff. Line managers try to staff with people who understand the need for teamwork.

When employees are attached to a project, the project manager must identify the “star” employees. These are the employees who are vital for the success of the project and who can either make or break the project manager. Most of the time, star employees are found in the line organization, not the project office.

As a final point, project managers can assign line employees added responsibilities within the scope of the project. If the added responsibilities can result in upgrading, then the project manager should consult with the line manager before such situations are initi- ated. Quite often, line managers (or even personnel representatives) send “check” people into the projects to verify that employees are performing at their proper pay grade. This is very important when working with blue-collar workers who, by union contractual agree- ments, must be paid at the grade level at which they are performing.

Also, project managers must be willing to surrender resources when they are no longer required. If the project manager constantly cries wolf in a situation where a problem really does not exist, the line manager will simply pull away the resources (this is the line man- ager’s right), and a deteriorating working relationship will result.

4.11 THE PROJECT ORGANIZATIONAL CHART

One of the first requirements of the project startup phase is to develop the organizational chart for the project and determine its relationship to the parent organizational structure. Figure 4–5 shows, in abbreviated form, the six major programs at Dalton Corporation. Our concern is with the Midas Program. Although the Midas Program may have the lowest priority of the six programs, it is placed at the top, and in boldface, to give the impression

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206 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

that it is the top priority. This type of representation usually makes the client or customer feel that his program is important to the contractor.

The employees shown in Figure 4–5 may be part-time or full-time, depending upon the project’s requirements. Perturbations on Figure 4–5 might include one employee’s name iden- tified on two or more vertical positions (i.e., the project engineer on two projects) or the same name in two horizontal boxes (i.e., for a small project, the same person could be the project manager and project engineer). Remember, this type of chart is for the customer’s benefit and may not show the true “dotted/solid” reporting relationships in the company.

VICE PRESIDENT AND GENERAL MANAGER

RICHARD GREEN

PROGRAM MANAGEMENT ARTHUR LENZ

DIRECTOR

ENGINEERING MANAGEMENT

DR. HENRY WICKS DIRECTOR

OPERATIONS MANAGEMENT

STEVEN KRANSKY DIRECTOR

MIDAS PROGRAM

PAUL JONES

MIDAS PROGRAM AL TANDY

MIDAS PROGRAM DON DAVIS

AXLE PROGRAM LES WHITE

AXLE PROGRAM DR. MAX MOY

AXLE PROGRAM AL BLACK

LEX PROGRAM GEORGE MAY

LEX PROGRAM LEE ABLE

LEX PROGRAM SID JONES

UMB PROGRAM JOHN TURNER

UMB PROGRAM RICHARD LORD

UMB PROGRAM ALEX CORD

TALON PROGRAM

FRED DARK

TALON PROGRAM

LON CHANK

TALON PROGRAM

PAUL STERNS

MM PROGRAM RALPH DAVIS

MM PROGRAM FRED BERN

MM PROGRAM LOU BLUHM

FIGURE 4–5. Dalton Corporation.

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The Project Organizational Chart 207

The next step is to show the program office structure, as illustrated in Figure 4–6. Note that the chief of operations and the chief engineer have dual reporting responsibility; they report directly to the program manager and indirectly to the directors. Again, this may be just for the customer’s benefit with the real reporting structure being reversed. Beneath the chief engineer, there are three positions. Although these positions appear as solid lines, they might actually be dotted lines. For example, Ed White might be working only part- time on the Midas Program but is still shown on the chart as a permanent program office member. Jean Flood, under contracts, might be spending only ten hours per week on the Midas Program.

If the function of two positions on the organizational chart takes place at different times, then both positions may be shown as manned by the same person. For example, Ed White may have his name under both engineering design and engineering testing if the two activities are far enough apart that he can perform them independently.

The people shown in the project office organizational chart, whether full-time or part- time, may not be physically sitting in the project office. For full-time, long-term assignments,

as in construction projects, the employees may be physically sitting side by side, whereas for part-time assignments, it may be imperative for them to sit in their functional group. Remember, these types of charts may simply be eyewash for the customer.

Most customers realize that the top-quality personnel may be shared with other programs and projects. Project manning charts, such as the one shown in Figure 4–7, can be used for this purpose. These manning charts are also helpful in preparing the management volume of proposals to show the customer that key personnel will be readily available on his project.

DIRECTOR ENGINEERING

DIRECTOR PROGRAM

MANAGEMENT

PAUL JONES MIDAS PROGRAM

MANAGER

ED WHITE ENG DESIGN

LOU PEARLY ENG TESTING

FERD CAIN PROJECT ENG

ANDY LINK Q.A.

JOHN ROYAL MANU. ENG

REX WHITE PRODUCTION

REPORTING LEGEND

ERNIE JONES COST ACCT

JEAN FLOOD CONTRACTS

TED BLACK SCHEDULES

DIRECT

INDIRECT

DIRECTOR OPERATIONS

AL TANDY CHIEF ENGINEER

DON DAVIS CHIEF

OPERATIONS

FIGURE 4–6. Midas Program office.

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208 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

4.12 SPECIAL PROBLEMS

There are always special problems that influence the organizational staffing process. For example, the department shown in Figure 4–8 has a departmental matrix. All activities stay within the department. Project X and project Y are managed by line employees who have been temporarily assigned to the projects, whereas project Z is headed by supervisor B. The department’s activities involve high-technology engineering as well as R&D.

The biggest problem facing the department managers is that of training their new employees. The training process requires nine to twelve months. The employees become familiar with the functioning of all three sections, and only after training is an employee assigned to one of the sections. Line managers claim that they do not have sufficient time to supervise training. As a result, the department manager in the example found staff person C to be the most competent person to supervise training. A special department training project was set up, as shown in Figure 4–8.

FERD CAIN CHIEF PROJECT

ENGINEER

FRED TAYLOR PROJECT ENG.

RUBBER

TONY PALO PH.D.

PROJECT ENG. ADHESIVES

TED FLYNN PH.D.

PROJECT ENG. STRUCTURES

ED MAPLE PROJECT ENG.

THERMODYNAMIC

LOU HAZEL PH.D.

PROJECT ENG. CONFIGURATION

EXPERTISE:

PERCENT TIME ON PROGRAM

0 20 40 60 80 100

PERCENT TIME ON PROGRAM

0 20 40 60 80 100

FIGURE 4–7. Project engineering department manning for the Midas Program.

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Special Problems 209

Figure 4–9 shows a utility company that has three full-time project managers control- ling three projects, all of which cut across the central division. Unfortunately, the three full-time project managers cannot get sufficient resources from the central division because the line managers are also acting as divisional project managers and saving the best resources for their own projects.

The obvious solution to the problem is that the central division line managers not be permitted to wear two hats. Instead, one full-time project manager can be added to the left division to manage all three central division projects. It is usually best for all project man- agers to report to the same division for priority setting and conflict resolution.

Line managers have a tendency to feel demoted when they are suddenly told that they can no longer wear two hats. For example, Mr. Adams was a department manager with thirty years of experience in a company. For the last several years, he had worn two hats and acted as both project manager and functional manager on a variety of projects. He was regarded as an expert in his field. The company decided to incorporate formal project man- agement and established a project management department. Mr. Bell, a thirty-year-old employee with three years of experience with the company, was assigned as the project manager. In order to staff his project, Bell asked Adams for Mr. Cane (Bell’s friend) to be assigned to the project as the functional representative. Cane had been with the company for two years. Adams agreed to the request and informed Cane of his new assignment,

DEPARTMENT MANAGER

DEPARTMENT MANAGER EVALUATES ALL NEW EMPLOYEES DURING TRAINING. AFTER TRAINING, EMPLOYEE WILL WORK FOR A SECTION SUPERVISOR.

NOTE:

STAFF PERSON A

STAFF PERSON B

STAFF PERSON C

TRAINING

STAFF PERSON

NEW EMPLOYEES

SUPERVISOR SECTION A

SUPERVISOR SECTION B

SUPERVISOR SECTION C

PROJECT X

PROJECT Y

PROJECT Z (SUPERVISOR B)

FIGURE 4–8. The training problem.

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210 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

closing with the remarks, “This project is yours all the way. I don’t want to have anything to do with it. I’ll be busy with paperwork as a result of the new organizational structure. Just send me a memo once in a while telling me what’s happening.”

During the project kickoff meeting, it became obvious to everyone that the only person with the necessary expertise was Adams. Without his support, the duration of the project could be expected to double.

The real problem here was that Adams wanted to feel important and needed, and was hoping that the project manager would come to him asking for his assistance. The project manager correctly analyzed the situation but refused to ask for the line manager’s help. Instead, the project manager asked an executive to step in and force the line manager to help. The line manager gave his help, but with great reluctance. Today, the line manager provides poor support to the projects that come across his line organization.

4.13 SELECTING THE PROJECT MANAGEMENT IMPLEMENTATION TEAM

The implementation of project management within an organization requires strong executive support and an implementation team that is dedicated to making project management work. Selecting the wrong team players can either lengthen the implementation process or reduce

VICE PRESIDENT

DIVISION MANAGER

NOTE: X INDICATES FULL–TIME FUNCTIONAL MANAGERS

Y INDICATES FULL–TIME PROJECT MANAGERS

X X X

X X X X X X X X

FIGURE 4–9. Utility service organization.

PMBOK® Guide, 5th Edition Chapter 9 Human Resources

Management

9.2 Acquire Project Team

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Selecting The Project Management Implementation Team 211

employee morale. Some employees may play destructive roles on a project team. These roles, which undermine project management implementation, are shown in Figure 4–10 and described below:

● The aggressor ● Criticizes everybody and everything on project management ● Deflates the status and ego of other team members ● Always acts aggressively

● The dominator ● Always tries to take over ● Professes to know everything about project management ● Tries to manipulate people ● Will challenge those in charge for leadership role

● The devil’s advocate ● Finds fault in all areas of project management ● Refuses to support project management unless threatened ● Acts more of a devil than an advocate

● The topic jumper ● Must be the first one with a new idea/approach to project management ● Constantly changes topics ● Cannot focus on ideas for a long time unless it is his/her idea ● Tries to keep project management implementation as an action item forever

● The recognition seeker ● Always argues in favor of his/her own ideas ● Always demonstrates status consciousness ● Volunteers to become the project manager if status is recognized ● Likes to hear himself/herself talk ● Likes to boast rather than provide meaningful information

Aggressor

Blocker Dominator

Destructive Roles

Withdrawer Devil's

Advocate

Recognition Seeker

Topic Jumper

FIGURE 4–10. Roles people play that undermine project management implementation.

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212 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

● The withdrawer ● Is afraid to be criticized ● Will not participate openly unless threatened ● May withhold information ● May be shy

● The blocker ● Likes to criticize ● Rejects the views of others ● Cites unrelated examples and personal experiences ● Has multiple reasons why project management will not work

These types of people should not be assigned to project management implementation teams. The types of people who should be assigned to implementation teams are shown in Figure 4–11 and described below. Their roles are indicated by their words:

● The initiators ● “Is there a chance that this might work?” ● “Let’s try this.”

● The information seekers ● “Have we tried anything like this before?” ● “Do we know other companies where this has worked?” ● “Can we get this information?”

● The information givers ● “Other companies found that . . .” ● “The literature says that . . .” ● “Benchmarking studies indicate that . . .”

● The encouragers ● “Your idea has a lot of merit.” ● “The idea is workable, but we may have to make small changes.” ● “What you said will really help us.”

Supportive Roles

Initiators Information

Seekers

Gate Keepers

Consensus Takers

Harmonizers Clarifiers

Information Givers

Encouragers

FIGURE 4–11. Roles people play that support project management implementation.

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Mistakes Made by Inexperienced Project Managers 213

● The clarifiers ● “Are we saying that . . . ?” ● “Let me state in my own words what I’m hearing from the team.” ● “Let’s see if we can put this into perspective.”

● The harmonizers ● “We sort of agree, don’t we?” ● “Your ideas and mine are close together.” ● “Aren’t we saying the same thing?”

● The consensus takers ● “Let’s see if the team is in agreement.” ● “Let’s take a vote on this.” ● “Let’s see how the rest of the group feels about this.”

● The gate keepers ● “Who has not given us their opinions on this yet?” ● “Should we keep our options open?” ● “Are we prepared to make a decision or recommendation, or is there additional

information to be reviewed?”

4.14 MISTAKES MADE BY INEXPERIENCED PROJECT MANAGERS

We are all prone to making mistakes as a project manager or team member. You’ve read the PMBOK® Guide several times, taken the certification exam for project managers, and passed, and you are now a PMP®. Yet you still persist in making mistakes. Project man- agers are not infallible. Most project management training courses, even those focusing on the PMBOK® Guide, stress “generally accepted best practices.” What is not taught are dis- cussions on what not to do as a project manager.

The list below shows twenty of the most common mistakes that young or inexperi- enced project managers make. Obviously there are more than twenty mistakes, and many of these may be unique to specific industries. However, the list is a good starting point for understanding why many project managers get into trouble because of their own doing.13

● Believing that excessive detail is needed to be an effective leader ● Pretending to know more than you actually do, thus alienating the true subject

matter experts ● Trying to impress people by preparing an ambitious schedule that line managers

may find difficulty in supporting ● Having an overreliance on repeatable processes that lack flexibility ● Ignoring problems in the belief that they will go away

13 For additional information, see H. Kerzner, “Twenty Common Mistakes Made by Inexperienced Project Managers,” https://learningcenter.iil.com/Saba/Web/Main/goto/Catalog, ©2012 by the International Institute for Learning, New York City. Reproduced by permission.

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214 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

● Failing to share accountability for success and failure with functional managers ● Gold-plating the deliverables by adding in unnecessary functionality ● Failing to understand what stakeholders and sponsors want to hear ● Not fully understanding requirements ● Refusing to ask for help ● Ignoring problems that are the responsibility of the project manager to resolve ● Believing in saviors and miracles rather than effective leadership ● Trying to motivate by making promises that cannot be kept ● Failing to see dependencies between your project and other company projects ● Refusing to tell the client that they are wrong ● Continuously reminding everyone who’s the boss ● Failing to understand the effects on the project resulting from internal and

external politics ● Unwilling to say “no” ● Unable to determine which battles are worth fighting and when

4.15 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses:

● Human Resources Management ● Planning ● Project Staffing

Understanding the following principles is beneficial if the reader is using this text to study for the PMP® Certification Exam:

● What is meant by a project team ● Staffing process and environment ● Role of the line manager in staffing ● Role of the executive in staffing ● Skills needed to be a project manager ● That the project manager is responsible for helping the team members grow and

learn while working on the project

In Appendix C, the following Dorale Products mini–case studies are applicable:

● Dorale Products (G) [Human Resources Management] ● Dorale Products (H) [Human Resources Management] ● Dorale Products (I) [Human Resources Management]

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● Dorale Products (J) [Human Resources Management] ● Dorale Products (K) [Human Resources Management]

The following multiple-choice questions will be helpful in reviewing the principles of this chapter:

1. During project staffing, the primary role of senior management is in the selection of the: A. Project manager B. Assistant project managers C. Functional team D. Executives do not get involved in staffing.

2. During project staffing, the primary role of line management is: A. Approving the selection of the project manager B. Approving the selection of assistant project managers C. Assigning functional resources based upon who is available D. Assigning functional resources based upon availability and the skill set needed

3. A project manager is far more likely to succeed if it is obvious to everyone that: A. The project manager has a command of technology. B. The project manager is a higher pay grade than everyone else on the team. C. The project manager is over 45 years of age. D. Executive management has officially appointed the project manager.

4. Most people believe that the best way to train someone in project management is through: A. On-the-job training B. University seminars C. Graduate degrees in project management D. Professional seminars and meeting

5. In staffing negotiations with the line manager, you identify a work package that requires a skill set of a grade 7 worker. The line manager informs you that he will assign a grade 6 and a grade 8 worker. You should: A. Refuse to accept the grade 6 because you are not responsible for training B. Ask for two different people C. Ask the sponsor to interfere D. Be happy! You have two workers.

6. You priced out a project at 1000 hours assuming a grade 7 employee would be assigned. The line manager assigns a grade 9 employee. This will result in a significant cost overrun. The project manager should: A. Reschedule the start date of the project based upon the availability of a grade 7 B. Ask the sponsor for a higher priority for your project C. Reduce the scope of the project D. See if the grade 9 can do the job in less time

7. As a project begins to wind down, the project manager should: A. Release all nonessential personnel so that they can be assigned to other projects B. Wait until the project is officially completed before releasing anyone C. Wait until the line manager officially requests that the people be released D. Talk to other project managers to see who wants your people

Studying Tips for the PMI® Project Management Certification Exam 215

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ANSWERS

1. A

2. D

3. D

4. A

5. D

6. D

7. A

PROBLEMS

4–1 From S. K. Grinnell and H. P. Apple (“When Two Bosses Are Better Than One,” Machine Design, January 1975, pp. 84–87):

● People trained in single-line-of-command organizations find it hard to serve more than one boss.

● People may give lip service to teamwork, but not really know how to develop and maintain a good working team.

● Project and functional managers sometimes tend to compete rather than cooperate with each other.

● Individuals must learn to do more “managing” of themselves.

The authors identify the above four major problems associated with staffing. Discuss each problem and identify the type of individual most likely to be involved (i.e., engineer, contract administrator, cost accountant, etc.) and in which organizational form this problem would be most apt to occur.

4–2 David Cleland (“Why Project Management?” Reprinted from Business Horizons, Winter 1964, p. 85. Copyright © 1964 by the Foundation for the School of Business at Indiana University. Used with permission) made the following remarks:

His [project manager’s] staff should be qualified to provide personal administrative and tech-

nical support. He should have sufficient authority to increase or decrease his staff as necessary

throughout the life of the project. This authorization should include selective augmentation for

varying periods of time from the supporting functional areas.

Do you agree or disagree with these statements? Should the type of project or type of organi- zation play a dominant role in your answer?

4–3 The contractor’s project office is often structured to be compatible with the customer’s project office, sometimes on a one-to-one basis. Some customers view the contractor’s project organization merely as an extension of their own company. Below are three statements concern- ing this relationship. Are these statements true or false? Defend your answers.

● There must exist mutual trust between the customer and contractor together with a close day-to-day working relationship.

216 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

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● The project manager and the customer must agree on the hierarchy of decision that each must make, either independently or jointly. (Which decisions can each make independently or jointly?)

● Both the customer and contractor’s project personnel must be willing to make deci- sions as fast as possible.

4–4 C. Ray Gullett (“Personnel Management in the Project Organization,” Personnel Administration/Public Personnel Review, November–December 1972, pp. 17–22) has identified five personnel problems. How would you, as a project manager, cope with each problem?

● Staffing levels are more variable in a project environment. ● Performance evaluation is more complex and more subject to error in a matrix form

of organization. ● Wage and salary grades are more difficult to maintain under a matrix form of organi-

zation. Job descriptions are often of less value. ● Training and development are more complex and at the same time more necessary

under a project form of organization. ● Morale problems are potentially greater in a matrix organization.

4–5 Some people believe that a project manager functions, in some respects, like a physician. Is there any validity in this?

4–6 Paul is a project manager for an effort that requires twelve months. During the seventh, eighth, and ninth months he needs two individuals with special qualifications. The functional man- ager has promised that these individuals will be available two months before they are needed. If Paul does not assign them to his project at that time, they will be assigned elsewhere and he will have to do with whomever will be available later. What should Paul do? Do you have to make any assumptions in order to defend your answer?

4–7 Some of the strongest reasons for promoting functional engineers to project engineers are:

● Better relationships with fellow researchers ● Better prevention of duplication of effort ● Better fostering of teamwork

These reasons are usually applied to R&D situations. Could they also be applied to product life- cycle phases other than R&D?

4–8 The following have been given as qualifications for a successful advanced-technology project manager:

● Career has progressed up through the technical ranks ● Knowledgeable in many engineering fields ● Understands general management philosophy and the meaning of profitability ● Interested in training and teaching his superiors ● Understands how to work with perfectionists

Can these same qualifications be modified for non-R&D project management? If so, how?

4–9 W. J. Taylor and T. F. Watling (Successful Project Management, London: Business Books, 1972, p. 32) state:

It is often the case, therefore, that the Project Manager is more noted for his management

technique expertise, his ability to “get things done” and his ability to “get on with people”

than for his sheer technical prowess. However, it can be dangerous to minimize this latter

talent when choosing Project Managers dependent upon project type and size. The Project

Problems 217

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Manager should preferably be an expert either in the field of the project task or a subject

allied to it.

How dangerous can it be if this latter talent is minimized? Will it be dangerous under all circumstances?

4–10 Frank Boone is the most knowledgeable piping engineer in the company. For five years, the company has turned down his application for transfer to project engineering and project management stating that he is too valuable to the company in his current position. If you were a project manager, would you want this individual as part of your functional team? How should an organization cope with this situation?

4–11 Tom Weeks is manager of the insulation group. During a recent group meeting, Tom commented, “The company is in trouble. As you know, we’re bidding on three programs right now. If we win just one of them, we can probably maintain our current work level. If, by some slim chance, we were to win all three, you’ll all be managers tomorrow.” The company won all three programs, but the insulation group did not hire anyone, and there were no promotions. What would you, as a project manager on one of the new projects, expect your working rela- tions to be with the insulation group?

4–12 You are a project engineer on a high-technology program. As the project begins to wind down, your boss asks you to write a paper so that he can present it at a technical meeting. His name goes first on the paper. Should this be part of your job? How do you feel about this situation?

4–13 Research has indicated that the matrix structure is often confusing because it requires multiple roles for people, with resulting confusion about these roles (Keith Davis, Human Relations at Work, New York: McGraw-Hill, 1967, pp. 296–297). Unfortunately, not all pro- gram managers, project managers, and project engineers possess the necessary skills to operate in this environment. Stuckenbruck has stated, “The path to success is strewn with the bodies of project managers who were originally functional line managers and then went into project man- agement” (Linn Stuckenbruck, “The Effective Project Manager,” Project Management Quarterly, Vol. VII, No. 1, March 1976, pp. 26–27). What do you feel is the major cause for this downfall of the functional manager?

4–14 For each of the organizational forms shown below, who determines what resources are needed, when they are needed, and how they will be employed? Who has the authority and responsibility to mobilize these resources?

a. Traditional organization b. Matrix organization c. Product line organization d. Line/staff project organization

4–15 Do you agree or disagree that project organizational forms encourage peer-to-peer com- munications and dynamic problem-solving?

4–16 The XYZ Company operates on a traditional structure. The company has just received a contract to develop a new product line for a special group of customers. The company has decided to pull out selected personnel from the functional departments and set up a single prod- uct organizational structure to operate in parallel with the functional departments.

a. Set up the organizational chart. b. Do you think this setup can work? Does your answer depend on how many years this

situation must exist?

218 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

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Problems 219

4–17 You are the project engineer on a program similar to one that you directed previously. Should you attempt to obtain the same administrative and/or technical staff that you had before?

4–18 A person assigned to your project is performing unsatisfactorily. What should you do? Will it make a difference if he is in the project office or a functional employee?

4–19 You have been assigned to the project office as an assistant project engineer. You are to report to the chief project engineer who reports formally to the project manager and informally to the vice president of engineering. You have never worked with this chief project engineer before. During the execution of the project, it becomes obvious to you that the chief project engineer is making decisions that do not appear to be in the best interest of the project. What should you do about this?

4–20 Should individuals be promoted to project management because they are at the top of their functional pay grade?

4–21 Should one functional department be permitted to “borrow” (on a temporary basis) peo- ple from another functional department in order to fulfill project manning requirements? Should this be permitted if overtime is involved?

4–22 Should a project manager be paid for performance or for the number of people he supervises?

4–23 Should a project manager try to upgrade his personnel?

4–24 Why should a functional manager assign his best people to you on a long-term project?

4–25 A coal company has adopted the philosophy that the project manager for new mine startup projects will be the individual who will eventually become the mine superintendent. The coal company believes that this type of “ownership” philosophy is good. Do you agree?

4–26 Can a project manager be considered as a “hired gun”?

4–27 Manufacturing organizations are using project management/project engineering strictly to give new employees exposure to total company operations. After working on one or two projects, each approximately one to two years in duration, the employee is transferred to line management for his career path and opportunities for advancement. Can a situation such as this, where there is no career path in either project management or project engineering, work suc- cessfully? Could there be any detrimental effects on the projects?

4–28 Can a project manager create dedication and a true winning spirit and still be hated by all?

4–29 Can anyone be trained to be a project manager?

4–30 A power and light company has part-time project management in which an individual acts as both a project manager and a functional employee at the same time. The utility company claims that this process prevents an employee from becoming “technically obsolete,” and that when the employee returns to full-time functional duties, he is a more well-rounded individual. Do you agree or disagree? What are the arrangement’s advantages and disadvantages?

4–31 Some industries consider the major criterion for promotion and advancement to be gray hair and/or baldness. Is this type of maturity advantageous?

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220 ORGANIZING AND STAFFING THE PROJECT OFFICE AND TEAM

4–32 In Figure 4–8 we showed that Al Tandy and Don Davis (as well as other project office personnel) reported directly to the project manager and indirectly to functional management. Could this situation be reversed, with the project office personnel reporting indirectly to the project manager and directly to functional management?

4–33 Most organizations have “star” people who are usually identified as those individuals who are the key to success. How does a project manager identify these people? Can they be in the project office, or must they be functional employees or managers?

4–34 Considering your own industry, what job-related or employee-related factors would you wish to know before selecting someone to be a project manager or a project engineer on an effort valued at:

a. $30,000? b. $300,000? c. $3,000,000? d. $30,000,000?

4–35 One of the major controversies in project management occurs over whether the project man- ager needs a command of technology in order to be effective. Consider the following situation:

You are the project manager on a research and development project. Marketing informs you that they have found a customer for your product and that you must make major modifica- tions to satisfy the customer’s requirements. The engineering functional managers tell you that these modifications are impossible. Can a project manager without a command of technology make a viable decision as to whether to risk additional funds and support marketing, or should he believe the functional managers, and tell marketing that the modifications are impossible? How can a project manager, either with or without a command of technology, tell whether the functional managers are giving him an optimistic or a pessimistic opinion?

4–36 As a functional employee, you demonstrate that you have exceptionally good writing skills. You are then promoted to the position of special staff assistant to the division manager and told that you are to assume full responsibility for all proposal work that must flow through your division. How do you feel about this? Is it a promotion? Where can you go from here?

4–37 Government policymakers content that only high-ranking individuals (high GS grades) can be project managers because a good project manager needs sufficient “clout” to make the project go. In government, the project manager is generally the highest grade on the project team. How can problems of pay grade be overcome? Is the government’s policy effective?

4–38 A major utility company is worried about the project manager’s upgrading functional employees. On an eight-month project that employs four hundred full-time project employees, the department managers have set up “check” people whose responsibility is to see that func- tional employees do not have unauthorized (i.e., not approved by the functional manager) work assignments above their current grade level. Can this system work? What if the work is at a position below their grade level?

4–39 A major utility company begins each computer project with a feasibility study in which a cost-benefit analysis is performed. The project managers, all of whom report to a project man- agement division, perform the feasibility study themselves without any functional support. The functional personnel argue that the feasibility study is inaccurate because the functional “experts” are not involved. The project managers, on the other hand, stipulate that they never have sufficient time or money to involve the functional personnel. Can this situation be resolved?

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4–40 How would you go about training individuals within your company or industry to be good project managers? What assumptions are you making?

4–41 Should project teams be allowed to evolve by themselves?

4–42 At what point or phase in the life cycle of a project should a project manager be appointed?

4–43 Top management generally has two schools of thought concerning project management. One school states that the project manager should be used as a means for coordinating activi- ties that cut across several functional departments. The second school states that the project management position should be used as a means of creating future general managers. Which school of thought is correct?

4–44 Some executives feel that personnel working in a project office should be cross-trained in several assistant project management functions. What do you think about this?

4–45 A company has a policy that employees wishing to be project managers must first spend one to one-and-a-half years in the functional employee side of the house so that they can get to know the employees and company policy. What do you think about this?

4–46 Your project has grown to a point where there now exist openings for three full-time assistant project managers. Unfortunately, there are no experienced assistant project managers available. You are told by upper-level management that you will fill these three positions by promotions from within. Where in the organization should you look? During an interview, what questions should you ask potential candidates? Is it possible that you could find candidates who are qualified to be promoted vertically but not horizontally?

4–47 A functional employee has demonstrated the necessary attributes of a potentially suc- cessful project manager. Top management can:

● Promote the individual in salary and grade and transfer him into project management. ● Laterally transfer the employee into project management without any salary or grade

increase. If, after three to six months, the employee demonstrates that he can perform, he will receive an appropriate salary and grade increase.

● Give the employee either a grade increase without any salary increase, or a small salary increase without any grade increase, under the stipulation that additional awards will be given at the end of the observation period, assuming that the employee can handle the position.

If you were in top management, which method would you prefer? If you dislike the above three choices, develop your own alternative. What are the advantages and disadvantages of each choice? For each choice, discuss the ramifications if the employee cannot handle the project management position.

Problems 221

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Management of Your Time and Stress

355

4th Edition) Study Guide, 11th Edition) Certification Exam

• The Reluctant • Multiple Choice Exam • Human Resource Workers* Management

• Time Management • Risk Management Exercise

6.0 INTRODUCTION

Managing projects within time, cost, and performance is easier said than done. The project management environment is extremely turbulent, and is composed of numerous meetings, report writing, conflict resolution, con- tinuous planning and replanning, communications with the customer, and crisis management. Ideally, the effective project manager is a manager,

not a doer, but in the “real world,” project managers often compromise their time by doing both. Disciplined time management is one of the keys to effective project management. It is often said

that if the project manager cannot control his own time, then he will control nothing else on the project.

*Case Study also appears at end of chapter.

PMBOK® Guide, 5th Edition Chaper 9 Human Resources

Management

Chapter 6 Time Management

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6.1 UNDERSTANDING TIME MANAGEMENT1

For most people, time is a resource that, when lost or misplaced, is gone forever. For a project manager, however, time is more of a constraint, and effective time management principles must be employed to make it a resource.

Most executives prefer to understaff projects, in the mistaken belief that the project manager will assume the additional workload. The project manager may already be heav- ily burdened with meetings, report preparation, internal and external communications, conflict resolution, and planning/replanning for crises. And yet, most project managers somehow manipulate their time to get the work done. Experienced personnel soon learn to delegate tasks and to employ effective time management principles. The following ques- tions should help managers identify problem areas:

● Do you have trouble completing work within the allocated deadlines? ● How many interruptions are there each day? ● Do you have a procedure for handling interruptions? ● If you need a large block of uninterrupted time, is it available? With or without

overtime? ● How do you handle drop-in visitors and phone calls? ● How is incoming mail handled? ● Do you have established procedures for routine work? ● Are you accomplishing more or less than you were three months ago? Six months

ago? ● How difficult is it for you to say no? ● How do you approach detail work? ● Do you perform work that should be handled by your subordinates? ● Do you have sufficient time each day for personal interests? ● Do you still think about your job when away from the office? ● Do you make a list of things to do? If yes, is the list prioritized? ● Does your schedule have some degree of flexibility?

The project manager who can deal with these questions has a greater opportunity to convert time from a constraint to a resource.

6.2 TIME ROBBERS

The most challenging problem facing the project manager is his inability to say no. Consider the situation in which an employee comes into your office with a problem. The employee may be sincere when he says that he simply wants your advice but, more often

356 MANAGEMENT OF YOUR TIME AND STRESS

1. Sections 6.1, 6.2, and 6.3 are adapted from David Cleland and Harold Kerzner, Engineering Team Management (Melbourne, Florida: Krieger, 1986), Chapter 8.

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than not, the employee wants to take the monkey off of his back and put it onto yours. The employee’s problem is now your problem.

To handle such situations, first screen out the problems with which you do not wish to get involved. Second, if the situation does necessitate your involvement, then you must make sure that when the employee

leaves your office, he realizes that the problem is still his, not yours. Third, if you find that the problem will require your continued attention, remind the employee that all future de- cisions will be joint decisions and that the problem will still be on the employee’s shoul- ders. Once employees realize that they cannot put their problems on your shoulders, they learn how to make their own decisions.

There are numerous time robbers in the project management environment. These include:

Time Robbers 357

● Incomplete work ● A job poorly done that must be done

over ● Telephone calls, mail, and email ● Lack of adequate responsibility and

commensurate authority ● Changes without direct

notification/explanation ● Waiting for people ● Failure to delegate, or unwise

delegation ● Poor retrieval systems ● Lack of information in a ready-to-use

format ● Day-to-day administration ● Union grievances ● Having to explain “thinking” to

superiors ● Too many levels of review ● Casual office conversations ● Misplaced information ● Shifting priorities ● Indecision at any level ● Procrastination

● Setting up appointments ● Too many meetings ● Monitoring delegated work ● Unclear roles/job descriptions ● Executive meddling ● Budget adherence requirements ● Poorly educated customers ● Not enough proven managers ● Vague goals and objectives

● Lack of a job description ● Too many people involved in minor

decision-making ● Lack of technical knowledge ● Lack of authorization to make

decisions ● Poor functional status reporting ● Work overload ● Unreasonable time constraints ● Too much travel ● Lack of adequate project management

tools ● Departmental “buck passing” ● Company politics ● Going from crisis to crisis ● Conflicting directives ● Bureaucratic roadblocks (“ego”) ● Empire-building line managers ● No communication between sales and

engineering ● Excessive paperwork ● Lack of clerical/administrative

support ● Dealing with unreliable

subcontractors ● Personnel not willing to take risks ● Demand for short-term results ● Lack of long-range planning ● Learning new company systems ● Poor lead time on projects ● Documentation (reports/red tape) ● Large number of projects ● Desire for perfection

PMBOK® Guide, 5th Edition Chapter 6 Time Management

Chapter 11 Risk Management

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6.3 TIME MANAGEMENT FORMS

There are two basic forms that project managers and project engineers can use for prac- ticing better time management. The first form is the “to do” pad as shown in Figure 6–1. The project manager or secretary prepares the list of things to do. The project mana- ger then decides which activities he must perform himself and assigns the appropriate priorities.

The activities with the highest priorities are then transferred to the “daily calendar log,” as shown in Figure 6–2. The project manager assigns these activities to the appropri- ate time blocks based on his own energy cycle. Unfilled time blocks are then used for unexpected crises or for lower-priority activities.

If there are more priority elements than time slots, the project manager may try to schedule well in advance. This is normally not a good practice, because it creates a backlog of high-priority activities. In addition, an activity that today is a “B” priority could easily become an “A” priority in a day or two. The moral here is do not postpone until tomorrow what you or your team can do today.

358 MANAGEMENT OF YOUR TIME AND STRESS

● Lack of project organization ● Constant pressure ● Constant interruptions

● Shifting of functional personnel ● Lack of employee discipline ● Lack of qualified manpower

Date

Activities Priority Started In Process Completed

FIGURE 6–1. “To-do” pad.

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6.4 EFFECTIVE TIME MANAGEMENT

There are several techniques that project managers can practice in order to make better use of their time2:

● Delegate. ● Follow the schedule. ● Decide fast. ● Decide who should attend. ● Learn to say no. ● Start now. ● Do the tough part first. ● Travel light. ● Work at travel stops.

● Avoid useless memos. ● Refuse to do the unimportant. ● Look ahead. ● Ask: Is this trip necessary? ● Know your energy cycle.

Effective Time Management 359

Date

Time Activity Priority

8:00–9:00

9:00–10:00

10:00–11:00

11:00–12:00

12:00–1:00

1:00–2:00

2:00–3:00

3:00–4:00

4:00–5:00

FIGURE 6–2. Daily calendar log.

2. Source unknown.

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● Control telephone and email time. ● Send out the meeting agenda. ● Overcome procrastination. ● Manage by exception.

As we learned in Chapter 5, the project manager, to be effective, must establish time management rules and then ask himself four questions:

● Rules for time management ● Conduct a time analysis (time log).

● Plan solid blocks for important things. ● Classify your activities. ● Establish priorities. ● Establish opportunity cost on activities. ● Train your system (boss, subordinate, peers). ● Practice delegation. ● Practice calculated neglect. ● Practice management by exception. ● Focus on opportunities—not on problems.

● Questions ● What am I doing that I don’t have to do at all? ● What am I doing that can be done better by someone else? ● What am I doing that could be done as well by someone else? ● Am I establishing the right priorities for my activities?

6.5 STRESS AND BURNOUT

The factors that serve to make any occupation especially stressful are responsibility without the authority or ability to exert control, a necessity for perfection, the pressure of deadlines, role ambiguity, role conflict, role overload, the crossing of organizational bound- aries, responsibility for the actions of subordinates, and the necessity to keep up with the in- formation explosions or technological breakthroughs. Project managers have all of these fac- tors in their jobs.

A project manager has his resources controlled by line management, yet the respon- sibilities of bringing a project to completion by a prescribed deadline are his. A project manager may be told to increase the work output, while the work force is simultaneously being cut. Project managers are expected to get work out on schedule, but are often not permitted to pay overtime. One project manager described it this way: “I have to imple- ment plans I didn’t design, but if the project fails, I’m responsible.

Project managers are subject to stress due to several different facets of their jobs. This can manifest itself in a variety of ways, such as:

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1. Being tired. Being tired is a result of being drained of strength and energy, perhaps through physical exertion, boredom, or impatience. The definition here applies more to a short-term, rather than long-term, effect. Typical causes for feeling tired include meetings, report writing, and other forms of document preparation.

2. Feeling depressed. Feeling depressed is an emotional condition usually character- ized by discouragement or a feeling of inadequacy. It is usually the result of a situation that is beyond the control or capabilities of the project manager. There are several sources of depression in a project environment: Management or the client considers your report unacceptable, you are unable to get timely resources assigned, the technology is not avail- able, or the constraints of the project are unrealistic and may not be met.

3. Being physically and emotionally exhausted. Project managers are both managers and doers. It is quite common for project managers to perform a great deal of the work themselves, either because they consider the assigned personnel unqualified to perform the work or because they are impatient and consider themselves capable of performing the work faster. In addition, project managers often work a great deal of “self-inflicted” over- time. The most common cause of emotional exhaustion is report writing and the prepara- tion of handouts for interchange meetings.

4. Burned out. Being burned out is more than just a feeling; it is a condition. Being burned out implies that one is totally exhausted, both physically and emotionally, and that rest, recuperation, or vacation time may not remedy the situation. The most common cause is prolonged overtime, or the need thereof, and an inability to endure or perform under continuous pressure and stress. Burnout can occur almost overnight, often with very little warning. The solution is almost always a change in job assignment, preferably with another company.

5. Being unhappy. There are several factors that produce unhappiness in project management. Such factors include highly optimistic planning, unreasonable expectations by management, management cutting resources because of a “buy-in,” or simply cus- tomer demands for additional data items. A major source of unhappiness is the frustra- tion caused by having limited authority that is not commensurate with the assigned responsibility.

6. Feeling trapped. The most common situation where project managers feel trapped is when they have no control over the assigned resources on the project and feel as though they are at the mercy of the line managers. Employees tend to favor the manager who can offer them the most rewards, and that is usually the line manager. Providing the project manager with some type of direct reward power can remedy the situation.

7. Feeling worthless. Feeling worthless implies that one is without worth or merit, that is, valueless. This situation occurs when project managers feel that they are manag- ing projects beneath their dignity. Most project managers look forward to the death of their project right from the onset, and expect their next project to be more important, per- haps twice the cost, and more complex. Unfortunately, there are always situations where one must take a step backwards.

8. Feeling resentful and disillusioned about people. This situation occurs most fre- quently in the project manager’s dealings (i.e., negotiations) with the line managers.

Stress and Burnout 361

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During the planning stage of a project, line managers often make promises concerning future resource commitments, but renege on their promises during execution. Disillusionment then occurs and can easily develop into serious conflict. Another poten- tial source of these feelings is when line managers appear to be making decisions that are not in the best interest of the project.

9. Feeling hopeless. The most common source of hopelessness are R&D projects where the ultimate objective is beyond the reach of the employee or even of the state-of- the-art technology. Hopelessness means showing no signs of a favorable outcome. Hopelessness is more a result of the performance constraint than of time or cost.

10. Feeling rejected. Feeling rejected can be the result of a poor working relation- ship with executives, line managers, or clients. Rejection often occurs when people with authority feel that their options or opinions are better than those of the project manager. Rejection has a demoralizing effect on the project manager because he feels that he is the “president” of the project and the true “champion” of the company.

11. Feeling anxious. Almost all project managers have some degree of “tunnel vision,” where they look forward to the end of the project, even when the project is in its infancy. This anxious feeling is not only to see the project end, but to see it completed successfully.

Stress is not always negative, however. Without certain amounts of stress, reports would never get written or distributed, deadlines would never be met, and no one would even get to work on time. But stress can be a powerful force resulting in illness and even fatal disease, and must be understood and managed if it is to be controlled and utilized for constructive purposes.

The mind, body, and emotions are not the separate entities they were once thought to be. One affects the other, sometimes in a positive way, and sometimes in a negative way. Stress becomes detrimental when it is prolonged beyond what an individual can comfortably handle. In a project environment, with continually changing requirements, impossible deadlines, and each project being considered as a unique entity in itself, we must ask, How much prolonged stress can a project manager handle comfortably?

The stresses of project management may seem excessive for whatever rewards the position may offer. However, the project manager who is aware of the stresses inherent in the job and knows stress management techniques can face this challenge objectively and make it a rewarding experience.

6.6 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses:

● Human Resources Management ● Risk Management ● Execution

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Understanding the following principles is beneficial if the reader is using this text to study for the PMP® Certification Exam:

● How stress can affect the way that the project manager works with the team ● How stress affects the performance of team members

The following multiple-choice questions will be helpful in reviewing the principles of this chapter:

1. Which of the following leadership styles most frequently creates “additional” time robbers for a project manager? A. Telling B. Selling C. Participating D. Delegating

2. Which of the following leadership styles most frequently creates “additional” time robbers for the project team? A. Telling B. Selling C. Participating D. Delegating

3. Which of the following time robbers would a project manager most likely want to handle by himself or herself rather than through delegation to equally qualified team members? A. Approval of procurement expenditures B. Status reporting to a customer C. Conflicting directives from the executive sponsor D. Earned-value status reporting

ANSWERS

1. A

2. D

3. C

PROBLEMS

6–1 Should time robbers be added to direct labor standards for pricing out work?

6–2 Is it possible for a project manager to improve his time management skills by knowing the “energy cycle” of his people? Can this energy cycle be a function of the hour of the day, day of the week, or whether overtime is required?

Problems 363

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THE RELUCTANT WORKERS

Tim Aston had changed employers three months ago. His new position was project manager. At first he had stars in his eyes about becoming the best project manager that his company had ever seen. Now, he wasn’t sure if project management was worth the effort. He made an ap- pointment to see Phil Davies, director of project management.

Tim Aston: “Phil, I’m a little unhappy about the way things are going. I just can’t seem to moti- vate my people. Every day, at 4:30 P.M., all of my people clean off their desks and go home. I’ve had people walk out of late afternoon team meetings because they were afraid that they’d miss their car pool. I have to schedule morning team meetings.”

Phil Davies: “Look, Tim. You’re going to have to realize that in a project environment, people think that they come first and that the project is second. This is a way of life in our organiza- tional form.”

Tim Aston: “I’ve continually asked my people to come to me if they have problems. I find that the people do not think that they need help and, therefore, do not want it. I just can’t get my people to communicate more.”

Phil Davies: “The average age of our employees is about forty-six. Most of our people have been here for twenty years. They’re set in their ways. You’re the first person that we’ve hired in the past three years. Some of our people may just resent seeing a thirty-year-old project manager.”

Tim Aston: “I found one guy in the accounting department who has an excellent head on his shoulders. He’s very interested in project management. I asked his boss if he’d release him for a position in project management, and his boss just laughed at me, saying something to the effect that as long as that guy is doing a good job for him, he’ll never be released for an assignment elsewhere in the company. His boss seems more worried about his personal empire than he does in what’s best for the company.

“We had a test scheduled for last week. The customer’s top management was planning on flying in for firsthand observations. Two of my people said that they had programmed vacation days coming, and that they would not change, under any conditions. One guy was going fish- ing and the other guy was planning to spend a few days working with fatherless children in our community. Surely, these guys could change their plans for the test.”

Phil Davies: “Many of our people have social responsibilities and outside interests. We encourage social responsibilities and only hope that the outside interests do not interfere with their jobs.

“There’s one thing you should understand about our people. With an average age of forty- six, many of our people are at the top of their pay grades and have no place to go. They must look elsewhere for interests. These are the people you have to work with and motivate. Perhaps you should do some reading on human behavior.”

364 MANAGEMENT OF YOUR TIME AND STRESS

CASE STUDY

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Conflicts

365

4th Edition) Study Guide, 11th Edition) Certification Exam

• Facilities Scheduling • Multiple Choice Exam • Human Resource at Mayer Manufacturing* Management

• Scheduling the Safety Lab

• Telestar International* • The Problem with

Priorities

7.0 INTRODUCTION

In discussing the project environment, we have purposely avoided discus- sion of what may be its single most important characteristic: conflicts. Opponents of project management assert that the major reason why many companies avoid changeover to a project management organizational struc-

ture is either fear or an inability to handle the resulting conflicts. Conflicts are a way of life in a project structure and can generally occur at any level in the organization, usually as a result of conflicting objectives.

*Case Study also appears at end of chapter.

PMBOK® Guide, 5th Edition 9.4 Manage Project Team

9.4.2.3 Conflict Management

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The project manager has often been described as a conflict manager. In many organizations the project manager continually fights fires and crises evolving from conflicts, and delegates the day-to-day responsibility of running the project to the project team members. Although this is not the best situation, it cannot always be prevented, especially after organizational restructuring or the initiation of projects requiring new resources.

The ability to handle conflicts requires an understanding of why they occur. Asking and answering these four questions may help handle and prevent conflicts.

● What are the project objectives and are they in conflict with other projects? ● Why do conflicts occur? ● How do we resolve conflicts? ● Is there any type of analysis that could identify possible conflicts before they occur?

7.1 OBJECTIVES

Each project must have at least one objective. The objectives of the project must be made known to all project personnel and all managers, at every level of the organization. If this information is not communicated accurately, then it is entirely possible that upper-level managers, project managers, and functional managers may all have a different interpretation of the ultimate objective, a situation that invites conflicts. As an example, company X has been awarded a $100,000 government contract for surveillance of a component that appears to be fatiguing. Top management might view the objective of this project to be dis- covering the cause of the fatigue and eliminating it in future component production. This might give company X a “jump” on the competition. The division manager might just view it as a means of keeping people employed, with no follow-on possibilities. The department manager can consider the objective as either another job that has to be filled, or a means of establishing new surveillance technology. The department manager, therefore, can staff the necessary positions with any given degree of expertise, depending on the importance and definition of the objective.

Project objectives must be:

● Specific, not general ● Not overly complex

● Measurable, tangible, and verifiable ● Appropriate level, challenging ● Realistic and attainable ● Established within resource bounds ● Consistent with resources available or anticipated ● Consistent with organizational plans, policies, and procedures

Some practitioners use the more simplistic approach of defining an objective by saying that the project’s objective must follow the SMART rule, whereby:

● S 5 specific ● M 5 measurable ● A 5 attainable ● R 5 realistic or relevant ● T 5 tangible or time bound

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Unfortunately, the above characteristics are not always evident, especially if we con- sider that the project might be unique to the organization in question. As an example, research and development projects sometimes start out general, rather than specific. Research and development objectives are reestablished as time goes on because the initial objective may not be attainable. As an example, company Y believes that they can develop a high-energy rocket-motor propellant. A proposal is submitted to the government, and, after a review period, the contract is awarded. However, as is the case with all R&D projects, there always exists the question of whether the objective is attainable within time, cost, and performance constraints. It might be possible to achieve the initial objective, but at an incredibly high production cost. In this case, the specifications of the propellant (i.e., initial objectives) may be modified so as to align them closer to the available production funds.

Many projects are directed and controlled using a management-by-objective (MBO) approach. The philosophy of management by objectives:

● Is proactive rather than reactive management ● Is results oriented, emphasizing accomplishment ● Focuses on change to improve individual and organizational effectiveness

Management by objectives is a systems approach for aligning project goals with organi- zational goals, project goals with the goals of other subunits of the organization, and project goals with individual goals. Furthermore, management by objectives can be regarded as a:

● Systems approach to planning and obtaining project results for an organization ● Strategy of meeting individual needs at the same time that project needs are met ● Method of clarifying what each individual and organizational unit’s contribution

to the project should be

Whether or not MBO is utilized, project objectives must be set.

7.2 THE CONFLICT ENVIRONMENT

In the project environment, conflicts are inevitable. Conflicts occur because people on the project team may have different values, interests, feelings, and goals. Project managers that cannot resolve these conflicts in a timely manner are doomed to failure. Some con- flicts can be resolved quickly while other conflicts may take much longer to resolve. In general, the fewer the number of people involved in the conflict, the less time is needed to resolve the issues. Determining the amount of time needed to resolve an issue is difficult. Resolving conflicts with direct reportees is easier than resolving conflicts with those team members that are still attached administratively to other functional managers.

There are several causes of conflicts. First, project managers have historically been brought on board the project after the business case has been prepared. As a result, the business case, schedule, cost, assumptions, and other constraints are imposed upon the pro- ject team. All of this happens well before a detailed project plan is prepared. Once the project plan is finally prepared, it is often the case that the deliverables cannot be achieved in a timely manner within the imposed requirements and constraints.

The Conflict Environment 367

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Second, companies often approve projects without any consideration being given to capacity planning and whether or not qualified resources will be available once the project begins. This is particularly true for companies that survive on competitive bidding. These companies may have no idea how many contracts they will win, if any. The result is usu- ally a shortage of qualified resources.

Third, projects are often approved and added to the queue without knowing when the project will begin. High-level schedules are established from a go-ahead date rather than a calendar date and, once again, with little regard for available or qualified resources. Once the project officially begins, the qualifications or work habits of the assigned project team members may not fit the needs of the project. And, as expected, you are then told that these are the only resources that are available.

Fourth, your project must be accomplished without disrupting the ongoing business of your company and other projects being performed. If your project has a low priority, then you must expect that your most critical resources may be temporarily removed to put out fires else- where in the company. These conflicts are highly probable in non–project-driven companies.

Fifth, the type of organizational structure can create conflicts. As an example, line managers that perform in a matrix structure are under tremendous pressure to staff a mul- titude of projects possibly at the same time. A delay on one project could result is a late release of personnel needed to staff new projects about to begin.

Here, we described five common causes of conflicts that can occur as the project begins. There are also numerous other conflicts that can occur during project execution. Ginger Levin provides a good discussion of the types of conflicts that can exist in each life- cycle phase as well as ways to handle them.1

Good project managers understand that conflicts will happen and try to plan for their resolution. For example, projects managers know that team members can have a misun- derstanding of each other’s roles and responsibilities, and therefore a responsibility assign- ment matrix or linear responsibility chart can prevent the conflict from occurring.

7.3 TYPES OF CONFLICTS

It is impossible to develop a list of all of the different types of conflicts that can exist on each and every project. All projects differ in size, scope, and complexity.

The most common types of conflicts involve:

● Manpower resources ● Equipment and facilities ● Capital expenditures ● Costs ● Technical opinions and trade-offs ● Priorities

368 CONFLICTS

1. G. Levin, Interpersonal Skills for Portfolio, Program, and Project Managers (Management Concepts, Leesburg Pike, VA, 2010), Chapter 8.

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Types of Conflicts 369

● Administrative procedures ● Scheduling ● Responsibilities ● Personality clashes

Each of these conflicts can vary in relative intensity over the life cycle of a project. However, project managers believe that the most frequently occurring conflicts are over schedules but the potentially damaging conflicts can occur over personality clashes. The relative intensity can vary as a function of:

● Getting closer to project constraints ● Having only two constraints instead of three (i.e., time and performance, but

not cost) ● The project life cycle itself ● The person with whom the conflict occurs

Sometimes conflict is “meaningful” and produces beneficial results. These meaning- ful conflicts should be permitted to continue as long as project constraints are not violated and beneficial results are being received. An example of this would be two technical spe- cialists arguing that each has a better way of solving a problem, and each trying to find additional supporting data for his hypothesis.

Conflicts can occur with anyone and over anything. Some people contend that per- sonality conflicts are the most difficult to resolve. Below are several situations. The reader might consider what he or she would do if placed in the situations.

● Two of your functional team members appear to have personality clashes and almost always assume opposite points of view during decision-making. They are both from the same line organization.

● Manufacturing says that they cannot produce the end-item according to engineer- ing specifications.

● R&D quality control and manufacturing operations quality control argue as to who should perform a certain test on an R&D project. R&D postulates that it is their project, and manufacturing argues that it will eventually go into production and that they wish to be involved as early as possible.

● Mr. X is the project manager of a $65 million project of which $1 million is sub- contracted out to another company in which Mr. Y is the project manager. Mr. X does not consider Mr. Y as his counterpart and continually communicates with the director of engineering in Mr. Y’s company.

Ideally, the project manager should report high enough so that he can get timely assistance in resolving conflicts. Unfortunately, this is easier said than done. Therefore, project managers must plan for conflict resolution. As examples of this:

● The project manager might wish to concede on a low-intensity conflict if he knows that a high-intensity conflict is expected to occur at a later point in the project.

● Jones Construction Company has recently won a $120 million effort for a local company. The effort includes three separate construction projects, each one

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beginning at the same time. Two of the projects are twenty-four months in duration, and the third is thirty-six months. Each project has its own project manager. When resource conflicts occur between the projects, the customer is usually called in.

● Richard is a department manager who must supply resources to four different projects. Although each project has an established priority, the project managers continually argue that departmental resources are not being allocated effectively. Richard now holds a monthly meeting with all four of the project managers and lets them determine how the resources should be allocated.

Many executives feel that the best way of resolving conflicts is by establishing prior- ities. This may be true as long as priorities are not continually shifted around. As an example, Minnesota Power and Light established priorities as:

● Level 0: no completion date ● Level 1: to be completed on or before a specific date ● Level 2: to be completed in or before a given fiscal quarter ● Level 3: to be completed within a given year

This type of technique will work as long as there are not a large number of projects in any one level.

The most common factors influencing the establishment of project priorities include:

● The technical risks in development ● The risks that the company will incur, financially or competitively ● The nearness of the delivery date and the urgency ● The penalties that can accompany late delivery dates ● The expected savings, profit increase, and return on investment ● The amount of influence that the customer possesses, possibly due to the size of

the project ● The impact on other projects or product lines ● The impact on affiliated organizations

The ultimate responsibility for establishing priorities rests with top-level manage- ment. Yet even with priority establishment, conflicts still develop. David Wilemon has identified several reasons why conflicts still occur2:

● The greater the diversity of disciplinary expertise among the participants of a project team, the greater the potential for conflict to develop among members of the team.

● The lower the project manager’s degree of authority, reward, and punishment power over those individuals and organizational units supporting his project, the greater the potential for conflict to develop.

370 CONFLICTS

2. David L. Wilemon, “Managing Conflict in Temporary Management Situations,” The Journal of Management Studies, 1973, pp. 282–296.

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Conflict Resolution 371

● The less the specific objectives of a project (cost, schedule, and technical perfor- mance) are understood by the project team members, the more likely it is that con- flict will develop.

● The greater the role of ambiguity among the participants of a project team, the more likely it is that conflict will develop.

● The greater the agreement on superordinate goals by project team participants, the lower the potential for detrimental conflict.

● The more the members of functional areas perceive that the implementation of a project management system will adversely usurp their traditional roles, the greater the potential for conflict.

● The lower the percent need for interdependence among organizational units sup- porting a project, the greater the potential for dysfunctional conflict.

● The higher the managerial level within a project or functional area, the more likely it is that conflicts will be based upon deep-seated parochial resentments. By contrast, at the project or task level, it is more likely that cooperation will be facilitated by the task orientation and professionalism that a project requires for completion.

7.4 CONFLICT RESOLUTION

Although each project within the company may be inherently different, the company may wish to have the resulting conflicts resolved in the same manner. The four most common methods are:

1. The development of company-wide conflict resolution policies and procedures 2. The establishment of project conflict resolution procedures during the early

planning activities 3. The use of hierarchical referral 4. The requirement of direct contact

Many companies have attempted to develop company-wide policies and procedures for conflict resolution, but this method is often doomed to failure because each project and conflict is different. Furthermore, project managers, by virtue of their individuality, and sometimes differing amounts of authority and responsibility, prefer to resolve conflicts in their own fashion.

A second method for resolving conflicts, and one that is often very effective, is to “plan” for conflicts during the planning activities. This can be accomplished through the use of linear responsibility charts. Planning for conflict resolution is similar to the first method except that each project manager can develop his own policies, rules, and procedures.

Hierarchial referral for conflict resolution, in theory, appears as the best method because neither the project manager nor the functional manager will dominate. Under this arrangement, the project and functional managers agree that for a proper balance to exist

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their common superior must resolve the conflict to protect the company’s best interest. Unfortunately, this is not realistic because the common superior cannot be expected to continually resolve lower-level conflicts and it gives the impression that the functional and project managers cannot resolve their own problems.

The last method is direct contact in which conflicting parties meet face-to-face and resolve their disagreement. Unfortunately, this method does not always work and, if continually stressed, can result in conditions where individuals will either suppress the identification of problems or develop new ones during confrontation.

Many conflicts can be either reduced or eliminated by constant communication of the project objectives to the team members. This continual repetition may prevent individuals from going too far in the wrong direction.

7.5 UNDERSTANDING SUPERIOR, SUBORDINATE, AND FUNCTIONAL CONFLICTS3

In order for the project manager to be effective, he must understand how to work with the various employees who interface with the project. These employees include upper-level management, subordinate project team

members, and functional personnel. Quite often, the project manager must demonstrate an ability for continuous adaptability by creating a different working environment with each group of employees. The need for this was shown in the previous section by the fact that the relative intensity of conflicts can vary in the life cycle of a project.

The type and intensity of conflicts can also vary with the type of employee, as shown in Figure 7–1. Both conflict causes and sources are rated according to relative conflict intensity. The data in Figure 7–1 were obtained for a 75 percent confidence level.

In the previous section we discussed the basic resolution modes for handling conflicts. The specific mode that a project manager will use might easily depend on whom the conflict is with, as shown in Figure 7–2. The data in Figure 7–2 do not necessarily show the modes that project managers would prefer, but rather identify the modes that will increase or decrease the potential conflict intensity. For example, although project managers consider, in general, that withdrawal is their least favorite mode, it can be used quite effec- tively with functional managers. In dealing with superiors, project managers would rather be ready for an immediate compromise than for face-to-face confrontation that could favor upper-level management.

Figure 7–3 identifies the various influence styles that project managers find effective in helping to reduce potential conflicts. Penalty power, authority, and expertise are con- sidered as strongly unfavorable associations with respect to low conflicts. As expected, work challenge and promotions (if the project manager has the authority) are strongly favorable.

372 CONFLICTS

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Understanding Superior, Subordinate, and Functional Conflicts 373

SOURCES: CONFLICTS OCCURRED MOSTLY WITH

FUNCTIONAL MANGERS

FUNCTIONAL PERSONNEL

SUPERIORS SUBORDINATES BETWEEN PROJECT

PERSONNEL

SCHEDULES

PRIORITIES

MANPOWER

TECHNICAL

PROCEDURES

PERSONALITY

COSTS

C O

N F

L IC

T C

A U

S E

HIGH RELATIVE CONFLICT INTENSITY LOW

H IG

H R

E L

A T

IV E

C O

N F

L IC

T I

N T

E N

S IT

Y L O

W (The figure shows only those associations which are statistically significant at the 95 percent level)

ACTUAL CONFLICT RESOLUTION STYLE

FORCING CONFRONTA-

TION COMPROMISE SMOOTHING WITHDRAWAL

INTENSITY OF CONFLICT PERCEIVED BY

PROJECT MANAGERS (P.M.)

BETWEEN P.M. AND HIS PERSONNEL

BETWEEN P.M. AND HIS SUPERIOR BETWEEN P.M. AND FUNCTIONAL SUPPORT DEPARTMENTS

STRONGLY FAVORABLE ASSOCIATION WITH REGARD TO LOW CONFLICT (2 t )

STRONGLY UNFAVORABLE ASSOCIATION WITH REGARD TO LOW CONFLICT(1 t )

• KENDALL t CORRELATION

FIGURE 7–1. Relationship between conflict causes and sources.

FIGURE 7–2. Association between perceived intensity of conflict and mode of conflict resolution.

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7.6 THE MANAGEMENT OF CONFLICTS4

Good project managers realize that conflicts are inevitable, but that good procedures or techniques can help resolve them. Once a conflict occurs, the project manager must:

● Study the problem and collect all available information ● Develop a situational approach or methodology ● Set the appropriate atmosphere or climate

If a confrontation meeting is necessary between conflicting parties, then the project manager should be aware of the logical steps and sequence of events that should be taken. These include:

● Setting the climate: establishing a willingness to participate ● Analyzing the images: how do you see yourself and others, and how do they see you? ● Collecting the information: getting feelings out in the open

● Defining the problem: defining and clarifying all positions ● Sharing the information: making the information available to all ● Setting the appropriate priorities: developing working sessions for setting priori-

ties and timetables ● Organizing the group: forming cross-functional problem-solving groups

374 CONFLICTS

(The figure shows only those associated which are statistically significant at the 95 percent level)

INFLUENCE METHODS AS PERCEIVED BY PROJECT MANAGERSINTENSITY OF CONFLICT PERCEIVED BY

PROJECT MANAGER (P.M.)

BETWEEN P.M. AND HIS PERSONNEL

BETWEEN P.M. AND HIS SUPERIOR BETWEEN P.M. AND FUNCTIONAL SUPPORT DEPARTMENTS

STRONGLY FAVORABLE ASSOCIATION WITH REGARD TO LOW CONFLICT (2 t )

STRONGLY UNFAVORABLE ASSOCIATION WITH REGARD TO LOW CONFLICT(1 t )

• KENDALL t CORRELATION

EXPERTISE AUTHORITY WORK

CHALLENGE FRIENDSHIP PROMOTION SALARY PENALTY

FIGURE 7–3. Association between influence methods of project managers and their perceived conflict intensity.

4. See note 3.

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Conflict Resolution modes 375

● Problem-solving: obtaining cross-functional involvement, securing commitments, and setting the priorities and timetable

● Developing the action plan: getting commitment ● Implementing the work: taking action on the plan ● Following up: obtaining feedback on the implementation for the action plan

The project manager or team leader should also understand conflict minimization pro- cedures. These include:

● Pausing and thinking before reacting ● Building trust ● Trying to understand the conflict motives ● Keeping the meeting under control ● Listening to all involved parties ● Maintaining a give-and-take attitude ● Educating others tactfully on your views ● Being willing to say when you were wrong ● Not acting as a superman and leveling the discussion only once in a while

Thus, the effective manager, in conflict problem-solving situations:

● Knows the organization ● Listens with understanding rather than evaluation ● Clarifies the nature of the conflict ● Understands the feelings of others ● Suggests the procedures for resolving differences ● Maintains relationships with disputing parties ● Facilitates the communications process ● Seeks resolutions

7.7 CONFLICT RESOLUTION MODES

The management of conflicts places the project manager in the precarious situation of having to select a conflict resolution mode (previously defined in Section 7.4). Based upon the situation, the type of conflict, and whom

the conflict is with, any of these modes could be justified.

With this approach, the conflicting parties meet face-to-face and try to work through their disagreements. This approach should focus more on solving the problem and less on being combative. This approach is

collaboration and integration where both parties need to win. This method should be used:

● When you and the conflicting party can both get at least what you wanted and maybe more

● To reduce cost

Confronting (or Collaborating)

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● To create a common power base ● To attack a common foe ● When skills are complementary ● When there is enough time ● When there is trust ● When you have confidence in the other person’s ability ● When the ultimate objective is to learn

To compromise is to bargain or to search for solutions so both parties leave with some degree of satisfaction. Compromising is often the

result of confrontation. Some people argue that compromise is a “give and take” approach, which leads to a “win-win” position. Others argue that compromise is a “lose-lose” posi- tion, since neither party gets everything he/she wants or needs. Compromise should be used:

● When both parties need to be winners ● When you can’t win ● When others are as strong as you are ● When you haven’t time to win ● To maintain your relationship with your opponent ● When you are not sure you are right ● When you get nothing if you don’t ● When stakes are moderate ● To avoid giving the impression of “fighting”

This approach is an attempt to reduce the emotions that exist in a conflict. This is accomplished by emphasizing areas of agreement and de-emphasizing areas of disagreement. An example of smoothing would

be to tell someone, “We have agreed on three of the five points and there is no reason why we cannot agree on the last two points.” Smoothing does not necessarily resolve a conflict, but tries to convince both parties to remain at the bargaining table because a solution is possible. In smoothing, one may sacrifice one’s own goals in order to satisfy the needs of the other party. Smoothing should be used:

● To reach an overarching goal ● To create obligation for a trade-off at a later date ● When the stakes are low ● When liability is limited ● To maintain harmony ● When any solution will be adequate ● To create goodwill (be magnanimous) ● When you’ll lose anyway ● To gain time

376 CONFLICTS

Compromising

Smoothing (or Accommodating)

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Studying Tips for the PMI® Project Management Certification Exam 377

This is what happens when one party tries to impose the solution on the other party. Conflict resolution works best when resolution is achieved at the lowest possible levels. The higher up the conflict goes, the greater the tendency for the conflict to be forced, with the result

being a “win-lose” situation in which one party wins at the expense of the other. Forcing should be used:

● When you are right ● When a do-or-die situation exists ● When stakes are high

● When important principles are at stake ● When you are stronger (never start a battle you can’t win) ● To gain status or to gain power ● In short-term, one-shot deals ● When the relationship is unimportant ● When it’s understood that a game is being played ● When a quick decision must be made

Avoidance is often regarded as a temporary solution to a problem. The problem and the resulting conflict can come up again and again. Some

people view avoiding as cowardice and an unwillingness to be responsive to a situation. Avoiding should be used:

● When you can’t win ● When the stakes are low ● When the stakes are high, but you are not ready yet ● To gain time ● To unnerve your opponent ● To preserve neutrality or reputation ● When you think the problem will go away ● When you win by delay

7.8 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses:

● Human Resources Management ● Execution

Forcing (or Competing, Being Uncooperative, Being Assertive)

Avoiding (or Withdrawing)

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Understanding the following principles is beneficial if the reader is using this text to study for the PMP® Certification Exam:

● Components of an objective ● What is meant by a SMART criteria for an objective ● Different types of conflicts that can occur in a project environment ● Different conflict resolution modes and when each one should be used

The following multiple-choice questions will be helpful in reviewing the principles of this chapter:

1. When talking about SMART objectives, the “S” stands for: A. Satisfactory B. Static C. Specific D. Standard

2. When talking about SMART objectives, the “A” stands for: A. Accurate B. Acute C. Attainable D. Able

3. Project managers believe that the most commonly occurring conflict is: A. Priorities B. Schedules C. Personalities D. Resources

4. The conflict that generally is the most damaging to the project when it occurs is: A. Priorities B. Schedules C. Personalities D. Resources

5. The most commonly preferred conflict resolution mode for project managers is: A. Compromise B. Confrontation C. Smoothing D. Withdrawal

6. Which conflict resolution mode is equivalent to problem-solving? A. Compromise B. Confrontation C. Smoothing D. Withdrawal

7. Which conflict resolution mode avoids a conflict temporarily rather than solving it? A. Compromise B. Confrontation C. Smoothing D. Withdrawal

378 CONFLICTS

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Problems 379

ANSWERS

1. C

2. C

3. B

4. C

5. B

6. B

7. D

PROBLEMS

7–1 Is it possible to establish formal organizational procedures (either at the project level or company-wide) for the resolution of conflicts? If a procedure is established, what can go wrong?

7–2 Under what conditions would a conflict result between members of a group over misun- derstandings of each other’s roles?

7–3 Is it possible to have a situation in which conflicts are not effectively controlled, and yet have a decision-making process that is not lengthy or cumbersome?

7–4 If conflicts develop into a situation where mistrust prevails, would you expect activity documentation to increase or decrease? Why?

7–5 If a situation occurs that can develop into meaningful conflict, should the project man- ager let the conflict continue as long as it produces beneficial contributions, or should he try to resolve it as soon as possible?

7–6 Consider the following remarks made by David L. Wilemon (“Managing Conflict in Temporary Management Situations,” Journal of Management Studies, October 1973, p. 296):

The value of the conflict produced depends upon the effectiveness of the project manager in pro- moting beneficial conflict while concomitantly minimizing its potential dysfunctional aspects. A good project manager needs a “sixth sense” to indicate when conflict is desirable, what kind of conflict will be useful, and how much conflict is optimal for a given situation. In the final analysis he has the sole responsibility for his project and how conflict will impact the success or failure of his project.

Based upon these remarks, would your answer to Problem 7–5 change?

7–7 Mr. X is the project manager of a $65 million project of which $1 million is subcon- tracted out to another company in which Mr. Y is project manager. Unfortunately, Mr. X does not consider Mr. Y as his counterpart and continually communicates with the director of engi- neering in Mr. Y’s company. What type of conflict is that, and how should it be resolved?

7–8 Contract negotiations can easily develop into conflicts. During a disagreement, the vice president of company A ordered his director of finance, the contract negotiator, to break off

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380 CONFLICTS

contract negotiations with company B because the contract negotiator of company B did not report directly to a vice president. How can this situation be resolved?

7–9 For each part below there are two statements; one represents the traditional view and the other the project organizational view. Identify each one.

a. Conflict should be avoided; conflict is part of change and is therefore inevitable. b. Conflict is the result of troublemakers and egoists; conflict is determined by the struc-

ture of the system and the relationship among components. c. Conflict may be beneficial; conflict is bad.

7–10 Using the modes for conflict resolution defined in Section 7.6, which would be strongly favorable and strongly unfavorable for resolving conflicts between:

a. Project manager and his project office personnel? b. Project manager and the functional support departments? c. Project manager and his superiors? d. Project manager and other project managers?

7–11 Which influence methods should increase and which should decrease the opportunities for conflict between the following:

● Project manager and his project office personnel?

● Project manager and the functional support departments?

● Project manager and his superiors?

● Project manager and other project managers?

7–12 Would you agree or disagree with the statement that “Conflict resolution through col- laboration needs trust; people must rely on one another.”

7–13 Davis and Lawrence (Matrix, © 1977. Adapted by permission of Pearson Education Inc., Upper Saddle River, New Jersey) identify several situations common to the matrix that can eas- ily develop into conflicts. For each situation, what would be the recommended cure?

a. Compatible and incompatible personnel must work together b. Power struggles break the balance of power c. Anarchy d. Groupitis (people confuse matrix behavior with group decision-making) e. A collapse during economic crunch f. Decision strangulation processes g. Forcing the matrix organization to the lower organizational levels h. Navel-gazing (spending time ironing out internal disputes instead of developing bet-

ter working relationships with the customer)

7–14 Determine the best conflict resolution mode for each of the following situations:

a. Two of your functional team members appear to have personality clashes and almost always assume opposite points of view during decision-making.

b. R&D quality control and manufacturing operations quality control continually argue as to who should perform testing on an R&D project. R&D postulates that it’s their project, and manufacturing argues that it will eventually go into production and that they wish to be involved as early as possible.

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Problems 381

c. Two functional department managers continually argue as to who should perform a certain test. You know that this situation exists, and that the department managers are trying to work it out themselves, often with great pain. However, you are not sure that they will be able to resolve the problem themselves.

7–15 Forcing a confrontation to take place assures that action will be taken. Is it possible that, by using force, a lack of trust among the participants will develop?

7–16 With regard to conflict resolution, should it matter to whom in the organization the project manager reports?

7–17 One of the most common conflicts in an organization occurs with raw materials and finished goods. Why would finance/accounting, marketing/sales, and manufacturing have dis- agreements?

7–18 Explain how the relative intensity of a conflict can vary as a function of:

a. Getting closer to the actual constraints b. Having only two constraints instead of three (i.e., time and performance, but not cost) c. The project life cycle d. The person with whom the conflict occurs

7–19 The conflicts shown in Figure 7–1 are given relative intensities as perceived in project- driven organizations. Would this list be arranged differently for non–project-driven organizations?

7–20 Consider the responses made by the project managers in Figures 7–1 through 7–3. Which of their choices do you agree with, and which do you disagree with? Justify your answers.

7–21 As a good project manager, you try to plan for conflict avoidance. You now have a low- intensity conflict with a functional manager and, as in the past, handle the conflict with con- frontation. If you knew that there would be a high-intensity conflict shortly thereafter, would you be willing to use the withdrawal mode for the low-intensity conflict in order to lay the groundwork for the high-intensity conflict?

7–22 Jones Construction Company has recently won a $120 million effort for a local company. The effort includes three separate construction projects, each one beginning at the same time. Two of the projects are eighteen months in duration and the third one is thirty months. Each project has its own project manager. How do we resolve conflicts when each project may have a different priority but they are all for the same customer?

7–23 Several years ago, Minnesota Power and Light established priorities as follows:

Level 0: no priority Level 1: to be completed on or before a specific date Level 2: to be completed in or before a given fiscal quarter Level 3: to be completed within a given year

How do you feel about this system of establishing priorities?

7–24 Richard is a department manager who must supply resources to four different projects. Although each project has an established priority, the project managers continually argue that departmental resources are not being allocated effectively. Richard has decided to have a monthly group meeting with all four of the project managers and to let them determine how the resources should be allocated. Can this technique work? If so, under what conditions?

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FACILITIES SCHEDULING AT MAYER MANUFACTURING

Eddie Turner was elated with the good news that he was being promoted to section supervisor in charge of scheduling all activities in the new engineering research laboratory. The new laboratory was a necessity for Mayer Manufacturing. The engineering, manufacturing, and quality control directorates were all in desperate need of a new testing facility. Upper-level management felt that this new facility would alleviate many of the problems that previously existed.

The new organizational structure (as shown in Exhibit 7–1) required a change in policy over use of the laboratory. The new section supervisor, on approval from his department man- ager, would have full authority for establishing priorities for the use of the new facility. The new policy change was a necessity because upper-level management felt that there would be inevitable conflict between manufacturing, engineering, and quality control.

After one month of operations, Eddie Turner was finding his job impossible, so Eddie has a meeting with Gary Whitehead, his department manager.

Eddie: “I’m having a hell of a time trying to satisfy all of the department managers. If I give engineering prime-time use of the facility, then quality control and manufacturing say that I’m playing favorites. Imagine that! Even my own people say that I’m playing favorites with other directorates. I just can’t satisfy everyone.”

Gary: “Well, Eddie, you know that this problem comes with the job. You’ll get the job done.”

Eddie: “The problem is that I’m a section supervisor and have to work with department man- agers. These department managers look down on me like I’m their servant. If I were a depart- ment manager, then they’d show me some respect. What I’m really trying to say is that I would like you to send out the weekly memos to these department managers telling them of the new priorities. They wouldn’t argue with you like they do with me. I can supply you with all the necessary information. All you’ll have to do is to sign your name.”

382 CONFLICTS

CASE STUDIES

Exhibit 7–1. Mayer Manufacturing organizational structure

V.P.

GARY WHITEHEAD

EDDIE TURNER

DIVISION MANAGERS

DEPARTMENT MANAGERS

SECTION SUPERVISORS

OTHERS ENGINEERING MANUFACTURING QUALITY

CONTROL

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Case Studies 383

Gary: “Determining the priorities and scheduling the facilities is your job, not mine. This is a new position and I want you to handle it. I know you can because I selected you. I do not intend to interfere.”

During the next two weeks, the conflicts got progressively worse. Eddie felt that he was unable to cope with the situation by himself. The department managers did not respect the authority delegated to him by his superiors. For the next two weeks, Eddie sent memos to Gary in the early part of the week asking whether Gary agreed with the priority list. There was no response to the two memos. Eddie then met with Gary to discuss the deteriorating situation.

Eddie: “Gary, I’ve sent you two memos to see if I’m doing anything wrong in establishing the weekly priorities and schedules. Did you get my memos?”

Gary: “Yes, I received your memos. But as I told you before, I have enough problems to worry about without doing your job for you. If you can’t handle the work let me know and I’ll find someone who can.”

Eddie returned to his desk and contemplated his situation. Finally, he made a decision. Next week he was going to put a signature block under his for Gary to sign, with carbon copies for all division managers. “Now, let’s see what happens,” remarked Eddie.

TELESTAR INTERNATIONAL*

On November 15, 1998, the Department of Energy Resources awarded Telestar a $475,000 con- tract for the developing and testing of two waste treatment plants. Telestar had spent the better part of the last two years developing waste treatment technology under its own R&D activities. This new contract would give Telestar the opportunity to “break into a new field”—that of waste treatment.

The contract was negotiated at a firm-fixed price. Any cost overruns would have to be incurred by Telestar. The original bid was priced out at $847,000. Telestar’s management, how- ever, wanted to win this one. The decision was made that Telestar would “buy in” at $475,000 so that they could at least get their foot into the new marketplace.

The original estimate of $847,000 was very “rough” because Telestar did not have any good man-hour standards, in the area of waste treatment, on which to base their man-hour pro- jections. Corporate management was willing to spend up to $400,000 of their own funds in order to compensate the bid of $475,000.

By February 15, 1999, costs were increasing to such a point where overrun would be occurring well ahead of schedule. Anticipated costs to completion were now $943,000. The project manager decided to stop all activities in certain functional departments, one of which was structural analysis. The manager of the structural analysis department strongly opposed the closing out of the work order prior to the testing of the first plant’s high-pressure pneumatic and electrical systems.

Structures Manager: “You’re running a risk if you close out this work order. How will you know if the hardware can withstand the stresses that will be imposed during the test? After all, the test is scheduled for next month and I can probably finish the analysis by then.”

* Revised, 2008.

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Project Manager: “I understand your concern, but I cannot risk a cost overrun. My boss expects me to do the work within cost. The plant design is similar to one that we have tested before, without any structural problems being detected. On this basis I consider your analysis unnecessary.”

Structures Manager: “Just because two plants are similar does not mean that they will be iden- tical in performance. There can be major structural deficiencies.”

Project Manager: “I guess the risk is mine.”

Structures Manager: “Yes, but I get concerned when a failure can reflect on the integrity of my department. You know, we’re performing on schedule and within the time and money budgeted. You’re setting a bad example by cutting off our budget without any real justification.”

Project Manager: “I understand your concern, but we must pull out all the stops when overrun costs are inevitable.”

Structures Manager: “There’s no question in my mind that this analysis should be completed. However, I’m not going to complete it on my overhead budget. I’ll reassign my people tomor- row. Incidentally, you had better be careful; my people are not very happy to work for a project that can be canceled immediately. I may have trouble getting volunteers next time.”

Project Manager: “Well, I’m sure you’ll be able to adequately handle any future work. I’ll report to my boss that I have issued a work stoppage order to your department.”

During the next month’s test, the plant exploded. Postanalysis indicated that the failure was due to a structural deficiency.

a. Who is at fault? b. Should the structures manager have been dedicated enough to continue the work on

his own? c. Can a functional manager, who considers his organization as strictly support, still be

dedicated to total project success?

HANDLING CONFLICT IN PROJECT MANAGEMENT

The next several pages contain a six-part case study in conflict management. Read the instruc- tions carefully on how to keep score and use the boxes in the table on page 314 as the work- sheet for recording your choice and the group’s choice; after the case study has been completed, your instructor will provide you with the proper grading system for recording your scores.

As part of his first official duties, the new department manager informs you by memo that he has changed his input and output requirements for the MIS project (on which you are the project manager) because of several

complaints by his departmental employees. This is contradictory to the project plan that you developed with the previous manager and are currently working toward. The department man- ager states that he has already discussed this with the vice president and general manager, a man to whom both of you report, and feels that the former department manager made a poor deci- sion and did not get sufficient input from the employees who would be using the system as to

384 CONFLICTS

Part 1: Facing the Conflict

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Case Studies 385

the best system specifications. You telephone him and try to convince him to hold off on his request for change until a later time, but he refuses.

Changing the input–output requirements at this point in time will require a major revision and will set back total system implementation by three weeks. This will also affect other department managers who expect to see this system operational according to the original sched- ule. You can explain this to your superiors, but the increased project costs will be hard to absorb. The potential cost overrun might be difficult to explain at a later date.

At this point you are somewhat unhappy with yourself at having been on the search com- mittee that found this department manager and especially at having recommended him for this position. You know that something must be done, and the following are your alternatives:

A. You can remind the department manager that you were on the search committee that recommended him and then ask him to return the favor, since he “owes you one.”

B. You can tell the department manager that you will form a new search committee to replace him if he doesn’t change his position.

C. You can take a tranquilizer and then ask your people to try to perform the additional work within the original time and cost constraints.

D. You can go to the vice president and general manager and request that the former requirements be adhered to, at least temporarily.

E. You can send a memo to the department manager explaining your problem and asking him to help you find a solution.

F. You can tell the department manager that your people cannot handle the request and his people will have to find alternate ways of solving their problems.

G. You can send a memo to the department manager requesting an appointment, at his earliest convenience, to help you resolve your problem.

H. You can go to the department manager’s office later that afternoon and continue the discussion further.

I. You can send the department manager a memo telling him that you have decided to use the old requirements but will honor his request at a later time.

Personal Group Line Part

Choice Score Choice Score

1 1. Facing the Conflict

2 2. Understanding Emotions

3 3. Establishing

Communications

4 4. Conflict Resolution

5 5. Understanding

Your Choices

6 6. Interpersonal

Influences

TOTAL

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Although other alternatives exist, assume that these are the only ones open to you at the moment. Without discussing the answer with your group, record the letter representing your choice in the appropriate space on line 1 of the worksheet under “Personal.”

As soon as all of your group have finished, discuss the problem as a group and determine that alternative that the group considers to be best. Record this answer on line 1 of the work- sheet under “Group.” Allow ten minutes for this part.

Never having worked with this department manager before, you try to predict what his reactions will be when confronted with the problem. Obviously, he can react in a variety of ways:

A. He can accept your solution in its entirety without asking any questions. B. He can discuss some sort of justification in order to defend his position. C. He can become extremely annoyed with having to discuss the problem again and

demonstrate hostility. D. He can demonstrate a willingness to cooperate with you in resolving the problem. E. He can avoid making any decision at this time by withdrawing from the discussion.

386 CONFLICTS

Part 2: Understanding Emotions

Your Choice Group Choice

Acc. Def. Host. Coop. With. Acc. Def. Host. Coop. With.

A. I’ve given my answer. See the general manager if you’re not happy.

B. I understand your prob- lem. Let’s do it your way.

C. I understand your prob- lem, but I’m doing what is best for my department.

D. Let’s discuss the prob- lem. Perhaps there are alternatives.

E. Let me explain to you why we need the new requirements.

F. See my section supervisors. It was their recommendation.

G. New managers are supposed to come up with new and better ways, aren’t they?

In the table above are several possible statements that could be made by the department manager when confronted with the problem. Without discussion with your group, place a check mark beside the appropriate emotion that could describe this statement. When each member of

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Case Studies 387

the group has completed his choice, determine the group choice. Numerical values will be assigned to your choices in the discussion that follows. Do not mark the worksheet at this time. Allow ten minutes for this part.

Unhappy over the department manager’s memo and the resulting follow- up phone conversation, you decide to walk in on the department manager. You tell him that you will have a problem trying to honor his request. He

tells you that he is too busy with his own problems of restructuring his department and that your schedule and cost problems are of no concern to him at this time. You storm out of his office, leaving him with the impression that his actions and remarks are not in the best interest of either the project or the company.

The department manager’s actions do not, of course, appear to be those of a dedicated manager. He should be more concerned about what’s in the best interest of the company. As you contemplate the situation, you wonder if you could have received a better response from him had you approached him differently. In other words, what is your best approach to opening up communications between you and the department manager? From the list of alternatives shown below, and working alone, select the alternative that best represents how you would handle this situation. When all members of the group have selected their personal choices, repeat the process and make a group choice. Record your personal and group choices on line 3 of the worksheet. Allow ten minutes for this part.

A. Comply with the request and document all results so that you will be able to defend yourself at a later date in order to show that the department manager should be held accountable.

B. Immediately send him a memo reiterating your position and tell him that at a later time you will reconsider his new requirements. Tell him that time is of utmost importance, and you need an immediate response if he is displeased.

C. Send him a memo stating that you are holding him accountable for all cost overruns and schedule delays.

D. Send him a memo stating you are considering his request and that you plan to see him again at a later date to discuss changing the requirements.

E. See him as soon as possible. Tell him that he need not apologize for his remarks and actions, and that you have reconsidered your position and wish to discuss it with him.

F. Delay talking to him for a few days in hopes that he will cool off sufficiently and then see him in hopes that you can reopen the discussions.

G. Wait a day or so for everyone to cool off and then try to see him through an appoint- ment; apologize for losing your temper, and ask him if he would like to help you resolve the problem.

Having never worked with this manager before, you are unsure about which conflict resolution mode would work best. You decide to wait a few days and then set up an appointment with the department manager with-

out stating what subject matter will be discussed. You then try to determine what conflict reso- lution mode appears to be dominant based on the opening remarks of the department manager. Neglecting the fact that your conversation with the department manager might already be con- sidered as confrontation, for each statement shown below, select the conflict resolution mode that the department manager appears to prefer. After each member of the group has recorded

Part 4: Conflict Resolution Modes

Part 3: Establishing Communications

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his personal choices in the table below, determine the group choices. Numerical values will be attached to your answers at a later time. Allow ten minutes for this part.

A. Withdrawal is retreating from a potential conflict. B. Smoothing is emphasizing areas of agreement and de-emphasizing areas of disagreement. C. Compromising is the willingness to give and take. D. Forcing is directing the resolution in one direction or another, a win-or-lose position. E. Confrontation is a face-to-face meeting to resolve the conflict.

388 CONFLICTS

Personal Choice Group Choice

With. Smooth. Comp. Forc. Conf. With. Smooth. Comp. Forc. Conf.

A. The requirements are my decision, and we’re doing it my way.

B. I’ve thought about it and you’re right. We’ll do it your way.

C. Let’s discuss the problem. Perhaps there are alternatives.

D. Let me again explain why we need the new requirements.

E. See my section supervisors; they’re handling it now.

F. I’ve looked over the prob- lem and I might be able to ease up on some of the requirements.

Assume that the department manager has refused to see you again to dis- cuss the new requirements. Time is running out, and you would like to make a decision before the costs and schedules get out of hand. From the

list below, select your personal choice and then, after each group member is finished, find a group choice.

A. Disregard the new requirements, since they weren’t part of the original project plan. B. Adhere to the new requirements, and absorb the increased costs and delays. C. Ask the vice president and general manager to step in and make the final decision. D. Ask the other department managers who may realize a schedule delay to try to con-

vince this department manager to ease his request or even delay it.

Record your answer on line 5 of the worksheet. Allow five minutes for this part.

Part 5: Understanding Your Choices

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Case Studies 389

Assume that upper-level management resolves the conflict in your favor. In order to complete the original work requirements you will need support from this department manager’s organization. Unfortunately, you are not

sure as to which type of interpersonal influence to use. Although you are considered as an expert in your field, you fear that this manager’s functional employees may have a strong alle- giance to the department manager and may not want to adhere to your requests. Which of the following interpersonal influence styles would be best under the given set of conditions?

A. You threaten the employees with penalty power by telling them that you will turn in a bad performance report to their department manager.

B. You can use reward power and promise the employees a good evaluation, possible promotion, and increased responsibilities on your next project.

C. You can continue your technique of trying to convince the functional personnel to do your bidding because you are the expert in the field.

D. You can try to motivate the employees to do a good job by convincing them that the work is challenging.

E. You can make sure that they understand that your authority has been delegated to you by the vice president and general manager and that they must do what you say.

F. You can try to build up friendships and off-work relationships with these people and rely on referent power.

Record your personal and group choices on line 6 of the worksheet. Allow ten minutes for com- pletion of this part.

The solution to this exercise appears in Appendix A.

Part 6: Interpersonal Influences

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Planning

505

4th Edition) Study Guide, 11th Edition) Certification Exam

• Quantum Telecom • The Statement of Work • Scope • Concrete Masonry • Technology Forecasting Management

Corporation* • The Noncompliance Project • Margo Company • Multiple Choice Exam • Project Overrun • Crossword Puzzle on Scope • The Two-Boss Problem Management • Denver International

Airport (DIA)

11.0 INTRODUCTION

The most important responsibilities of a project manager are planning, integrating, and executing plans. Almost all projects, because of their rel- atively short duration and often prioritized control of resources, require formal, detailed planning. The integration of the planning activities is

* Case Study also appears in Workbook.

PMBOK® Guide, 5th Edition Chapter 5 Scope Management

5.3 Define Scope

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necessary because each functional unit may develop its own planning documentation with little regard for other functional units.

Planning, in general, can best be described as the function of selecting the enterprise objectives and establishing the policies, procedures, and programs necessary for achieving them. Planning in a project environment may be described as establishing a predetermined course of action within a forecasted envi- ronment. The project’s requirements set the major milestones. If line managers cannot commit because the milestones are perceived as unrealistic, the project manager may have to develop alternatives, one of which may be to move the milestones. Upper-level management must become involved in the selection of alternatives.

The project manager is the key to successful project planning. It is desirable that the project manager be involved from project conception through execution. Project planning must be systematic, flexible enough to handle unique activities, disciplined through reviews and controls, and capable of accepting multi- functional inputs. Successful project managers realize that project planning is an iterative process and must be performed throughout the life of the project.

One of the objectives of project planning is to completely define all work required (possibly through the development of a documented project plan) so that it will be readily identifiable to each project participant. This is a necessity in a project environment because:

● If the task is well understood prior to being performed, much of the work can be preplanned. ● If the task is not understood, then during the actual task execution more knowledge is gained that,

in turn, leads to changes in resource allocations, schedules, and priorities. ● The more uncertain the task, the greater the amount of information that must be processed in order

to ensure effective performance.

These considerations are important in a project environment because each project can be different from the others, requiring a variety of different resources, but having to be performed under time, cost, and per- formance constraints with little margin for error. Figure 11–1 identifies the type of project planning required to establish an effective monitoring and control system. The boxes at the top represent the plan- ning activities, and the lower boxes identify the “tracking” or monitoring of the planned activities.

There are two proverbs that affect project planning:

● Failing to plan is planning to fail. ● The primary benefit of not planning is that failure will then come as a complete surprise rather than

being preceded by periods of worry and depression.

Without proper planning, programs and projects can start off “behind the eight ball.” Consequences of poor planning include:

● Project initiation without defined requirements ● Wild enthusiasm ● Disillusionment ● Chaos ● Search for the guilty ● Punishment of the innocent ● Promotion of the nonparticipants

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MASTER/DETAILED SCHEDULES

BUDGETS

TIME

NETWORK SCHEDULING

PERT/CPM

WORK DESCRIPTION AND INSTRUCTIONS

SPECS SOW WBS GOALS/OBJECTIVES

• SYSTEM LEVEL

• COMPANY LEVEL

MANAGEMENT DECISION-MAKING

STATES OF NATURE

PAYOFF TABLES

S T

R A T

E G

IE S

FEEDBACK

• TIME • COST • PERFORMANCE • RELIABILITY • MAINTAINABILITY • EFFECTIVENESS

SYSTEM REPORTS TIME/COST/PERFORMANCE

TRACKING

FIGURE 11–1. The project planning and control system.

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There are four basic reasons for project planning:

● To eliminate or reduce uncertainty

● To improve efficiency of the operation

● To obtain a better understanding of the objectives

● To provide a basis for monitoring and controlling work

Planning is a continuous process of making entrepreneurial decisions with an eye to the future, and methodically organizing the effort needed to carry out these decisions. Furthermore, systematic planning allows an organization of set goals. The alternative to systematic planning is decision-making based on history. This generally results in reactive management leading to crisis management, conflict management, and fire fighting.

11.1 VALIDATING THE ASSUMPTIONS

Planning begins with an understanding of the assumptions. Quite often, the assumptions are made by marketing and sales personnel and then approved by senior management as part of the project selection and approval process. The expectations for the final results are based upon the assumptions made.

Why is it that, more often than not, the final results of a project do not satisfy senior management’s expectations? At the beginning of a project, it is impossible to ensure that the benefits expected by senior management will be realized at project completion. While project length is a critical factor, the real culprit is changing assumptions.

Assumptions must be documented at project initiation using the project charter as a possible means. Throughout the project, the project manager must revalidate and challenge the assumptions. Changing assumptions may mandate that the project be terminated or redirected toward a different set of objectives.

A project management plan is based upon the assumptions described in the project charter. But there are additional assumptions made by the team that are inputs to the pro- ject management plan.1 One of the primary reasons companies use a project charter is that project managers were most often brought on board well after the project selection process and approval process were completed. As a result, project managers were needed to know what assumptions were considered.

These are assumptions about the external environmental conditions that can affect the success of the project, such as interest rates, market conditions, changing customer demands and requirements, changes in

technology, and even government policies.

These are assumptions about present or future company assets that can impact the success of the project such

as the capability of your enterprise project management methodology,

508 PLANNING

1. See A Guide to the Project Management Body of Knowledge®, 4th ed., 2008, Figure 4-4.

Enterprise Environmental Factors

Organizational Process Assets

PMBOK® Guide, 5th Edition 2.1.4 Organizational Process

Assets

2.1.5 Enterprise Environmental

Factors

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Validating the Objectives 509

Table 11–1. Assumption Validation Checklist

Checklist for Validating Assumptions Yes No

Assumption is outside of the control of the project Assumption is outside of the control of the stakeholder(s) The assumption can be validated as correct Changes in the assumption can be controlled The assumed condition is not fatal The probability of the assumption holding true is clear The consequences of this assumption pose a serious risk to the project Unfavorable changes in the assumption can be fatal to the Project

the project management information system, forms, templates, guidelines, checklists, and the ability to capture and use lessons learned data and best practices.

Examples of assumptions that are likely to change over the duration of a project, espe- cially on a long-term project, might be that:

● The cost of borrowing money and financing the project will remain fixed ● The procurement costs will not increase ● The breakthrough in technology will take place as scheduled ● The resources with the necessary skills will be available when needed ● The marketplace will readily accept the product ● Our competitors will not catch up to us ● The risks are low and can be easily mitigated ● The political environment in the host country will not change

The problem with having faulty assumptions is that they can lead to faulty conclu- sions, bad results, and unhappy customers. The best defense against poor assumptions is good preparation at project initiation, including the development of risk mitigation strate- gies. One possible way to do this is with a validation checklist as shown in Table 11–1.

11.2 VALIDATING THE OBJECTIVES

When project managers are assigned to a project and review the business case, they look first at the objectives for the project. Clearly written and well-understood objectives are essential so that the project team will know when the project is over. Unfortunately the objectives are usually imposed upon the project manager, rather than having the project manager assigned early enough so as to participate in the establishment of the objectives.

Clearly written objectives follow the SMART rule as defined in Section 7.1:

● S 5 specific ● M 5 measurable ● A 5 attainable ● R 5 realistic or relevant ● T 5 tangible or time bound

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Stating that the objective is to “reduce defects” does not satisfy the SMART rule. Likewise, stating that the objective is to “reduce defects by ten percent” is also a violation of the SMART rule. However, if we say that the objective is to “reduce defects by ten percent from current levels within the next six months,” we are closer to satisfying the SMART rule.

There is a valid argument that project managers may not be able to establish the objec- tives themselves without some assistance from perhaps the project sponsor. Most project managers may be able to establish the technical components of the objectives but must rely heavily upon the project sponsor for the business components. Regardless of where the objectives come from, the project manager must validate the objectives to be sure that they can be achieved. Objectives that are impossible to attain can have a serious demoralizing effect on the team’s performance.

During project execution, project managers must revalidate the objectives the same way that they revalidate the assumptions. If the enterprise environmental factors change, then the objectives may no longer be valid and the project may have to be terminated or be redirected to different objectives.

11.3 GENERAL PLANNING

Planning is determining what needs to be done, by whom, and by when, in order to fulfill one’s assigned responsibility. There are nine major com- ponents of the planning phase:

● Objective: a goal, target, or quota to be achieved by a certain time ● Program: the strategy to be followed and major actions to be taken in order to

achieve or exceed objectives ● Schedule: a plan showing when individual or group activities or accomplishments

will be started and/or completed ● Budget: planned expenditures required to achieve or exceed objectives ● Forecast: a projection of what will happen by a certain time ● Organization: design of the number and kinds of positions, along with corre-

sponding duties and responsibilities, required to achieve or exceed objectives ● Policy: a general guide for decision-making and individual actions ● Procedure: a detailed method for carrying out a policy ● Standard: a level of individual or group performance defined as adequate or

acceptable

An item that has become important in recent years is documenting assumptions that go into the objectives or the project/subsidiary plans. As projects progress, even for short- term projects, assumptions can change because of the economy, technological advances, or market conditions. These changes can invalidate original assumptions or require that new assumptions be made. These changes could also mandate that projects be canceled. Companies are now validating assumptions during gate review meetings. Project charters now contain sections for documenting assumptions.

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General Planning 511

Several of these factors require additional comment. Forecasting what will happen may not be easy, especially if predictions of environmental reactions are required. For example, planning is customarily defined as either strategic, tactical, or operational. Strategic plan- ning is generally for five years or more, tactical can be for one to five years, and operational is the here and now of six months to one year. Although most projects are operational, they can be considered as strategic, especially if spin-offs or follow-up work is promising. Forecasting also requires an understanding of strengths and weaknesses as found in:

● The competitive situation ● Marketing

● Research and development ● Production ● Financing ● Personnel ● The management structure

If project planning is strictly operational, then these factors may be clearly definable. However, if strategic or long-range planning is necessary, then the future economic outlook can vary, say, from year to year, and replanning must be done at regular intervals because the goals and objectives can change. (The procedure for this can be seen in Figure 11–1.)

The last three factors, policies, procedures, and standards, can vary from project to project because of their uniqueness. Each project manager can establish project policies, provided that they fall within the broad limits set forth by top management.

Project policies must often conform closely to company policies, and are usually sim- ilar in nature from project to project. Procedures, on the other hand, can be drastically dif- ferent from project to project, even if the same activity is performed. For example, the signing off of manufacturing plans may require different signatures on two selected projects even though the same end-item is being produced.

Planning varies at each level of the organization. At the individual level, planning is required so that cognitive simulation can be established before irrevocable actions are taken. At the working group or functional level, planning must include:

● Agreement on purpose ● Assignment and acceptance of individual responsibilities ● Coordination of work activities ● Increased commitment to group goals ● Lateral communications

At the organizational or project level, planning must include:

● Recognition and resolution of group conflict on goals ● Assignment and acceptance of group responsibilities ● Increased motivation and commitment to organizational goals ● Vertical and lateral communications ● Coordination of activities between groups

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The logic of planning requires answers to several questions in order for the alterna- tives and constraints to be fully understood. A list of questions would include:

● Prepare environmental analysis

● Where are we?

● How and why did we get here?

● Set objectives

● Is this where we want to be?

● Where would we like to be? In a year? In five years?

● List alternative strategies

● Where will we go if we continue as before?

● Is that where we want to go?

● How could we get to where we want to go?

● List threats and opportunities

● What might prevent us from getting there?

● What might help us to get there? ● Prepare forecasts

● Where are we capable of going? ● What do we need to take us where we want to go?

● Select strategy portfolio ● What is the best course for us to take? ● What are the potential benefits? ● What are the risks?

● Prepare action programs ● What do we need to do? ● When do we need to do it? ● How will we do it? ● Who will do it?

● Monitor and control ● Are we on course? If not, why? ● What do we need to do to be on course? ● Can we do it?

One of the most difficult activities in the project environment is to keep the planning on target. These procedures can assist project managers during planning activities:

● Let functional managers do their own planning. Too often operators are operators,

planners are planners, and never the twain shall meet. ● Establish goals before you plan. Otherwise short-term thinking takes over. ● Set goals for the planners. This will guard against the nonessentials and places

your effort where there is payoff. ● Stay flexible. Use people-to-people contact, and stress fast response. ● Keep a balanced outlook. Don’t overreact, and position yourself for an upturn. ● Welcome top-management participation. Top management has the capability to

make or break a plan, and may well be the single most important variable.

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● Beware of future spending plans. This may eliminate the tendency to underestimate. ● Test the assumptions behind the forecasts. This is necessary because professionals

are generally too optimistic. Do not depend solely on one set of data. ● Don’t focus on today’s problems. Try to get away from crisis management and fire

fighting. ● Reward those who dispel illusions. Avoid the Persian messenger syndrome (i.e.,

beheading the bearer of bad tidings). Reward the first to come forth with bad news.

11.4 LIFE-CYCLE PHASES

Project planning takes place at two levels. The first level is the corporate cultural approach; the second method is the individual’s approach. The corporate cultural approach breaks the project down into life-cycle phases, such as those shown in Table 2–6. The life-cycle phase approach is not an attempt to put handcuffs on the project manager but to provide a methodology for uniformity in project planning. Many companies, includ-

ing government agencies, prepare checklists of activities that should be considered in each phase. These checklists are for consistency in planning. The project manager can still exer- cise his own planning initiatives within each phase.

A second benefit of life-cycle phases is control. At the end of each phase there is a meet- ing of the project manager, sponsor, senior management, and even the customer, to assess the accomplishments of this life-cycle phase and to get approval for the next phase. These meet- ings are often called critical design reviews, “on-off ramps,” and “gates.” In some companies, these meetings are used to firm up budgets and schedules for the follow-on phases. In addi- tion to monetary considerations, life-cycle phases can be used for manpower deployment and equipment/facility utilization. Some companies go so far as to prepare project management policy and procedure manuals where all information is subdivided according to life-cycle phasing. Life-cycle phase decision points eliminate the problem where project managers do not ask for phase funding, but rather ask for funds for the whole project before the true scope of the project is known. Several companies have even gone so far as to identify the types of decisions that can be made at each end-of-phase review meeting. They include:

● Proceed with the next phase based on an approved funding level ● Proceed to the next phase but with a new or modified set of objectives ● Postpone approval to proceed based on a need for additional information ● Terminate project

Consider a company that utilizes the following life-cycle phases:

● Conceptualization ● Feasibility ● Preliminary planning ● Detail planning ● Execution

● Testing and commissioning

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The conceptualization phase includes brainstorming and common sense and involves two critical factors: (1) identify and define the problem, and (2) identify and define poten- tial solutions.

In a brainstorming session, all ideas are recorded and none are discarded. The brain- storming session works best if there is no formal authority present and if it lasts thirty to sixty minutes. Sessions over sixty minutes will produce ideas that may resemble science fiction.

The feasibility study phase considers the technical aspects of the conceptual alterna- tives and provides a firmer basis on which to decide whether to undertake the project.

The purpose of the feasibility phase is to:

● Plan the project development and implementation activities. ● Estimate the probable elapsed time, staffing, and equipment requirements. ● Identify the probable costs and consequences of investing in the new project.

If practical, the feasibility study results should evaluate the alternative conceptual solutions along with associated benefits and costs.

The objective of this step is to provide management with the predictable results of implementing a specific project and to provide generalized project requirements. This, in the form of a feasibility study report, is used as the basis on which to decide whether to proceed with the costly requirements, development, and implementation phases.

User involvement during the feasibility study is critical. The user must supply much of the required effort and information, and, in addition, must be able to judge the impact of alternative approaches. Solutions must be operationally, technically, and economically fea- sible. Much of the economic evaluation must be substantiated by the user. Therefore, the primary user must be highly qualified and intimately familiar with the workings of the organization and should come from the line operation.

The feasibility study also deals with the technical aspects of the proposed project and requires the development of conceptual solutions. Considerable experience and techni- cal expertise are required to gather the proper information, analyze it, and reach practical conclusions.

Improper technical or operating decisions made during this step may go undetected or unchallenged throughout the remainder of the process. In the worst case, such an error could result in the termination of a valid project—or the continuation of a project that is not economically or technically feasible.

In the feasibility study phase, it is necessary to define the project’s basic approaches and its boundaries or scope. A typical feasibility study checklist might include:

● Summary level ● Evaluate alternatives ● Evaluate market potential ● Evaluate cost effectiveness ● Evaluate producibility ● Evaluate technical base

● Detail level ● A more specific determination of the problem ● Analysis of the state-of-the-art technology ● Assessment of in-house technical capabilities

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Life-Cycle Phases 515

● Test validity of alternatives ● Quantify weaknesses and unknowns ● Conduct trade-off analysis on time, cost, and performance

● Prepare initial project goals and objectives ● Prepare preliminary cost estimates and development plan

The end result of the feasibility study is a management decision on whether to terminate the project or to approve its next phase. Although management can stop the project at several later phases, the decision is especially critical at this point, because later phases require a major commitment of resources. All too often, management review committees approve the continu- ation of projects merely because termination at this point might cast doubt on the group’s judg- ment in giving earlier approval.

The decision made at the end of the feasibility study should identify those projects that are to be terminated. Once a project is deemed feasible and is approved for development, it must be prioritized with previously approved projects waiting for development (given a limited availability of capital or other resources). As development gets under way, man- agement is given a series of checkpoints to monitor the project’s actual progress as com- pared to the plan.

The third life-cycle phase is either preliminary planning or “defining the require- ments.” This is the phase where the effort is officially defined as a project. In this phase, we should consider the following:

● General scope of the work ● Objectives and related background ● Contractor’s tasks ● Contractor end-item performance requirements ● Reference to related studies, documentation, and specifications ● Data items (documentation) ● Support equipment for contract end-item ● Customer-furnished property, facilities, equipment, and services ● Customer-furnished documentation ● Schedule of performance ● Exhibits, attachments, and appendices

These elements can be condensed into four core documents, as will be shown in Section 11.8. Also, it should be noted that the word “customer” can be an internal cus- tomer, such as the user group or your own executives.

The table below shows the percentage of direct labor hours/dollars that are spent in each phase:

Percent of Direct Phase Labor Dollars

Conceptualization 5 Feasibility study 10 Preliminary planning 15 Detail planning 20 Execution 40 Commissioning 10

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516 PLANNING

The interesting fact from this table is that as much as 50 percent of the direct labor hours and dollars can be spent before execution begins. The reason for this is simple: Quality must be planned for and designed in. Quality cannot be inspected into the project. Companies that spend less than these percentages usually find quality problems in execution.

11.5 PROPOSAL PREPARATION

There is always a question of what to do with a project manager between assignments. For companies that survive on competitive bidding, the assignment is clear: The project man- ager writes proposals for future work. This takes place during the feasibility study, when the company must decide whether to bid on the job. There are four ways in which proposal preparation can occur:

● Project manager prepares entire proposal. This occurs frequently in small compa- nies. In large organizations, the project manager may not have access to all avail- able data, some of which may be company proprietary, and it may not be in the best interest of the company to have the project manager spend all of his time doing this.

● Proposal manager prepares entire proposal. This can work as long as the project manager is allowed to review the proposal before delivery to the customer and feels committed to its direction.

● Project manager prepares proposal but is assisted by a proposal manager. This is common, but again places tremendous pressure on the project manager.

● Proposal manager prepares proposal but is assisted by a project manager. This is the preferred method. The proposal manager maintains maximum authority and control until such time as the proposal is sent to the customer, at which point the project manager takes charge. The project manager is on board right from the start, although his only effort may be preparing the technical volume of the proposal and perhaps part of the management volume.

11.6 KICKOFF MEETINGS

The typical launch of a project begins with a kickoff meeting involving the major players responsible for planning, including the project manager, assis- tant project managers for certain areas of knowledge, subject matter experts (SME), and functional leads. A typical sequence is shown in Figure 11–2.

There can be multiple kickoff meetings based upon the size, complexity, and time requirements for the project. The major players are usually authorized by their functional areas to make decisions concerning timing, costs, and resource requirements.

Some of the items discussed in the initial kickoff meeting include:

● Wage and salary administration, if applicable ● Letting the employees know that their boss will be informed as to how well or how

poorly they perform

PMBOK® Guide, 5th Edition 5.1.2.1 Meetings?

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Kickoff Meetings 517

● Initial discussion of the scope of the project including both the technical objective and the business objective

● The definition of success on this project ● The assumptions and constraints as identified in the project charter ● The project’s organizational chart (if known at that time) ● The participants’ roles and responsibilities

For a small or short-term project, estimates on cost and duration may be established in the kickoff meeting. In this case, there may be little need to establish a cost estimating schedule. But where the estimating cycle is expected to take several weeks, and where

inputs will be required from various organizations and/or disciplines, an essential tool is an estimating schedule. In this case, there may be a need for a prekickoff meeting simply to determine the estimates. The minimum key milestones in a cost estimating schedule are (1) a “kickoff ” meeting; (2) a “review of ground rules” meeting; (3) “resources input and review” meeting; and (4) summary meetings and presentations. Descriptions of these meetings and their approximate places in the estimating cycle follow.2

Figure 11–2. Typical project launch.

KICKOFF #1

CUSTOMER PM & APMS (& SMES &

LEADS)

PM & APMS (& SMES &

LEADS)

TYPICAL PROJECT LAUNCH

PM & APMS (& SMES &

LEADS)

KICKOFF #2

CUSTOMER’S SOW

SCOPE MANAGEMENT

PLAN WBS

DEVELOPMENT

SCOPE BASELINE

(PRELIMINARY SCOPE

STATEMENT 1 WBS

1 WBS DICTIONARY) WBS

DICTIONARY

PRELIMINARY PLANNING

EXECUTION

PRELIMINARY SCOPE

STATEMENT

DETAIL PLANNING

2. R. D. Stewart, Cost Estimating (New York: Wiley, 1982), pp. 56–57.

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518 PLANNING

The very first formal milestone in an estimate schedule is the estimate kickoff meeting. This is a meeting of all the individuals who are

expected to have an input to the cost estimate. It usually includes individuals who are pro- ficient in technical disciplines involved in the work to be estimated; business-oriented indi- viduals who are aware of the financial factors to be considered in making the estimate; project-oriented individuals who are familiar with the project ground rules and constraints; and, finally, the cost estimator or cost estimating team. The estimating team may not include any of the team members responsible for execution of the project.

Sufficient time should be allowed in the kickoff meeting to describe all project ground rules, constraints, and assumptions; to hand out technical specifications, drawings, sched- ules, and work element descriptions and resource estimating forms; and to discuss these items and answer any questions that might arise. It is also an appropriate time to clarify estimating assignments among the various disciplines represented in the event that organi- zational charters are not clear as to who should support which part of the estimate. This kickoff meeting may be 6 weeks to 3 months prior to the estimate completion date to allow sufficient time for the overall estimating process. If the estimate is being made in response to a request for quotation or request for bid, copies of the request for quotation document will be distributed and its salient points discussed.

Several days after the estimate kickoff meeting, when the participants have had the opportunity to study the material, a review of ground rules meeting should be conducted. In this meeting the estimate manager

answers questions regarding the conduct of the cost estimate, assumptions, ground rules, and estimating assignments. If the members of the estimating team are experienced in develop- ing resource estimates for their respective disciplines, very little discussion may be needed. However, if this is the first estimating cycle for one or more of the estimating team members, it may be necessary to provide these team members with additional information, guidance, and instruction on estimating tools and methods. If the individuals who will actually perform the work are doing the estimating (which is actually the best arrangement for getting a real- istic estimate), more time and support may be needed than would experienced estimators.

Several weeks after the kickoff and review of ground rules meetings, each team member that has a resources (man-hour and/or materials) input is asked to present his or her input before the entire estimating

team. Thus starts one of the most valuable parts of the estimating process: the interaction of team members to reduce duplications, overlaps, and omissions in resource data.

The most valuable aspect of a team estimate is the synergistic effect of team interac- tion. In any multidisciplinary activity, it is the synthesis of information and actions that pro- duces wise decisions rather than the mere volume of data. In this review meeting the estimator of each discipline area has the opportunity to justify and explain the rationale for his estimates in view of his peers, an activity that tends to iron out inconsistencies, over- statements, and incompatibilities in resources estimates. Occasionally, inconsistencies, overlaps, duplications, and omissions will be so significant that a second input and review meeting will be required to collect and properly synthesize all inputs for an estimate.

The Prekickoff Meeting

The Review of Ground Rules Meeting

The Resources Input and Review Meeting

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Project Planning 519

Once the resources inputs have been collected, adjusted, and “priced,” the cost estimate is presented to the estimating team as a “dry run” for the final presentation to the company’s management or to the requesting

organization. This dry run can produce visibility into further inconsistencies or errors that have crept into the estimate during the process of consolidation and reconciliation. The final review with the requesting organization or with the company’s management could also bring about some changes in the estimate due to last minute changes in ground rules or bud- get-imposed cost ceilings.

11.7 UNDERSTANDING PARTICIPANTS’ ROLES

Companies that have histories of successful plans also have employees who fully under- stand their roles in the planning process. Good up-front planning may not eliminate the need for changes, but may reduce the number of changes required. The responsibilities of the major players are as follows:

● Project manager will define: ● Goals and objectives ● Major milestones ● Requirements ● Ground rules and assumptions ● Time, cost, and performance constraints ● Operating procedures ● Administrative policy ● Reporting requirements

● Line manager will define: ● Detailed task descriptions to implement objectives, requirements, and milestones ● Detailed schedules and manpower allocations to support budget and schedule ● Identification of areas of risk, uncertainty, and conflict

● Senior management (project sponsor) will: ● Act as the negotiator for disagreements between project and line management ● Provide clarification of critical issues ● Provide communication link with customer’s senior management

Successful planning requires that project, line, and senior management are in agree- ment with the plan.

11.8 PROJECT PLANNING

Successful project management, whether in response to an in-house project or a customer request, must utilize effective planning techniques. The first step is understanding the project objectives. These goals may be to develop expertise in a given area, to become competitive, to modify an existing facil- ity for later use, or simply to keep key personnel employed.

Summary Meetings and Presentations

PMBOK® Guide, 5th Edition Chapter 5 Project Scope

Management

5.3 Define Scope

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520 PLANNING

The objectives are generally not independent; they are all interrelated, both implicitly and explicitly. Many times it is not possible to satisfy all objectives. At this point, man- agement must prioritize the objectives as to which are strategic and which are not. Typical problems with developing objectives include:

● Project objectives/goals are not agreeable to all parties. ● Project objectives are too rigid to accommodate changing priorities. ● Insufficient time exists to define objectives well. ● Objectives are not adequately quantified. ● Objectives are not documented well enough. ● Efforts of client and project personnel are not coordinated. ● Personnel turnover is high.

Once the objectives are clearly defined, four questions must be considered:

● What are the major elements of the work required to satisfy the objectives, and how are these elements interrelated?

● Which functional divisions will assume responsibility for accomplishment of these objectives and the major-element work requirements?

● Are the required corporate and organizational resources available? ● What are the information flow requirements for the project?

If the project is large and complex, then careful planning and analysis must be accom- plished by both the direct- and indirect-labor-charging organizational units. The project orga- nizational structure must be designed to fit the project; work plans and schedules must be established so that maximum allocation of resources can be made; resource costing and accounting systems must be developed; and a management information and reporting system must be established.

Effective total program planning cannot be accomplished unless all of the necessary information becomes available at project initiation. These information requirements are:

● The statement of work (SOW) ● The project specifications ● The milestone schedule ● The work breakdown structure (WBS)

The statement of work (SOW) is a narrative description of the work to be accom- plished. It includes the objectives of the project, a brief description of the work, the fund- ing constraint if one exists, and the specifications and schedule. The schedule is a “gross” schedule and includes such things as the:

● Start date ● End date ● Major milestones ● Written reports (data items)

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The Statement of Work 521

Written reports should always be identified so that if functional input is required, the functional manager will assign an individual who has writing skills.

The last major item is the work breakdown structure. The WBS is the breaking down of the statement of work into smaller elements for better visibility and control. Each of these planning items is described in the following sections.

11.9 THE STATEMENT OF WORK

The PMBOK® Guide addresses four elements related to scope:

● Scope: Scope is the summation of all deliverables required as part of the project. This includes all products, services, and results.

● Project Scope: This is the work that must be completed to achieve the final scope of the project, namely the products, ser-

vices, and end results. (Previously, in Section 2.7, we differentiated between proj- ect scope and product scope.)

● Scope Statement: This is a document that provides the basis for making future decisions such as scope changes. The intended use of the document is to make sure that all stakeholders have a common knowledge of the project scope. Included in this document are the objectives, description of the deliverables, end result or product, and justification for the project. The scope statement addresses seven questions: who, what, when, why, where, how, and how many. This document val- idates the project scope against the statement of work provided by the customer.

● Statement of Work: This is a narrative description of the end results to be pro- vided under the contract. For the remainder of this section, we will focus our atten- tion on the statement of work.

The statement of work (SOW) is a narrative description of the work required for the project. The complexity of the SOW is determined by the desires of top management, the customer, and/or the user groups. For projects internal to the company, the SOW is prepared by the project office with input from the user groups because the project office is usually composed of personnel with writing skills.

For projects external to the organization, as in competitive bidding, the contractor may have to prepare the SOW for the customer because the customer may not have people trained in SOW preparation. In this case, as before, the contractor would submit the SOW to the customer for approval. It is also quite common for the project manager to rewrite a customer’s SOW so that the contractor’s line managers can price out the effort.

In a competitive bidding environment, there are two SOWs—the SOW used in the pro- posal and a contract statement of work (CSOW). There might also be a proposal WBS and a contract work breakdown structure (CWBS). Special care must be taken by contract and negotiation teams to discover all discrepancies between the SOW/WBS and CSOW/CWBS, or additional costs may be incurred. A good (or winning) proposal is no guarantee that the customer or contractor understands the SOW. For large projects, fact-finding is usually required before final negotiations because it is essential that both the customer and the

PMBOK® Guide, 5th Edition 5.3 Scope Definition

5.3.3.1 Project Scope Statement

12.1.3.2 Contract Statement of

Work

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522 PLANNING

contractor understand and agree on the SOW, what work is required, what work is proposed, the factual basis for the costs, and other related elements. In addition, it is imperative that there be agreement between the final CSOW and CWBS.

SOW preparation is not as easy as it sounds. Consider the following:

● The SOW says that you are to conduct a minimum of fifteen tests to determine the material properties of a new substance. You price out twenty tests just to “play it safe.” At the end of the fifteenth test, the customer says that the results are incon- clusive and that you must run another fifteen tests. The cost overrun is $40,000.

● The Navy gives you a contract in which the SOW states that the prototype must be tested in “water.” You drop the prototype into a swimming pool to test it. Unfortunately, the Navy’s definition of “water” is the Atlantic Ocean, and it costs you $1 million to transport all of your test engineers and test equipment to the Atlantic Ocean.

● You receive a contract in which the SOW says that you must transport goods across the country using “aerated” boxcars. You select boxcars that have open tops so that air can flow in. During the trip, the train goes through an area of torrential rains, and the goods are ruined.

These three examples show that misinterpretations of the SOW can result in losses of hundreds of millions of dollars. Common causes of misinterpretation are:

● Mixing tasks, specifications, approvals, and special instructions ● Using imprecise language (“nearly,” “optimum,” “approximately,” etc.) ● No pattern, structure, or chronological order ● Wide variation in size of tasks ● Wide variation in how to describe details of the work ● Failing to get third-party review

Misinterpretations of the statement of work can and will occur no matter how careful everyone has been. The result is creeping scope, or, as one telecommunications company calls it, “creeping elegance.” The best way to control creeping scope is with a good defi- nition of the requirements up front, if possible.

Today, both private industry and government agencies are developing manuals on SOW preparation. The following is adapted from a NASA publication on SOW preparation3:

● The project manager or his designees should review the documents that authorize the project and define its objectives, and also review contracts and studies leading to the present level of development. As a convenience, a bibliography of related studies should be prepared together with samples of any similar SOWs, and com- pliance specifications.

● A copy of the WBS should be obtained. At this point coordination between the CWBS elements and the SOW should commence. Each task element of the prelim- inary CWBS should be explained in the SOW, and related coding should be used.

3. Adapted from Statement of Work Handbook NHB5600.2, National Aeronautics and Space Administration, February 1975.

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The Statement of Work 523

● The project manager should establish a SOW preparation team consisting of per- sonnel he deems appropriate from the program or project office who are experts in the technical areas involved, and representatives from procurement, financial man- agement, fabrication, test, logistics, configuration management, operations, safety, reliability, and quality assurance, plus any other area that may be involved in the contemplated procurement.

● Before the team actually starts preparation of the SOW, the project manager should brief program management as to the structure of the preliminary CWBS and the nature of the contemplated SOW. This briefing is used as a baseline from which to proceed further.

● The project manager may assign identified tasks to team members and identify compliance specifications, design criteria, and other requirements documentation that must be included in the SOW and assign them to responsible personnel for preparation. Assigned team members will identify and obtain copies of specifica- tions and technical requirements documents, engineering drawings, and results of preliminary and/or related studies that may apply to various elements of the pro- posed procurement.

● The project manager should prepare a detailed checklist showing the mandatory items and the selected optional items as they apply to the main body or the appen- dixes of the SOW.

● The project manager should emphasize the use of preferred parts lists; standard subsystem designs, both existing and under development; available hardware in inventory; off-the-shelf equipment; component qualification data; design criteria handbooks; and other technical information available to design engineers to pre- vent deviations from the best design practices.

● Cost estimates (manning requirements, material costs, software requirements, etc.) developed by the cost estimating specialists should be reviewed by SOW contrib- utors. Such reviews will permit early trade-off consideration on the desirability of requirements that are not directly related to essential technical objectives.

● The project manager should establish schedules for submission of coordinated SOW fragments from each task team member. He must assure that these schedules are compatible with the schedule for the request for proposal (RFP) issuance. The statement of work should be prepared sufficiently early to permit full project coordination and to ensure that all project requirements are included. It should be completed in advance of RFP preparation.

SOW preparation manuals also contain guides for editors and writers4:

● Every SOW that exceeds two pages in length should have a table of contents con- forming to the CWBS coding structure. There should rarely be items in the SOW that are not shown on the CWBS; however, it is not absolutely necessary to restrict items to those cited in the CWBS.

4. See note 3.

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524 PLANNING

● Clear and precise task descriptions are essential. The SOW writer should realize that his or her efforts will have to be read and interpreted by persons of varied back- ground (such as lawyers, buyers, engineers, cost estimators, accountants, and spe- cialists in production, transportation, security, audit, quality, finance, and contract management). A good SOW states precisely the product or service desired. The clarity of the SOW will affect administration of the contract, since it defines the scope of work to be performed. Any work that falls outside that scope will involve new procurement with probable increased costs.

● The most important thing to keep in mind when writing a SOW is the most likely effect the written work will have upon the reader. Therefore, every effort must be made to avoid ambiguity. All obligations of the government should be carefully spelled out. If approval actions are to be provided by the government, set a time limit. If government-furnished equipment (GFE) and/or services, etc., are to be provided, state the nature, condition, and time of delivery, if feasible.

● Remember that any provision that takes control of the work away from the con- tractor, even temporarily, may result in relieving the contractor of responsibility.

● In specifying requirements, use active rather than passive terminology. Say that the contractor shall conduct a test rather than that a test should be conducted. In other words, when a firm requirement is intended, use the mandatory term “shall” rather than the permissive term “should.”

● Limit abbreviations to those in common usage. Provide a list of all pertinent abbre- viations and acronyms at the beginning of the SOW. When using a term for the first time, spell it out and show the abbreviation or acronym in parentheses following the word or words.

● When it is important to define a division of responsibilities between the contrac- tor, other agencies, etc., a separate section of the SOW (in an appropriate location) should be included and delineate such responsibilities.

● Include procedures. When immediate decisions cannot be made, it may be possi- ble to include a procedure for making them (e.g., “as approved by the contracting officer,” or “the contractor shall submit a report each time a failure occurs”).

● Do not overspecify. Depending upon the nature of the work and the type of con- tract, the ideal situation may be to specify results required or end-items to be deliv- ered and let the contractor propose his best method.

● Describe requirements in sufficient detail to assure clarity, not only for legal rea- sons, but for practical application. It is easy to overlook many details. It is equally easy to be repetitious. Beware of doing either. For every piece of deliverable hard- ware, for every report, for every immediate action, do not specify that something be done “as necessary.” Rather, specify whether the judgment is to be made by the contractor or by the government. Be aware that these types of contingent actions may have an impact on price as well as schedule. Where expensive services, such as technical liaison, are to be furnished, do not say “as required.” Provide a ceil- ing on the extent of such services, or work out a procedure (e.g., a level of effort, pool of man-hours) that will ensure adequate control.

● Avoid incorporating extraneous material and requirements. They may add unnec- essary cost. Data requirements are common examples of problems in this area.

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The Statement of Work 525

5. See note 3.

Screen out unnecessary data requirements, and specify only what is essential and when. It is recommended that data requirements be specified separately in a data requirements appendix or equivalent.

● Do not repeat detailed requirements or specifications that are already spelled out in applicable documents. Instead, incorporate them by reference. If amplification, modification, or exceptions are required, make specific reference to the applicable portions and describe the change.

Some preparation documents also contain checklists for SOW preparation.5 A checklist is furnished below to provide considerations that SOW writers should keep in mind in preparing statements of work:

● Is the SOW (when used in conjunction with the preliminary CWBS) specific enough to permit a contractor to make a tabulation and summary of manpower and resources needed to accomplish each SOW task element?

● Are specific duties of the contractor stated so he will know what is required, and can the contracting officer’s representative, who signs the acceptance report, tell whether the contractor has complied?

● Are all parts of the SOW so written that there is no question as to what the con- tractor is obligated to do, and when?

● When it is necessary to reference other documents, is the proper reference docu- ment described? Is it properly cited? Is all of it really pertinent to the task, or should only portions be referenced? Is it cross-referenced to the applicable SOW task element?

● Are any specifications or exhibits applicable in whole or in part? If so, are they properly cited and referenced to the appropriate SOW element?

● Are directions clearly distinguishable from general information? ● Is there a time-phased data requirement for each deliverable item? If elapsed time

is used, does it specify calendar or work days? ● Are proper quantities shown? ● Have headings been checked for format and grammar? Are subheadings compara-

ble? Is the text compatible with the title? Is a multidecimal or alphanumeric num- bering system used in the SOW? Can it be cross-referenced with the CWBS?

● Have appropriate portions of procurement regulations been followed? ● Has extraneous material been eliminated? ● Can SOW task/contract line items and configuration item breakouts at lower lev-

els be identified and defined in sufficient detail so they can be summarized to dis- crete third-level CWBS elements?

● Have all requirements for data been specified separately in a data requirements appendix or its equivalent? Have all extraneous data requirements been eliminated?

● Are security requirements adequately covered if required? ● Has its availability to contractors been specified?

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526 PLANNING

Finally, there should be a management review of the SOW preparation interpretation6:

During development of the Statement of Work, the project manager should ensure ade-

quacy of content by holding frequent reviews with project and functional specialists to

determine that technical and data requirements specified do conform to the guidelines

herein and adequately support the common system objective. The CWBS/SOW matrix

should be used to analyze the SOW for completeness. After all comments and inputs have

been incorporated, a final team review should be held to produce a draft SOW for review

by functional and project managers. Specific problems should be resolved and changes

made as appropriate. A final draft should then be prepared and reviewed with the program

manager, contracting officer, or with higher management if the procurement is a major

acquisition. The final review should include a briefing on the total RFP package. If other

program offices or other Government agencies will be involved in the procurement, obtain

their concurrence also.

11.10 PROJECT SPECIFICATIONS

A specification list as shown in Table 11–2 is separately identified or called out as part of the statement of work. Specifications are used for man-hour, equipment, and material estimates. Small changes in a specifi- cation can cause large cost overruns.

Another reason for identifying the specifications is to make sure that

there are no surprises for the customer downstream. The specifications should be the most

current revision. It is not uncommon for a customer to hire outside agencies to evaluate the

technical proposal and to make sure that the proper specifications are being used.

Specifications are, in fact, standards for pricing out a proposal. If specifications do not

exist or are not necessary, then work standards should be included in the proposal. The

work standards can also appear in the cost volume of the proposal. Labor justification

backup sheets may or may not be included in the proposal, depending on RFP/RFQ

(request for quotation) requirements.

Several years ago, a government agency queried contractors as to why some govern-

ment programs were costing so much money. The main culprit turned out to be the speci-

fications. Typical specifications contain twice as many pages as necessary, do not stress

quality enough, are loaded with unnecessary designs and schematics, are difficult to read

and update, and are obsolete before they are published. Streamlining existing specifica-

tions is a costly and time-consuming effort. The better alternative is to educate those peo-

ple involved in specification preparation so that future specifications will be reasonably

correct.

6. Statement of Work Handbook NHB5600.2, National Aeronautics and Space Administration, February 1975.

PMBOK® Guide, 5th Edition 5.3 Define Scope

12.1.3.2 Contract Statement

of Work

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Project Specifications 527

TABLE 11–2. SPECIFICATION FOR STATEMENT OF WORK

Description Specification No.

Civil 100 (Index)

• Concrete 101 • Field equipment 102 • Piling 121 • Roofing and siding 122 • Soil testing 123 • Structural design 124

Electrical 200 (Index)

• Electrical testing 201 • Heat tracing 201 • Motors 209 • Power systems 225 • Switchgear 226 • Synchronous generators 227

HVAC 300 (Index)

• Hazardous environment 301 • Insulation 302 • Refrigeration piping 318 • Sheetmetal ductwork 319

Installation 400 (Index)

• Conveyors and chutes 401 • Fired heaters and boilers 402 • Heat exchangers 403 • Reactors 414 • Towers 415 • Vessels 416

Instruments 500 (Index)

• Alarm systems 501 • Control valves 502 • Flow instruments 503 • Level gages 536 • Pressure instruments 537 • Temperature instruments 538

Mechanical equipment 600 (Index)

• Centrifugal pumps 601 • Compressors 602 • High-speed gears 603 • Material handling equipment 640 • Mechanical agitators 641 • Steam turbines 642

Piping 700 (Index)

• Expansion joints 701 • Field pressure testing 702 • Installation of piping 703 • Pipe fabrication specs 749 • Pipe supports 750 • Steam tracing 751

Project administration 800 (Index)

• Design drawings 801 • Drafting standards 802 • General requirements 803 • Project coordination 841 • Reporting procedure 842 • Vendor data 843

(continues)

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528 PLANNING

11.11 MILESTONE SCHEDULES

Project milestone schedules contain such information as:

● Project start date ● Project end date ● Other major milestones ● Data items (deliverables or reports)

Project start and end dates, if known, must be included. Other major milestones, such as review meetings, prototype available, procurement, testing, and so on, should also be identified. The last topic, data items, is often overlooked. There are two good reasons for preparing a separate schedule for data items. First, the separate schedule will indicate to line managers that personnel with writing skills may have to be assigned. Second, data items require direct-labor man-hours for writing, typing, editing, retyping, proofing, graphic arts, and reproduction. Many companies identify on the data item schedules the approximate number of pages per data item, and each data item is priced out at a cost per page, say $500/page. Pricing out data items separately often induces customers to require fewer reports.

The steps required to prepare a report, after the initial discovery work or collection of information, include:

● Organizing the report ● Writing ● Typing ● Editing ● Retyping ● Proofing ● Graphic arts ● Submittal for approvals ● Reproduction and distribution

TABLE 11–2. SPECIFICATION FOR STATEMENT OF WORK (Continued)

Description Specification No.

Vessels 900 (Index)

• Fireproofing 901 • Painting 902 • Reinforced tanks 948 • Shell and tube heat exchangers 949 • Steam boilers 950 • Vessel linings 951

PMBOK® Guide, 5th Edition Chapter 6 Time Management

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Work Breakdown Structure 529

Typically, 6–8 hours of work are required per page. At a burdened hourly rate of $80/hour, it is easy for the cost of documentation to become exorbitant.

11.12 WORK BREAKDOWN STRUCTURE

The successful accomplishment of both contract and corporate objectives requires a plan that defines all effort to be expended, assigns responsibil- ity to a specially identified organizational element, and establishes sched-

ules and budgets for the accomplishment of the work. The preparation of this plan is the responsibility of the program manager, who is assisted by the program team assigned in accordance with program management system directives. The detailed planning is also established in accordance with company budgeting policy before contractural efforts are initiated.

In planning a project, the project manager must structure the work into small elements that are:

● Manageable, in that specific authority and responsibility can be assigned ● Independent, or with minimum interfacing with and dependence on other ongoing

elements ● Integratable so that the total package can be seen ● Measurable in terms of progress

There are certain core characteristics that every work breakdown structure (WBS) should possess. By knowing these core characteristics, the process of developing the WBS can be easier. According to Norman, Brotherton, and Fried, some of the core characteristics are7:

Core Characteristics are the minimum set of specific attributes that must be present in

every WBS. If a WBS adheres to these characteristics, it is said to have Core Quality.

These Core attributes are very black or white and contain no shades of gray. A WBS either

possesses these Core Characteristics or it does not. A WBS with Core Quality:

● Is deliverable-oriented ● Is hierarchical and constructed in such a manner that (a) each level of decomposi-

tion contains 100% of the work of its parent element, and (b) each parent element has at least two children elements

PMBOK® Guide, 5th Edition 5.4 Create WBS

7. E. S. Norman, S. A. Brotherton, and R. T. Fried, Work Breakdown Structures (Wiley, Hoboken, NJ, 2008), pp. 20–21.

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530 PLANNING

● Defines the full scope of the project and includes all project

related work elements including all internal, external and interim

deliverables

● Includes only those elements to be delivered by the project (and

nothing that is considered out of scope)

● Uses nouns and adjectives to describe the deliverables, not verbs

● Employs a coding scheme that clearly depicts the hierarchical

nature of the project

● Contains at least two levels of decomposition

● Is created by those performing the work with technical input from

knowledgeable subject matter experts and other project stakeholders

● Includes Project or Program Management at level 2 of the hierarchy

● Includes a WBS Dictionary that describes and defines the bound-

aries of the WBS elements

● Contains work packages that clearly support the identification of

the tasks, activities and milestones that must be performed in order

to deliver the work package

● Communicates the project scope to all stakeholders

● Is updated in accordance with project change management

procedures

The first major step in the planning process after project requirements definition is the development of the WBS. A WBS is a product-oriented fam- ily tree subdivision of the hardware, services, and data required to produce the end product. The WBS is structured in accordance with the way the work will be performed and reflects the way in which project costs and data will be summarized and eventually reported. Preparation of the WBS also considers other areas that require structured data, such as scheduling, configuration management, contract funding, and technical performance parameters. The WBS is the single most important element because it provides a common framework from which:

● The total program can be described as a summation of subdivided elements.

● Planning can be performed. ● Costs and budgets can be established. ● Time, cost, and performance can be tracked. ● Objectives can be linked to company resources in a logical manner. ● Schedules and status-reporting procedures can be established. ● Network construction and control planning can be initiated. ● The responsibility assignments for each element can be estab-

lished.

The work breakdown structure acts as a vehicle for breaking the work down into smaller elements, thus providing a greater probability that every

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major and minor activity will be accounted for. Although a variety of work breakdown structures exist, the most common is the six-level indented structure shown below:

Level Description

Managerial 1 Total program levels 52 Project

3 Task

Technical 4 Subtask levels 55 Work package

6 Level of effort

Level 1 is the total program and is composed of a set of projects. The summation of the activities and costs associated with each project must equal the total program. Each project, however, can be broken down into tasks, where the summation of all tasks equals the summation of all projects, which, in turn, comprises the total program. The reason for this subdivision of effort is simply ease of control. Program management therefore becomes synonymous with the integration of activities, and the project manager acts as the integrator, using the work breakdown structure as the common framework.

Careful consideration must be given to the design and development of the WBS. From Figure 11–3, the work breakdown structure can be used to provide the basis for:

● The responsibility matrix ● Network scheduling ● Costing ● Risk analysis ● Organizational structure ● Coordination of objectives ● Control (including contract administration)

The upper three levels of the WBS are normally specified by the customer (if part of an RFP/RFQ) as the summary levels for reporting purposes. The lower levels are generated by the contractor for in-house control. Each level serves a vital purpose: Level 1 is generally used for the authorization and release of all work, budgets are prepared at level 2, and sched- ules are prepared at level 3. Certain characteristics can now be generalized for these levels:

● The top three levels of the WBS reflect integrated efforts and should not be related to one specific department. Effort required by departments or sections should be defined in subtasks and work packages.

● The summation of all elements in one level must be the sum of all work in the next lower level.

● Each element of work should be assigned to one and only one level of effort. For example, the construction of the foundation of a house should be included in one project (or task), not extended over two or three. (At level 5, the work packages should be identifiable and homogeneous.)

Work Breakdown Structure 531

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532 PLANNING

● The level at which the project is managed is generally called the work package level. Actually, the work package can exist at any level below level one.

● The WBS must be accompanied by a description of the scope of effort required, or else only those individuals who issue the WBS will have a complete under- standing of what work has to be accomplished. It is common practice to reproduce the customer’s statement of work as the description for the WBS.

● It is often the best policy for the project manager, regardless of his technical exper- tise, to allow all of the line managers to assess the risks in the SOW. After all, the line managers are usually the recognized experts in the organization.

Project managers normally manage at the top three levels of the WBS and prefer to provide status reports to management at these levels also. Some companies are trying to standardize reporting to management by requiring the top three levels of the WBS to be the same for every project, the only differences being in levels 4–6. For companies with a great deal of similarity among projects, this approach has merit. For most companies, how- ever, the differences between projects make it almost impossible to standardize the top lev- els of the WBS.

Validates time and schedule

PERT network

Validates total risk and impact of decision-making

Decision tree

Validates management coordination

Feeder objectives

Interlocked objective networks

Work packages

Work breakdown structure

Validates organization charts

Major objective

Objective

Subobjective

Feeder objective

Corporate

Divisional

Departmental

Sectional

Matrix of

work packages

Validates work methods and accountability

Level 1

Level 2

Level 3

Level 4

Cost flow objective network

Validates total costs

FIGURE 11–3. Work breakdown structure for objective control and evaluation. Source: Paul Mali, Managing by Objectives (New York: Wiley, 1972), p. 163. Copyright © 1972 by John Wiley & Sons. Reprinted by permission of the publisher.

PMBOK® Guide, 5th Edition Figure 5–10 Sample WBS

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Work Breakdown Structure 533

The work package is the critical level for managing a work breakdown structure, as shown in Figure 11–4. However, it is possible that the actual management of the work packages is supervised and performed by the line managers with status reporting provided to the project manager at higher levels of the WBS.

Work packages are natural subdivisions of cost accounts and constitute the basic building blocks used by the contractor in planning, controlling, and measuring contract performance. A work package is simply a low-level task or job assignment. It describes the work to be accomplished by a specific performing organization or a group of cost centers and serves as a vehicle for monitoring and reporting progress of work. Documents that authorize and assign work to a performing organization are designated by various names throughout industry. “Work package” is the generic term used in the criteria to identify dis- crete tasks that have definable end results. Ideal work packages are 80 hours and 2–4 weeks. However, this may not be possible on large projects.

It is not necessary that work package documentation contain complete, stand-alone descriptions. Supplemental documentation may augment the work package descriptions. However, the work package descriptions must permit cost account managers and work package supervisors to understand and clearly distinguish one work package effort from another. In the review of work package documentation, it may be necessary to obtain explanations from personnel routinely involved in the work, rather than requiring the work package descriptions to be completely self-explanatory.

Short-term work packages may help evaluate accomplishments. Work packages should be natural subdivisions of effort planned according to the way the work will be done. However, when work packages are relatively short, little or no assessment of work- in-process is required and the evaluation of status is possible mainly on the basis of work package completions. The longer the work packages, the more difficult and subjective the work-in-process assessment becomes unless the packages are subdivided by objective indicators such as discrete milestones with preassigned budget values or completion percentages.

In setting up the work breakdown structure, tasks should:

● Have clearly defined start and end dates ● Be usable as a communications tool in which results can be compared with expec-

tations ● Be estimated on a “total” time duration, not when the task must start or end ● Be structured so that a minimum of project office control and documentation (i.e.,

forms) is necessary

For large projects, planning will be time phased at the work package level of the WBS. The work package has the following characteristics:

● Represents units of work at the level where the work is performed ● Clearly distinguishes one work package from all others assigned to a single func-

tional group ● Contains clearly defined start and end dates that are representative of physical

accomplishment (This is accomplished after scheduling has been completed.)

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HARDWARE

PROGRAM

TRAINING

ENGINEERING SUBSYSTEM

MANUFACTURING SUBSYSTEM

COMPONENT TESTING

MODULE A

MODULE B

MODULE C

MODULE D

ELECTRICAL DESIGN

MECHANICAL DESIGN

VERIFICATION VALIDATION

E N

G IN

E E

R IN

D E

S IG

C O

M P

A N

M F

G T

E S

COST ACCOUNT

WORK PACKAGES

LEVEL 2

LEVEL 1

LEVEL 3

LEVEL 4

FUNCTIONAL ORGANIZATION

COST ACCOUNT

FIGURE 11–4. The cost account intersection.

PMBOK® Guide, 5th Edition Figure 5–11 WBS Decomposition

Organizational Procedures Links

534

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Work Breakdown Structure 535

● Specifies a budget in terms of dollars, man-hours, or other measurable units ● Limits the work to be performed to relatively short periods of time to minimize the

work-in-process effort

Table 11–3 shows a simple work breakdown structure with the associated numbering system following the work breakdown. The first number represents the total program (in this case, it is represented by 01), the second number represents the project, and the third number identifies the task. Therefore, number 01-03-00 represents project 3 of program 01, whereas 01-03-02 represents task 2 of project 3. This type of numbering system is not standard; each company may have its own system, depending on how costs are to be controlled.

The preparation of the work breakdown structure is not easy. The WBS is a commu- nications tool, providing detailed information to different levels of management. If it does not contain enough levels, then the integration of activities may prove difficult. If too many levels exist, then unproductive time will be made to have the same number of levels for all projects, tasks, and so on. Each major work element should be considered by itself. Remember, the WBS establishes the number of required networks for cost control.

For many programs, the work breakdown structure is established by the customer. If the contractor is required to develop a WBS, then certain guidelines must be considered including:

● The complexity and technical requirements of the program (i.e., the statement of work)

● The program cost ● The time span of the program ● The contractor’s resource requirements ● The contractor’s and customer’s internal structure for management control and

reporting ● The number of subcontracts

TABLE 11–3. WORK BREAKDOWN STRUCTURE FOR NEW PLANT CONSTRUCTION AND START-UP

Program: New Plant Construction and Start-up 01-00-00 Project 1: Analytical Study 01-01-00

Task 1: Marketing/Production Study 01-01-01 Task 2: Cost Effectiveness Analysis 01-01-02

Project 2: Design and Layout 01-02-00 Task 1: Product Processing Sketches 01-02-01 Task 2: Product Processing Blueprints 01-02-02

Project 3: Installation 01-03-00 Task 1: Fabrication 01-03-01 Task 2: Setup 01-03-02 Task 3: Testing and Run 01-03-03

Project 4: Program Support 01-04-00 Task 1: Management 01-04-01 Task 2: Purchasing Raw Materials 01-04-02

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536 PLANNING

Applying these guidelines serves only to identify the complexity of the program. These data must then be subdivided and released, together with detailed information, to the different levels of the organization. The WBS should follow specified criteria because, although preparation of the WBS is performed by the program office, the actual work is performed by the doers, not the planners. Both the doers and the planners must be in agree- ment as to what is expected. A sample listing of criteria for developing a work breakdown structure is shown below:

● The WBS and work description should be easy to understand. ● All schedules should follow the WBS. ● No attempt should be made to subdivide work arbitrarily to the lowest possible

level. The lowest level of work should not end up having a ridiculous cost in com- parison to other efforts.

● Since scope of effort can change during a program, every effort should be made to maintain flexibility in the WBS.

● The WBS can act as a list of discrete and tangible milestones so that everyone will know when the milestones were achieved.

● The level of the WBS can reflect the “trust” you have in certain line groups. ● The WBS can be used to segregate recurring from nonrecurring costs. ● Most WBS elements (at the lowest control level) range from 0.5 to 2.5 percent of

the total project budget.

11.13 WBS DECOMPOSITION PROBLEMS

There is a common misconception that WBS decomposition is an easy task to perform. In the development of the WBS, the top three levels or management levels are usually roll-up levels. Preparing templates at these levels is becoming common practice. However, at levels 4–6 of the WBS, templates may not be appropriate. There are reasons for this.

● Breaking the work down to extremely small and detailed work packages may require the creation of hundreds or even thousands of cost accounts and charge numbers. This could increase the management, control, and reporting costs of these small packages to a point where the costs exceed the benefits. Although a typical work package may be 200–300 hours and approximately two weeks in duration, consider the impact on a large project, which may have more than one million direct labor hours.

● Breaking the work down to small work packages can provide accurate cost control if, and only if, the line managers can determine the costs at this level of detail. Line managers must be given the right to tell project managers that costs cannot be determined at the requested level of detail.

● The work breakdown structure is the basis for scheduling techniques such as the Arrow Diagramming Method and the Precedence Diagramming Method. At low levels of the WBS, the interdependencies between activities can become so com- plex that meaningful networks cannot be constructed.

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WBS Decomposition Problems 537

One solution to the above problems is to create “hammock” activities, which encom- pass several activities where exact cost identification cannot or may not be accurately determined. Some projects identify a “hammock” activity called management support (or project office), which includes overall project management, data items, management reserve, and possibly procurement. The advantage of this type of hammock activity is that the charge numbers are under the direct control of the project manager.

There is a common misconception that the typical dimensions of a work package are approximately 80 hours and less than two weeks to a month. Although this may be true on small projects, this would necessitate millions of work packages on large jobs and this may be impractical, even if line managers could control work packages of this size.

From a cost control point of view, cost analysis down to the fifth level is advantageous. However, it should be noted that the cost required to prepare cost analysis data to each lower level may increase exponentially, especially if the customer requires data to be pre- sented in a specified format that is not part of the company’s standard operating proce- dures. The level-5 work packages are normally for in-house control only. Some companies bill customers separately for each level of cost reporting below level 3.

The WBS can be subdivided into subobjectives with finer divisions of effort as we go lower into the WBS. By defining subobjectives, we add greater understanding and, it is hoped, clarity of action for those individuals who will be required to complete the objec- tives. Whenever work is structured, understood, easily identifiable, and within the capa- bilities of the individuals, there will almost always exist a high degree of confidence that the objective can be reached.

Work breakdown structures can be used to structure work for reaching such objectives as lowering cost, reducing absenteeism, improving morale, and lowering scrap factors. The lowest subdivision now becomes an end-item or subobjective, not necessarily a work pack- age as described here. However, since we are describing project management, for the remainder of the text we will consider the lowest level as the work package.

Once the WBS is established and the program is “kicked off,” it becomes a very costly procedure to either add or delete activities, or change levels of reporting because of cost control. Many companies do not give careful forethought to the importance of a prop- erly developed WBS, and ultimately they risk cost control problems downstream. One important use of the WBS is that it serves as a cost control standard for any future activi- ties that may follow on or may just be similar. One common mistake made by management is the combining of direct support activities with administrative activities. For example, the department manager for manufacturing engineering may be required to provide adminis- trative support (possibly by attending team meetings) throughout the duration of the pro- gram. If the administrative support is spread out over each of the projects, a false picture is obtained as to the actual hours needed to accomplish each project in the program. If one of the projects should be canceled, then the support man-hours for the total program would be reduced when, in fact, the administrative and support functions may be constant, regard- less of the number of projects and tasks.

Quite often work breakdown structures accompanying customer RFPs contain much more scope of effort, as specified by the statement of work, than the existing funding will support. This is done intentionally by the customer in hopes that a contractor may be will- ing to “buy in.” If the contractor’s price exceeds the customer’s funding limitations, then

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538 PLANNING

the scope of effort must be reduced by eliminating activities from the WBS. By develop- ing a separate project for administrative and indirect support activities, the customer can easily modify his costs by eliminating the direct support activities of the canceled effort.

Before we go on, there should be a brief discussion of the usefulness and applicabil- ity of the WBS system. Many companies and industries have been successful in managing programs without the use of work breakdown structures, especially on repetitive-type pro- grams. As was the case with the SOW, there are also preparation guides for the WBS8:

● Develop the WBS structure by subdividing the total effort into discrete and logi- cal subelements. Usually a program subdivides into projects, major systems, major subsystems, and various lower levels until a manageable-size element level is reached. Wide variations may occur, depending upon the type of effort (e.g., major systems development, support services, etc.). Include more than one cost center and more than one contractor if this reflects the actual situation.

● Check the proposed WBS and the contemplated efforts for completeness, compat- ibility, and continuity.

● Determine that the WBS satisfies both functional (engineering/manufacturing/ test) and program/project (hardware, services, etc.) requirements, including recur- ring and nonrecurring costs.

● Check to determine if the WBS provides for logical subdivision of all project work.

● Establish assignment of responsibilities for all identified effort to specific organizations.

● Check the proposed WBS against the reporting requirements of the organizations involved.

There are also checklists that can be used in the preparation of the WBS9:

● Develop a preliminary WBS to not lower than the top three levels for solicitation purposes (or lower if deemed necessary for some special reason).

● Assure that the contractor is required to extend the preliminary WBS in response to the solicitation, to identify and structure all contractor work to be compatible with his organization and management system.

● Following negotiations, the CWBS included in the contract should not normally extend lower than the third level.

● Assure that the negotiated CWBS structure is compatible with reporting requirements.

8. Source: Handbook for Preparation of Work Breakdown Structures, NHB5610.1, National Aeronautics and Space Administration, February 1975.

9. See note 8.

PMBOK® Guide, 5th Edition 5.4.2.1 WBS

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WBS Decomposition Problems 539

● Assure that the negotiated CWBS is compatible with the contractor’s organization and management system.

● Review the CWBS elements to ensure correlation with: ● The specification tree ● Contract line items ● End-items of the contract ● Data items required ● Work statement tasks ● Configuration management requirements

● Define CWBS elements down to the level where such definitions are meaningful and necessary for management purposes (WBS dictionary).

● Specify reporting requirements for selected CWBS elements if variations from standard reporting requirements are desired.

● Assure that the CWBS covers measurable effort, level of effort, apportioned effort, and subcontracts, if applicable.

● Assure that the total costs at a particular level will equal the sum of the costs of the constituent elements at the next lower level.

On simple projects, the WBS can be constructed as a “tree diagram” (see Figure 11–5) or according to the logic flow. In Figure 11–5, the tree diagram can follow the work or even the organizational structure of the company (i.e., division, department, section, unit). The second method is to create a logic flow (see Figure 12–21) and cluster certain elements to represent tasks and projects. In the tree method, lower-level functional units may be assigned to one, and only one, work element, whereas in the logic flow method the lower- level functional units may serve several WBS elements.

NEW CAR DESIGN

CHEMICAL

MECHANICAL

ELECTRICAL

LEVELS

PROGRAM

PROJECT

TASK

BRAKES ENGINE STRUCTURE INTERIOR

FIGURE 11–5. WBS tree diagram.

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540 PLANNING

A tendency exists to develop guidelines, policies, and procedures for project manage- ment, but not for the development of the WBS. Some companies have been marginally suc- cessful in developing a “generic” methodology for levels 1, 2, and 3 of the WBS to use on all projects. The differences appear in levels 4, 5, and 6.

The table below shows the three most common methods for structuring the WBS:

Method

Level Flow Life Cycle Organization

Program Program Program Program Project System Life cycle Division Task Subsystem System Department Subtask People Subsystem Section Work package People People People Level of effort People People People

The flow method breaks the work down into systems and major subsystems. This method is well suited for projects less than two years in length. For longer projects, we use the life-cycle method, which is similar to the flow method. The organization method is used for projects that may be repetitive or require very little integration between functional units.

11.14 WORK BREAKDOWN STRUCTURE DICTIONARY

Work breakdown structures are actually numbering systems such as the last column in Table 11–3. Wording is often added into the WBS to provide clarity. As an example, pro- ject management software treats the WBS as a numbering system but may ask you for a description of the work package and the name or initials of the person responsible for that work package.

Perhaps the best way to understand the meaning and intent of each work package is to use a WBS dictionary. For each element in the WBS, the dictionary provides a brief descrip- tion of each element, the name of the person or cost center responsible for that element such as in a responsibility assignment matrix, the element’s milestones, and the final deliverable. The WBS dictionary can also identify the cost associated with that element, the charge num- ber to be used, and the required resources by name or skill level. The dictionary can also provide a detailed technical description of each element and cross-listing to other WBS ele- ments, quality requirements, and contractual documentation. The WBS dictionary is also

cross-listed to the project’s work authorization form to be discussed in Chapter 15. The WBS and the WBS dictionary can be used to support the scope verification

process. Norman, Brotherton, and Fried state that10:

During project execution, validation of the deliverables can be accomplished by referenc-

ing the deliverables as they have been described in the WBS and WBS Dictionary. Since

10. See note 7, pp. 144–145.

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the WBS and WBS Dictionary each describe project deliverables including acceptance and

completion criteria, these then become the reference point for validation and acceptance of

the completed deliverables. The WBS and WBS Dictionary often are used additionally as

a baseline for monitoring and measuring “wants” and “needs” versus the agreed upon pro-

ject scope. This ensures that the project does not attempt to deliver outcomes that are not

included in the requirements. The WBS and WBS Dictionary help ensure the project team

does attempt to deliver outcomes or quality that exceed the boundaries of the requirements

while they also contain and control scope creep.

The WBS and WBS Dictionary help support communications between the project

manager, project team, sponsor(s) and stakeholders regarding the content and completion

criteria for the project deliverables. Without first developing the WBS, frequently the cri-

teria for deliverable acceptance and completion are ill-defined, leading to misunderstand-

ing and disagreement about the completion of specific project outcomes.

As work proceeds on the project, the WBS can be used as a checklist to determine

what deliverables have and have not been completed or accepted. When communicated

via the status report and other vehicles in the project’s Communications Plan, this

helps ensure that all project stakeholders clearly understand the current state of the

project.

At the end of the project, Scope Verification supports the transition of the project to

ongoing operations as well as closure of any open contracts or subcontracts. Here again

the WBS is used as the basis for verification and as a key input to the contract and project

closure processes.

11.15 ROLE OF THE EXECUTIVE IN PROJECT SELECTION

A prime responsibility of senior management (and possibly project spon- sors) is the selection of projects. Most organizations have an established selection criteria, which can be subjective, objective, quantitative, qualita- tive, or simply a seat-of-the-pants guess. In any event, there should be a valid reason for selecting the project.

From a financial perspective, project selection is basically a two-part process. First, the organization will conduct a feasibility study to determine whether the project can be done. The second part is to perform a benefit-to-cost analysis to see whether the company should do it.

The purpose of the feasibility study is to validate that the project meets feasibility of cost, technological, safety, marketability, and ease of execution requirements. The com- pany may use outside consultants or subject matter experts (SMEs) to assist in both feasi- bility studies and benefit-to-cost analyses. A project manager may not be assigned until after the feasibility study is completed.

As part of the feasibility process during project selection, senior management often solicits input from SMEs and lower-level managers through rating models. The rating models normally identify the business and/or technical criteria against which the ratings will be made. Figure 11–6 shows a scaling model for a single project. Figure 11–7 shows

Role of the Executive in Project Selection 541

PMBOK® Guide, 5th Edition Chapter 4 Integration

4.1.2 Develop Project Charter

Tools and Techniques

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542 PLANNING

T O

P M

A N

A G

E M

E N

CAPITAL REQUIREMENTS

CRITERIA

COMPETITIVE REACTION

RETURN ON INVESTMENT

PAYOUT TIME

WALL STREET IMPACTS

E N

G IN

E E

R IN

G REQUIRED EQUIPMENT

AVAILABILITY OF PERSONNEL

KNOW-HOW

DESIGN DIFFICULTY

EQUIPMENT AVAILABILITY

PIPING LAYOUTS

R E

S E

A R

C H

PATENTABILITY

LIKELIHOOD OF SUCCESS

KNOW-HOW

PROJECT COSTS

AVAILABILITY OF PERSONNEL

AVAILABILITY OF LABORATORY

M A

R K

E T

IN G

LENGTH OF PRODUCT LIFE

PRODUCT ADVANTAGE

SUITABILITY TO SALESFORCE

SIZE OF MARKET

NUMBER OF COMPETITORS

P R

O D

U C

T IO

PROCESSABILITY

KNOW-HOW

NUMBER OF XS

EQUIPMENT AVAILABILITY

–2 –1 0 +1 +2

5 3 2 7 7

SCALE

KEY: 12 5 EXCELLENT 11 5 GOOD 0 5 FAIR 21 5 BAD 22 5 UNACCEPTABLE

5 NOT APPLICABLE

5 SCORE FOR PROJECT A

FIGURE 11–6. Illustration of a scaling model for one project, Project A. Source: William E. Souder, Project Selection and Economic Appraisal, p. 66.

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Role of the Executive in Project Selection 543

a checklist rating system to evaluate three projects at once. Figure 11–8 shows a scoring model for multiple projects using weighted averages.

If the project is deemed feasible and a good fit with the strategic plan, then the project is prioritized for development along with other projects. Once feasibility is deter-

mined, a benefit-to-cost analysis is performed to validate that the project will, if executed correctly, provide the required financial and nonfinancial benefits. Benefit-to-cost analyses require significantly more information to be scrutinized than is usually available during a feasibility study. This can be an expensive proposition.

Estimating benefits and costs in a timely manner is very difficult. Benefits are often defined as:

● Tangible benefits for which dollars may be reasonably quantified and measured. ● Intangible benefits that may be quantified in units other than dollars or may be

identified and described subjectively.

PROJECTS

CRITERIA

PROJECT A

PROJECT B

PROJECT C

3 2 1 3 2 1 3 2 1 TOTAL SCORE

P R

O F

IT A

B IL

IT Y

M A

R K

E TA

B IL

IT Y

S U

C C

E S

S L

IK E

L IH

O O

FIGURE 11–7. Illustration of a checklist for three projects. Source: William Souder, Project Selection and Economic Appraisal, p. 68.

PMBOK® Guide, 5th Edition 5.3 Scope Definition

5.3.2.2 Product Analysis

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544 PLANNING

Costs are significantly more difficult to quantify. The minimum costs that must be determined are those that specifically are used for comparison to the benefits. These include:

● The current operating costs or the cost of operating in today’s circumstances. ● Future period costs that are expected and can be planned for. ● Intangible costs that may be difficult to quantify. These costs are often omitted if

quantification would contribute little to the decision-making process.

PROJECTS

PROJECT D

PROJECT E

PROJECT F

CRITERION SCORES*

CRITERION WEIGHTS 4 3 2 1

CRITERIA

P R

O F

IT A

B IL

IT Y

P A T

E N

TA B

IL IT

M A

R K

E TA

B IL

IT Y

P R

O D

U C

E A

B IL

IT Y

TOTAL WEIGHTED

SCORE

TOTAL WEIGHTED SCORE 5 S (CRITERION SCORE 3 CRITERION WEIGHT)

* SCALE: 10 5 EXCELLENT; 1 5 UNACCEPTABLE

FIGURE 11–8. Illustration of a scoring model. Source: William Souder, Project Selection and Economic Appraisal, p. 69.

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Role of the Executive in Project Selection 545

There must be careful documentation of all known constraints and assumptions that were made in developing the costs and the benefits. Unrealistic or unrecognized assumptions are often the cause of unrealistic benefits. The go or no-go decision to continue with a pro- ject could very well rest upon the validity of the assumptions.

Table 11–4 shows the major differences between feasibility studies and benefit-to-cost analyses.

Today, the project manager may end up participating in the project selection process. In Chapter 1, we discussed the new breed of project manager, namely a person that has excellent business skills as well as project management skills. These business skills now allow us to bring the project manager on board the project at the beginning of the initiation phase rather than at the end of the initiation phase because the project manager can now make a valuable contribution to the project selection process. The project manager can be of assistance during project selection by providing business case knowledge including:

● Opportunity options (sales volume, market share, and follow-on business)

● Resource requirements (team knowledge requirements and skill set)

● Refined project costs

● Refined savings

● Benefits (financial, strategic, payback)

● Project metrics (key performance indicators and critical success factors)

● Benefits realization (consistency with the corporate business plan)

● Risks

● Exit strategies

● Organizational readiness and strengths

● Schedule/milestones

● Overall complexity

● Technology complexity and constraints, if any11

TABLE 11–4. FEASIBILITY STUDY AND BENEFIT-COST ANALYSIS

Feasibility Study Benefit-Cost Analysis

Basic Question Can We Do It? Should We Do It? Life-Cycle Phase Preconceptual Conceptual PM Selected Usually not yet Usually identified but partial involvement Analysis Qualitative Quantitative Critical Factors for Go/No-Go • Technical • Net present value

• Cost • Discounted cash flow • Quality • Internal rate of return • Safety • Return on investment • Ease of performance • Probability of success • Economical • Reality of assumptions • Legal and constraints

Executive Decision Criteria Strategic fit Benefits exceed costs by required margin

11. For additional factors that can influence project selection decision making, see J. R. Meredith and S. J. Mantel, Jr., Project Management, 3rd ed., (New York: Wiley, 1995), pp. 44–46.

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546 PLANNING

11.16 ROLE OF THE EXECUTIVE IN PLANNING

Executives are responsible for selecting the project manager, and the person chosen should have planning expertise. Not all technical specialists are good planners. Likewise, some people that are excellent in execution have minimal planning skills. Executives must make sure that whomever is assigned as the project manager has both planning and execution skills. In addition, executives must take an active role during project planning activities especially if they also function as project sponsors.12

Executives must not arbitrarily set unrealistic milestones and then “force” line man- agers to fulfill them. Both project and line managers should try to adhere to unrealistic milestones, but if a line manager says he cannot, executives should comply because the line manager is supposedly the expert.

Executives should interface with project and line personnel during the planning stage in order to define the requirements and establish reasonable deadlines. Executives must realize that creating an unreasonable deadline may require the reestablishment of priori- ties, and, of course, changing priorities can push milestones backward.

11.17 THE PLANNING CYCLE

Previously, we stated that perhaps the most important reason for structuring projects into

life-cycle phases is to provide management with control of the critical decision points in

order to:

● Avoid commitment of major resources too early

● Preserve future options

● Maximize benefits of each project in relation to all other projects

● Assess risks

On long-term projects, phasing can be overdone, resulting in extra costs and delays.

To prevent this, many project-driven companies resort to other types of systems, such as a

management cost and control system (MCCS). No program or project can be efficiently

organized and managed without some form of management cost and control system.

Figure 11–9 shows the five phases of a management cost and control system. The first

phase constitutes the planning cycle, and the next four phases identify the operating cycle.

Figure 11–10 shows the activities included in the planning cycle. The work break-

down structure serves as the initial control from which all planning emanates. The WBS

acts as a vital artery for communications and operations in all phases. A comprehensive

analysis of management cost and control systems is presented in Chapter 15.

12. Although this section is called “The Role of the Executive in Planning,” it also applies to line management if project sponsorship is pushed down to the middle-management level or lower. This is quite common in highly mature project management organizations where senior management has sufficient faith in line management’s ability to serve as project sponsors.

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Work Planning Authorization 547

11.17 WORK PLANNING AUTHORIZATION

After receipt of a contract, some form of authorization is needed before

work can begin, even in the planning stage. Both work authorization and

work planning authorization are used to release funds, but for different pur-

poses. Work planning authorization releases funds (primarily for func-

tional management) so that scheduling, costs, budgets, and all other types of plans can be

prepared prior to the release of operational cycle funds, which hereafter shall be referred to

simply as work authorization. Both forms of authorization require the same paperwork. In

many companies this work authorization is identified as a subdivided work description

(SWD), which is a narrative description of the effort to be performed by the cost center

OPERATING CYCLE PLANNING

CYCLE

PHASE I PHASE II PHASE III PHASE IV PHASE V

PLANNING

WORK AUTHORIZATION

AND RELEASE

COST DATA COLLATION

AND REPORTING

COST ACCOUNTING

CUSTOMER AND

REPORTING

FIGURE 11–9. Phases of a management cost and control system.

MCCS BUDGET

PROGRAM PLAN

DETAILED SCHEDULE

MASTER PRODUCTION SCHEDULE

WORK PLANNING AUTHORIZATION

WORK BREAKDOWN STRUCTURE

MCCS PHASES

I II III IV V

FIGURE 11–10. The planning cycle of a management cost and control system.

PMBOK® Guide, 5th Edition 4.3.2 Direct and Manage

Project Work

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548 PLANNING

(division-level minimum). This package establishes the work to be performed, the period of

performance, and possibly the maximum number of hours available. The SWD is multi-

purpose in that it can be used to release contract funds, authorize planning, describe activi-

ties as identified in the WBS, and, last but not least, release work.

The SWD is one of the key elements in the planning of a program as shown in Figure

11–10. Contract control and administration releases the contract funds by issuing a SWD,

which sets forth general contractual requirements and authorizes program management to

proceed. Program management issues the SWD to set forth the contractual guidelines and

requirements for the functional units. The SWD specifies how the work will be performed,

which functional organizations will be involved, and who has what specific responsibili-

ties, and authorizes the utilization of resources within a given time period.

The SWD authorizes both the program team and functional management to begin

work. As shown in Figure 11–10, the SWD provides direct input to Phase II of the MCCS.

Phase I and Phase II can and do operate simultaneously because it is generally impossible

for program office personnel to establish plans, procedures, and schedules without input

from the functional units.

The subdivided work description package is used by the operating organizations to

further subdivide the effort defined by the WBS into small segments or work packages.

Many people contend that if the data in the work authorization document are different

from what was originally defined in the proposal, the project is in trouble right at the start.

This may not be the case, because most projects are priced out assuming “unlimited”

resources, whereas the hours and dollars in the work authorization document are based

upon “limited” resources. This situation is common for companies that thrive on compet-

itive bidding.

11.19 WHY DO PLANS FAIL?

No matter how hard we try, planning is not perfect, and sometimes plans fail. Typical rea-

sons include:

● Corporate goals are not understood at the lower organizational levels.

● Plans encompass too much in too little time.

● Financial estimates are poor.

● Plans are based on insufficient data.

● No attempt is being made to systematize the planning process.

● Planning is performed by a planning group.

● No one knows the ultimate objective.

● No one knows the staffing requirements.

● No one knows the major milestone dates, including written reports.

● Project estimates are best guesses, and are not based on standards or history.

● Not enough time has been given for proper estimating.

● No one has bothered to see if there will be personnel available with the necessary skills.

● People are not working toward the same specifications.

● People are consistently shuffled in and out of the project with little regard for

schedule.

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Stopping Projects 549

Why do these situations occur? If corporate goals are not understood, it is because cor-

porate executives have been negligent in providing the necessary strategic information and

feedback. If a plan fails because of extreme optimism, then the responsibility lies with both

the project and line managers for not assessing risk. Project managers should ask the line

managers if the estimates are optimistic or pessimistic, and expect an honest answer.

Erroneous financial estimates are the responsibility of the line manager. If the project fails

because of a poor definition of the requirements, then the project manager is totally at fault. Sometimes project plans fail because simple details are forgotten or overlooked.

Examples of this might be:

● Neglecting to tell a line manager early enough that the prototype is not ready and that rescheduling is necessary.

● Neglecting to see if the line manager can still provide additional employees for the next two weeks because it was possible to do so six months ago.

Sometimes plans fail because the project manager “bites off more than he can chew,” and then something happens, such as his becoming ill. Many projects have failed because the project manager was the only one who knew what was going on and then got sick.

11.20 STOPPING PROJECTS

There are always situations in which projects have to be stopped. Nine reasons for stopping are:

● Final achievement of the objectives ● Poor initial planning and market prognosis ● A better alternative is found ● A change in the company interest and strategy ● Allocated time is exceeded ● Budgeted costs are exceeded ● Key people leave the organization ● Personal whims of management ● Problem too complex for the resources available

Today most of the reasons why projects are not completed on time and within cost are behavioral rather than quantitative. They include:

● Poor morale ● Poor human relations ● Poor labor productivity ● No commitment by those involved in the project

The last item appears to be the cause of the first three items in many situations. Once the reasons for cancellation are defined, the next problem concerns how to stop

the project. Some of the ways are:

● Orderly planned termination ● The “hatchet” (withdrawal of funds and removal of personnel)

PMBOK® Guide, 5th Edition 4.6 Close Projects

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550 PLANNING

● Reassignment of people to higher priority tasks ● Redirection of efforts toward different objectives ● Burying it or letting it die on the vine (i.e., not taking any official action)

There are three major problem areas to be considered in stopping projects:

● Worker morale ● Reassignment of personnel ● Adequate documentation and wrap-up

11.21 HANDLING PROJECT PHASEOUTS AND TRANSFERS

By definition, projects (and even life cycle phases) have an end point. Closing out is a very important phase in the project life cycle, which should follow particular disciplines and procedures with the objective of:

● Effectively bringing the project to closure according to agreed-on contractual requirements

● Preparing for the transition of the project into the next operational phase, such as from production to field installation, field operation, or training

● Analyzing overall project performance with regard to financial data, schedules, and technical efforts

● Closing the project office, and transferring or selling off all resources originally assigned to the project, including personnel

● Identifying and pursuing follow-on business

Although most project managers are completely cognizant of the necessity for proper planning for project start-up, many project managers neglect planning for project termina- tion. Planning for project termination includes:

● Transferring responsibility ● Completion of project records

● Historic reports ● Postproject analysis

● Documenting results to reflect “as built” product or installation ● Acceptance by sponsor/user ● Satisfying contractual requirements ● Releasing resources

● Reassignment of project office team members ● Disposition of functional personnel ● Disposition of materials

● Closing out work orders (financial closeout) ● Preparing for financial payments

PMBOK® Guide, 5th Edition 4.4 Monitor and Control

Project Work

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Detailed Schedules and Charts 551

Project success or failure often depends on management’s ability to handle personnel issues properly during this final phase. If job assignments beyond the current project look undesirable or uncertain to project team members, a great deal of anxiety and conflict may develop that diverts needed energy to job hunting, foot dragging, or even sabotage. Project personnel may engage in job searches on their own and may leave the project prematurely. This creates a glaring void that is often difficult to patch.

Given business realities, it is difficult to transfer project personnel under ideal condi- tions. The following suggestions may increase organizational effectiveness and minimize personal stress when closing out a project:

● Carefully plan the project closeout on the part of both project and functional man- agers. Use a checklist to prepare the plan.

● Establish a simple project closeout procedure that identifies the major steps and responsibilities.

● Treat the closeout phase like any other project, with clearly delineated tasks, agreed-on responsibilities, schedules, budgets, and deliverable items or results.

● Understand the interaction of behavioral and organizational elements in order to build an environment conducive to teamwork during this final project phase.

● Emphasize the overall goals, applications, and utilities of the project as well as its business impact.

● Secure top-management involvement and support. ● Be aware of conflict, fatigue, shifting priorities, and technical or logistic problems.

Try to identify and deal with these problems when they start to develop. Communicating progress through regularly scheduled status meetings is the key to managing these problems.

● Keep project personnel informed of upcoming job opportunities. Resource man- agers should discuss and negotiate new assignments with personnel and involve people already in the next project.

● Be aware of rumors. If a reorganization or layoff is inevitable, the situation should be described in a professional manner or people will assume the worst.

● Assign a contract administrator dedicated to company-oriented projects. He will protect your financial position and business interests by following through on cus- tomer sign-offs and final payment.

11.22 DETAILED SCHEDULES AND CHARTS

The scheduling of activities is the first major requirement of the program office after pro- gram go-ahead. The program office normally assumes full responsibility for activity scheduling if the activity is not too complex. For large programs, functional management input is required before scheduling can be completed. Depending on program size and con- tractual requirements, the program office may have a staff member whose sole responsi- bility is to continuously develop and update activity schedules to track program work. The resulting information is supplied to program office personnel, functional management, team members, and the customer.

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552 PLANNING

Activity scheduling is probably the single most important tool for determining how company resources should be integrated. Activity schedules are invaluable for projecting time-phased resource utilization requirements, providing a basis for visually tracking per- formance and estimating costs. The schedules serve as master plans from which both the customer and management have an up-to-date picture of operations.

Certain guidelines should be followed in the preparation of schedules, regardless of the projected use or complexity:

● All major events and dates must be clearly identified. If a statement of work is sup- plied by the customer, those dates shown on the accompanying schedules must be included. If for any reason the customer’s milestone dates cannot be met, the cus- tomer should be notified immediately.

● The exact sequence of work should be defined through a network in which inter- relationships between events can be identified.

● Schedules should be directly relatable to the work breakdown structure. If the WBS is developed according to a specific sequence of work, then it becomes an easy task to identify work sequences in schedules using the same numbering sys- tem as in the WBS. The minimum requirement should be to show where and when all tasks start and finish.

● All schedules must identify the time constraints and, if possible, should identify those resources required for each event.

Although these four guidelines relate to schedule preparation, they do not define how complex the schedules should be. Before preparing schedules, three questions should be considered:

● How many events or activities should each network have? ● How much of a detailed technical breakdown should be included? ● Who is the intended audience for this schedule?

Most organizations develop multiple schedules: summary schedules for management and planners and detailed schedules for the doers and lower-level control. The detailed schedules may be strictly for interdepartmental activities. Program management must approve all schedules down through the first three levels of the work breakdown structure. For lower-level schedules (i.e., detailed interdepartmental), program management may or may not request a sign of approval.

One of the most difficult problems to identify in schedules is a hedge position. A hedge position is a situation in which the contractor may not be able to meet a customer’s mile- stone date without incurring a risk, or may not be able to meet activity requirements fol- lowing a milestone date because of contractual requirements. To illustrate a common hedge position, consider Example 11–1 below.

Example 11–1. Condor Corporation is currently working on a project that has three phases: design, development, and qualification of a certain component. Contractual requirements with the customer specify that no components will be fabricated for the development phase until the design review meeting is held following the design phase.

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Detailed Schedules and Charts 553

Condor has determined that if it does not begin component fabrication prior to the design review meeting, then the second and third phases will slip. Condor is willing to accept the risk that should specifications be unacceptable during the design review meeting, the costs associated with preauthorization of fabrication will be incurred. How should this be shown on a schedule? (The problems associated with performing unauthorized work are not being considered here.)

The solution is not easy. Condor must show on the master production schedule that component fabrication will begin early, at the contractor’s risk. This should be followed up by a contractual letter in which both the customer and contractor understand the risks and implications.

Detailed schedules are prepared for almost every activity. It is the responsibility of the program office to marry all of the detailed schedules into one master schedule to verify that all activities can be completed as planned. The preparation sequence for schedules (and also for program plans) is shown in Figure 11–11. The program office submits a request for detailed schedules to the functional managers and the functional managers prepare summary schedules, detailed schedules, and, if time permits, interdepartmental schedules. Each functional manager then reviews his schedules with the program office. The program office, together with the functional program team members, integrates all of the plans and schedules and verifies that all contractual dates can be met.

Before the schedules are submitted to publications, rough drafts of each schedule and plan should be reviewed with the customer. This procedure accomplishes the following:

● Verifies that nothing has fallen through the cracks ● Prevents immediate revisions to a published document and can prevent embar-

rassing moments ● Minimizes production costs by reducing the number of early revisions ● Shows customers early in the program that you welcome their help and input into

the planning phase

CONTRACTOR PROGRAM OFFICE

REQUEST FOR DETAILED SCHEDULES

AND PLANS (LEVEL 3)

1 INDIVIDUAL REVIEWS

4 VERIFICATION5 6 7 8

2 3

PROGRAM TEAM

REVIEW ROUGH DRAFTS

FINALIZE PLANS/

SCHEDULES

FUNCTIONAL MANAGEMENT

DEPARTMENT/SECTION LEVEL

PROGRAM TEAM MEMBERS CUSTOMER

PROGRAM OFFICE

SUPERVISE PREPARATION VERIFY THAT ALL

FUNCTIONAL PLANS ARE INTEGRATED

CUSTOMER REVIEW

FUNCTIONAL MANAGEMENT

REVIEW

PREPARE PLANS 10 DISTRIBUTION

PUBLICATIONS

FIGURE 11–11. Preparation sequence for schedules and program plans.

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554 PLANNING

After the document is published, it should be distributed to all program office person- nel, functional team members, functional management, and the customer. Examples of detailed schedules are shown in Chapter 13.

In addition to the detailed schedules, the program office, with input provided by func- tional management, must develop organization charts. The charts show who has responsibil- ity for each activity and display the formal (and often the informal) lines of communication. Examples were shown in Section 4.11.

The program office may also establish linear responsibility charts (LRCs). In spite of the best attempts by management, many functions in an organization may overlap between func- tional units. Also, management might wish to have the responsibility for a certain activity given to a functional unit that normally would not have that responsibility. This is a common occurrence on short-duration programs where management desires to cut costs and red tape.

Project personnel should keep in mind why the schedule was developed. The primary objective is usually to coordinate activities to complete the project with the:

● Best time ● Least cost ● Least risk

There are also secondary objectives of scheduling:

● Studying alternatives ● Developing an optimal schedule ● Using resources effectively ● Communicating ● Refining the estimating criteria ● Obtaining good project control ● Providing for easy revisions

Large projects, especially long-term efforts, may require a “ war room.” War rooms generally have only one door and no windows. All of the walls are covered with large schedules, perhaps printed on blueprint paper, and each wall could have numerous sliding panels. The schedules and charts on each wall could be updated on a daily basis. The room would be used for customer briefings, team meetings, and any other activities related specifically to this project.

11.23 MASTER PRODUCTION SCHEDULING

The release of the planning SWD, as shown in Figure 11–10, authorizes the manufactur- ing units to prepare a master production schedule from which detailed analysis of the uti- lization of company resources can be seen and tracked.

Master production scheduling is not a new concept. Earliest material control systems used a “quarterly ordering system” to produce a master production schedule (MPS) for plant production. This system uses customer order backlogs to develop a production plan over a

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Master Production Scheduling 555

three-month period. The production plan is then exploded manually to determine what parts must be purchased or manufactured at the proper time. However, rapidly changing customer requirements and fluctuating lead times, combined with a slow response to these changes, can result in the disruption of master production scheduling.13

A master production schedule is a statement of what will be made, how many units will be made, and when they will be made. It is a pro- duction plan, not a sales plan. The MPS considers the total demand on

a plant’s resources, including finished product sales, spare (repair) part needs, and inter- plant needs. The MPS must also consider the capacity of the plant and the requirements imposed on vendors. Provisions are made in the overall plan for each manufacturing facil- ity’s operation. All planning for materials, manpower, plant, equipment, and financing for the facility is driven by the master production schedule.

Objectives of master production scheduling are:

● To provide top management with a means to authorize and control manpower lev- els, inventory investment, and cash flow

● To coordinate marketing, manufacturing, engineering, and finance activities by a common performance objective

● To reconcile marketing and manufacturing needs ● To provide an overall measure of performance ● To provide data for material and capacity planning

The development of a master production schedule is a very important step in a planning cycle. Master production schedules directly tie together personnel, materials, equipment, and facilities, as shown in Figure 11–12. Master production schedules also identify key dates to the customer, should he wish to visit the contractor during specific operational periods.

13. The master production schedule is being discussed here because of its importance in the planning cycle. The MPS cannot be fully utilized without effective inventory control procedures.

MARKETING MASTER PROJECTSCHEDULE MASTER PRODUCTION

SCHEDULE MATERIAL REQUIREMENTS

PLANNING SCHEDULE

MARKETING AND CUSTOMER WORK TOGETHER TO IDENTIFY THE MAJOR MILESTONES

FUNCTIONAL GROUP (AND PROJECT OFFICE) PREPARE THE DETAIL SCHEDULES

MANUFACTURING PREPARES MASTER PRODUCTION SCHEDULE BASED UPON FACILITY, EQUIPMENT, MANPOWER AND MATERIAL AVAILABILITY

MATERIAL REQUIREMENTS FOR PROJECT WILL UPDATE THE MAP SYSTEM

FIGURE 11–12. Material requirements planning interrelationships.

Master Production Schedule Definition

Objectives of the MPS

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556 PLANNING

11.24 PROJECT PLAN

A project plan is fundamental to the success of any project. For large and often complex projects, customers may require a project plan that docu- ments all activities within the program. The project plan then serves as a guideline for the lifetime of the project and may be revised as often as once a month, depending on the circumstances and the type of project (i.e., research and development projects require more revisions to the proj-

ect plan than manufacturing or construction projects). The project plan provides the fol- lowing framework:

● Eliminates conflicts between functional managers ● Eliminates conflicts between functional management and program management ● Provides a standard communications tool throughout the lifetime of the project (It

should be geared to the work breakdown structure) ● Provides verification that the contractor understands the customer’s objectives and

requirements ● Provides a means for identifying inconsistencies in the planning phase ● Provides a means for early identification of problem areas and risks so that no sur-

prises occur downstream ● Contains all of the schedules defined in Section 11.18 as a basis for progress

analysis and reporting

Development of a project plan can be time-consuming and costly. All levels of the organization participate. The upper levels provide summary information, and the lower levels provide the details. The project plan, like activity schedules, does not preclude departments from developing their own plans.

The project plan must identify how the company resources will be integrated. The process is similar to the sequence of events for schedule preparation, shown in Figure 11–11. Since the project plan must explain the events in Figure 11–11, additional iterations are required, which can cause changes in a project. This can be seen in Figure 11–13.

The project plan is a standard from which performance can be measured by the cus- tomer and the project and functional managers. The plan serves as a cookbook by answer- ing these questions for all personnel identified with the project:

● What will be accomplished? ● How will it be accomplished? ● Where will it be accomplished? ● When will it be accomplished? ● Why will it be accomplished?

The answers to these questions force both the contractor and the customer to take a hard look at:

● Project requirements ● Project management

PMBOK® Guide, 5th Edition Chapter 5 Project Scope

Management

Chapter 4 Integration Management

3.4 Planning Process Group

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Project Plan 557

FORMULATE PLAN

HAVE ASSUMPTIONS

CHANGED?

ARE RISKS TOO GREAT?

YES

ARE SUFFICIENT RESOURCES AVAILABLE?

ITERATIONS

ARE OBJECTIVES SATISFIED?

FINALIZE PLANS

CUSTOMER INPUT

SCHEDULES

ST AT

EM EN

OF W

OR K

W ORK BREAKDOW

STRUCTURE

SPEC IFIC

ATIO N

B U

D G

E TS

LE GA

L SOCIAL

ENVIRONMENTAL INPUTPO

LITIC AL

ECONOMIC

TE C

H N

O LO

G IC

FIGURE 11–13. Iterations for the planning process.

● Project schedules ● Facility requirements ● Logistic support ● Financial support ● Manpower and organization

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558 PLANNING

The project plan is more than just a set of instructions. It is an attempt to eliminate cri- sis by preventing anything from “falling through the cracks.” The plan is documented and approved by both the customer and the contractor to determine what data, if any, are miss- ing and the probable resulting effect. As the project matures, the project plan is revised to account for new or missing data. The most common reasons for revising a plan are:

● “Crashing” activities to meet end dates ● Trade-off decisions involving manpower, scheduling, and performance ● Adjusting and leveling manpower requests

The makeup of the project plan may vary from contractor to contractor.14 Most pro- ject plans can be subdivided into four main sections: introduction, summary and conclu- sions, management, and technical. The complexity of the information is usually up to the discretion of the contractor, provided that customer requirements, as may be specified in the statement of work, are satisfied.

The introductory section contains the definition of the project and the major parts involved. If the project follows another, or is an outgrowth of similar activities, this is indi- cated, together with a brief summary of the background and history behind the project.

The summary and conclusion section identifies the targets and objectives of the proj- ect and includes the necessary “lip service” on how successful the project will be and how all problems can be overcome. This section must also include the project master schedule showing how all projects and activities are related. The total project master schedule should include the following:

● An appropriate scheduling system (bar charts, milestone charts, network, etc.) ● A listing of activities at the project level or lower ● The possible interrelationships between activities (can be accomplished by logic

networks, critical path networks, or PERT networks) ● Activity time estimates (a natural result of the item above)

The summary and conclusion chapter is usually the second section in the project plan so that upper-level customer management can have a complete overview of the project with- out having to search through the technical information.

The management section of the project plan contains procedures, charts, and sched- ules as follows:

● The assignment of key personnel to the project is indicated. This usually refers only to the project office personnel and team members, since under normal oper- ations these will be the only individuals interfacing with customers.

14. Cleland and King define fourteen subsections for a program plan. This detail appears more applicable to the technical and management volumes of a proposal. They do, however, provide a more detailed picture than pre- sented here. See David I. Cleland and William R. King, Systems Analysis and Project Management (New York: McGraw-Hill, 1975), pp. 371–380.

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Project Plan 559

● Manpower, planning, and training are discussed to assure customers that qualified people will be available from the functional units.

● A linear responsibility chart might also be included to identify to customers the authority relationships that will exist in the program.

Situations exist in which the management section may be omitted from the proposal. For a follow-up program, the customer may not require this section if management’s positions are unchanged. Management sections are also not required if the management information was previously provided in the proposal or if the customer and contractor have continuous business dealings.

The technical section may include as much as 75 to 90 percent of the program plan, especially if the effort includes research and development, and may require constant updat- ing as the project matures. The following items can be included as part of the technical section:

● A detailed breakdown of the charts and schedules used in the project master sched- ule, possibly including schedule/cost estimates.

● A listing of the testing to be accomplished for each activity. (It is best to include the exact testing matrices.)

● Procedures for accomplishment of the testing. This might also include a descrip- tion of the key elements in the operations or manufacturing plans, as well as a list- ing of the facility and logistic requirements.

● Identification of materials and material specifications. (This might also include system specifications.)

● An attempt to identify the risks associated with specific technical requirements (not commonly included). This assessment tends to scare management personnel who are unfamiliar with the technical procedures, so it should be omitted if possible.

The project plan, as used here, contains a description of all phases of the project. For many projects, especially large ones, detailed planning is required for all major events and activities. Table 11–5 identifies the type of individual plans that may be required in place of a (total) project plan. These are often called subsidiary plans.

The project plan, once agreed on by the contractor and customer, is then used to provide project direction. This is shown in Figure 11–14. If the project plan is written clearly, then any functional manager or supervisor should be able to identify what is expected of him. The project plan should be distributed to each member of the project team, all functional man- agers and supervisors interfacing with the project, and all key functional personnel.

One final note need be mentioned concerning the legality of the project plan. The proj- ect plan may be specified contractually to satisfy certain requirements as identified in the customer’s statement of work. The contractor retains the right to decide how to accomplish this, unless, of course, this is also identified in the SOW. If the SOW specifies that quality assurance testing will be accomplished on fifteen end-items from the production line, then fifteen is the minimum number that must be tested. The project plan may show that twenty- five items are to be tested. If the contractor develops cost overrun problems, he may wish to revert to the SOW and test only fifteen items. Contractually, he may do this without

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560 PLANNING

TABLE 11–5. TYPES OF PLANS

Type of Plan Description

Budget How much money is allocated to each event? Configuration management How are technical changes made? Facilities What facilities resources are available? Logistics support How will replacements be handled? Management How is the program office organized? Manufacturing What are the time-phase manufacturing events? Procurement What are my sources? Should I make or buy? If vendors are not qualified,

how shall I qualify them? Quality assurance How will I guarantee specifications will be met? Research/development What are the technical activities? Scheduling Are all critical dates accounted for? Tooling What are my time-phased tooling requirements? Training How will I maintain qualified personnel? Transportation How will goods and services be shipped?

MASTER SCHEDULES DETAILED SCHEDULES COST/TIME TRADE-OFF

FIGURE 11–14. Project direction activities.

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Total Project Planning 561

informing the customer. In most cases, however, the customer is notified, and the project is revised.

11.25 TOTAL PROJECT PLANNING

The difference between the good project manager and the poor project man- ager is often described in one word: planning. Project planning involves planning for:

● Schedule development ● Budget development ● Project administration (see Section 5.3)

● Leadership styles (interpersonal influences; see Section 5.4) ● Conflict management (see Chapter 7)

The first two items involve the quantitative aspects of planning. Planning for project administration includes the development of the linear responsibility chart.

Although each project manager has the authority and responsibility to establish project policies and procedures, they must fall within the general guidelines established by top management.

Linear responsibility charts can result from customer-imposed requirements above and beyond normal operations. For example, the customer may require as part of his qual- ity control requirements that a specific engineer supervise and approve all testing of a cer- tain item, or that another individual approve all data released to the customer over and above program office approval. Customer requirements similar to those identified above require LRCs and can cause disruptions and conflicts within an organization.

Several key factors affect the delegation of authority and responsibility both from upper-level management to project management, and from project management to func- tional management. These key factors include:

● The maturity of the project management function ● The size, nature, and business base of the company ● The size and nature of the project ● The life cycle of the project ● The capabilities of management at all levels

Once agreement has been reached on the project manager’s authority and responsibil- ity, the results may be documented to delineate that role regarding:

● Focal position ● Conflict between the project manager and functional managers ● Influence to cut across functional and organizational lines ● Participation in major management and technical decisions ● Collaboration in staffing the project ● Control over allocation and expenditure of funds ● Selection of subcontractors

PMBOK® Guide, 5th Edition Chapter 5 Project Scope

Management

Chapter 4 Integration Management

3.4 Planning Process Group

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562 PLANNING

● Rights in resolving conflicts ● Input in maintaining the integrity of the project team ● Establishment of project plans ● Provisions for a cost-effective information system for control ● Provisions for leadership in preparing operational requirements ● Maintenance of prime customer liaison and contact ● Promotion of technological and managerial improvements ● Establishment of project organization for the duration ● Elimination of red tape

Documenting the project manager’s authority is necessary in some situations because:

● All interfacing must be kept as simple as possible. ● The project manager must have the authority to “force” functional managers to

depart from existing standards and possibly incur risk. ● Gaining authority over those elements of a program that are not under the project

manager’s control is essential. This is normally achieved by earning the respect of the individuals concerned.

● The project manager should not attempt to fully describe the exact authority and responsibilities of the project office personnel or team members. Problem-solving rather than role definition should be encouraged.

Although documenting project authority is undesirable, it may be necessary, espe- cially if project initiation and planning require a formal project chart. In such a case, a let- ter such as that shown in Table 11–6 may suffice.

Power and authority are often discussed as though they go hand in hand. Authority comes from people above you, perhaps by delegation, whereas power comes from people below you. You can have authority without power or power without authority.

In a traditional organizational structure, most individuals maintain position power. The higher up you sit, the more power you have. But in project management, the reporting level of the project might be irrelevant, especially if a project sponsor exists. In project manage- ment, the project manager’s power base emanates from his

● Expertise (technical or managerial) ● Credibility with employees ● Sound decision-making ability

The last item is usually preferred. If the project manager is regarded as a sound decision-maker, then the employees normally give the project manager a great deal of power over them.

Leadership styles refer to the interpersonal influence modes that a project manager can use. Project managers may have to use several different leadership styles, depending on the makeup of the project personnel. Conflict management is important because if the project manager can predict what conflicts will occur and when they are most likely to occur, he may be able to plan for the resolution of the conflicts through project administration.

Figure 11–15 shows the complete project planning phase for the quantitative portions. The object, of course, is to develop a project plan that shows complete distribution of

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Total Project Planning 563

TABLE 11–6. PROJECT CHARTER

ELECTRODYNAMICS 12 Oak Avenue

Cleveland, Ohio 44114 11 June 2008

To: Distribution From: L. White, Executive Vice President Subject: Project Charter for the Acme Project

Mr. Robert L. James has been assigned as the Project Manager for the Acme Project.

Responsibility Mr. James will be responsible for ensuring that all key milestones are met within the time, cost, and performance constraints of his project, while adhering to proper quality control standards. Furthermore, the project manager must work closely with line managers to ensure that all assigned resources are used effectively and efficiently, and that the project is properly staffed. Additionally, the project manager will be responsible for: 1. All formal communications between the customer and contractor. 2. Preparation of a project plan that is realistic, and acceptable by both the customer

and contractor. 3. Preparation of all project data items. 4. Keeping executive management informed as to project status through weekly

(detailed) and monthly (summary) status reporting. 5. Ensuring that all functional employees and managers are kept informed as to their

responsibilities on the project and all revisions imposed by the customer or parent organization.

6. Comparing actual to predicted cost and performance, and taking corrective action when necessary.

7. Maintaining a plan that continuously displays the project’s time, cost, and perfor- mance as well as resource commitments made by the functional managers.

Authority To ensure that the project meets its objectives, Mr. James is authorized to manage the project and issue directives in accordance to the policies and procedures section of the company’s Project Management Manual. Additional directives may be issued through the office of the executive vice-president. The program manager’s authority also includes: 1. Direct access to the customer on all matters pertaining to the Acme Project. 2. Direct access to Electrodynamics’ executive management on all matters pertaining to

the Acme Project. 3. Control and distribution of all project dollars, including procurement, such that com-

pany and project cash flow limitations are adhered to. 4. To revise the project plan as needed, and with customer approval. 5. To require periodic functional status reporting. 6. To monitor the time, cost, and performance activities in the functional departments

and ensure that all problems are promptly identified, reported, and solved. 7. To cut across all functional lines and to interface with all levels of management as

necessary to meet project requirements. 8. To renegotiate with functional managers for changes in personnel assignments. 9. Delegating responsibilities and authority to functional personnel, provided that the

line manager is in approval that the employee can handle this authority/responsibility level.

Any questions regarding the above policies should be directed to the undersigned. L. White Executive Vice-President

PMBOK® Guide, 5th Edition 4.1 Develop Project Charter

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564

FIGURE 11–15. Project planning.

PMBOK® Guide, 5th Edition Chapter 4 Integration Management

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The Propject Charter 565

resources and the corresponding costs. The figure represents an iterative process. The proj- ect manager begins with a coarse (arrow diagram) network, and then decides on the work breakdown structure. The WBS is essential to the arrow diagram and should be constructed so that reporting elements and levels are easily identifiable. Eventually, there will be an arrow diagram and detailed chart for each element in the WBS. If there is too much detail, the project manager can refine the diagram by combining all logic into one plan and can then decide on the work assignments. There is a risk here that, by condensing the dia- grams as much as possible, there may be a loss of clarity. As shown in Figure 11–15, all the charts and schedules can be integrated into one summary-level figure. This can be accom- plished at each WBS level until the desired plan is achieved.

Finally, project, line, and executive management must analyze other internal and external variables before finalizing these schedules. These variables include:

● Introduction or acceptance of the product in the marketplace ● Present or planned manpower availability ● Economic constraints of the project ● Degree of technical difficulty ● Manpower availability ● Availability of personnel training ● Priority of the project

In small companies and projects, certain items in Figure 11–15 may be omitted, such as the LRCs.

11.26 THE PROJECT CHARTER

The original concept behind the project charter was to document the proj- ect manager’s authority and responsibility, especially for projects imple- mented away from the home office. Today, the project charter is more of

an internal legal document identifying to the line managers and their personnel the project manager’s authority and responsibility and the management- and/or customer-approved scope of the project.

Theoretically, the sponsor prepares the charter and affixes his/her signature, but in reality, the project manager may prepare it for the sponsor’s signature. At a minimum, the charter should include:

● Identification of the project manager and his/her authority to apply resources to the project

● The business purpose that the project was undertaken to address, including all assumptions and constraints

● Summary of the conditions defining the project ● Description of the project ● Objectives and constraints on the project

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566 PLANNING

● Project scope (inclusions and exclusions) ● Key stakeholders and their roles ● Risks ● Involvement by certain stakeholders

The PMBOK® Guide provides a framework for the project charter. What is somewhat unfortunate is that every company seems to have its own idea of what should be included in a charter. The contents of a charter are often dependent upon where in the evolution and life cycle of a project the charter is prepared. (See Advanced Project Management: Best Practices on Implementation by Harold Kerzner, John Wiley & Sons, New York, 2004, pp. 101–102, 120, 629–630.) Some companies such as Computer Associates use both a full charter (closely aligned to the PMBOK® Guide) and an abbreviated charter based upon the size and complexity of the project.

The charter is a “legal” agreement between the project manager and the company. Some companies supplement the charter with a “contract” that functions as an agreement between the project and the line organizations.

Some companies have converted the charter into a highly detailed document containing:

● The scope baseline/scope statement ● Scope and objectives of the project (SOW) ● Specifications ● WBS (template levels) ● Timing ● Spending plan (S-curve)

● The management plan ● Resource requirements and manloading (if known) ● Resumés of key personnel ● Organizational relationships and structure ● Responsibility assignment matrix ● Support required from other organizations ● Project policies and procedures ● Change management plan ● Management approval of above

When the project charter contains a scope baseline and management plan, the project char- ter may function as the project plan. This is not really an effective use of the charter, but it may be acceptable on certain types of projects for internal customers.

11.27 PROJECT BASELINES

Executives and clients expect project managers to effectively monitor and control projects. As part of monitoring and control, project managers must prepare progress, status, and forecast reports that clearly articulate the performance of the project. But to measure

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performance, one needs a reference point or baseline from which measurements can be made. The necessity for a baseline is clear:

● Without a baseline, performance cannot be measured. ● If performance cannot be measured, it cannot be managed. ● Performance that can be measured gets watched. ● What gets watched gets done.

For a project to be able to be controlled, it must be organized as a closed system. This requires that baselines be established for scope, time, and cost at a minimum. Without such baselines, a project is considered out of control and it may be impossible to track what has changed without knowing where you started.

The reference point for measuring performance is the performance measurement baseline (PMB). It serves as the metric benchmark against which performance is measured in terms of time, cost, and

scope. It is also used as the basis for business value tracking. The principal reasons for establishing, approving, controlling, and documenting the

PMB are to:

● Ensure achievement of project objectives ● Manage and monitor progress during project execution ● Ensure accurate information on the accomplishment of the deliverables and

requirements ● Establish performance measurement criteria

The PMB is finalized at the end of the planning phase once the requirements have been defined, the initial costs have been developed and approved, and the schedule has been set. Once established, the PMB serves as the benchmark from which to measure and gauge the project’s progress. The baseline is used to measure how actual progress compares to planned performance. Performance measurement may be meaningless with- out an accurate baseline as a starting point. Unfortunately, project managers tend to create baselines based upon just those elements of work they feel are important and this may or may not be in full alignment with customer requirements. The baseline is what the project manager plans to do, not necessarily what the customer has asked for.

The PMB can be displayed either in spreadsheet format or as a graph. In graphical notation, the PMB is represented as an S curve, or spending curve. The PMB can be com-

bined with the earned-value measurement system to highlight the performance measured against the original plans for cost and schedule. The result will display any cost and/or schedule variances which are a deviation from the plan. The deviation can be favorable or unfavorable. This will be explained in more detail in Chapter 15.

The decision to undertake or accept a project is the desire to meet some business objective or target. There might also be a technical objective or technical target. Hitting the target directly in the center of the bulls-eye may be impossible. But simply getting close to the bulls-eye may be acceptable. In other words, negative variances may not require

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Performance Measurement Baseline

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corrective action or scope changes as long as they are within acceptable threshold limits from the targets. If we underperform (or in some cases, even exceed) the threshold limits we must determine if the performance targets were overly aggressive, in which case a change to the performance baseline may be necessary.

Projects undergo scope changes for a variety of reasons, including:

● Customer requested changes or add-ons ● Team requested changes or add-ons ● Poor initial understanding or interpretation of customer requirements

● Poorly defined performance or flawed baseline ● Unfavorable variances that cannot be corrected

When changes to the baseline are requested, we go through a change control board (CCB) made up of stakeholders from both the customer’s and contractor’s organizations. At this change control board meeting, the following three questions are addressed at a minimum:

● The cost of the change ● The impact on the schedule ● The value added for the client

If the CCB approves the change, then the very first document to be updated is the per- formance baseline. This is referred to as rebaselining the project. Once rebaselining occurs, the new baseline is redefined as the original or previous baseline plus the approved changes. Records of all changes are maintained in archives to show how the plan changed over time. It is important to remember that projects seldom run exactly according to plan and trace- ability of changes is essential.

The following steps show a logical approach to creating a PMB:

● Review the project’s business case and accompanying constraints and assump- tions: This is a necessity in order to understand the business boundary of the PMB.

● Establish a requirements baseline: This comes from a review of the customer’s requirements and the contractual statement of work (CSOW). The requirements baseline is what the project manager plans to achieve and may contain inclusions and exclusions from the customer’s original requirements documentation. This establishes the technical boundary for the PMB and feeds into the project’s scope statement.

● Convert the requirements baseline into a WBS: Decompose the work into work packages. Each work package should have measurable milestones such that accom- plishment of deliverables and performance can be measured. Create a WBS dictio- nary. The scope baseline can now be defined as the scope statement plus the WBS plus the WBS dictionary.

568 PLANNING

Rebaselining

Developing the PMB

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● Arrange the work packages into a logical network of activities: This then becomes the schedule baseline.

● Price out the time-phased schedule, including both direct and indirect costs: This then becomes the distributed budget. If the project is multiyear, then work for the following years may not be broken down into work packages yet, even though a budget has been established for each year. This is called an undistributed budget. The summation of the distributed and undistributed budgets make up the cost base- line for the project.

● The cost baseline does not include the management reserve. The cost baseline is based upon distributed and undistributed budgets you plan on spending over the life of the project. The management reserve is money you hopefully do not plan on spending.

● Finalize the PMB: The PMB is the summation of the scope, schedule, and cost baselines.

● Prepare a requirements traceability matrix (RTM): The RTM links the projects requirements to the WBS and the PMB.

● Identify the key metrics or key performance indicators (KPIs): These metrics are what will be monitored to determine performance and accomplishment of deliver- ables and requirements.

Since project managers today are expected to make business decisions as well as tech- nical decisions, we must have both business and technical KPIs that indicate conformance to the two boundaries: technical and business. If the project is long term and the business environment is dynamic, the business-related KPIs are subject to change and may indicate that the business boundary must move, thus causing scope changes to the PMB.

These baselines are a necessity for change/version control. Without these baselines, status and the measurement of progress may become meaningless. And if measurement cannot be determined with some degree of accuracy, then no objective information may be found and it may be impossible to determine the true value of what has been accomplished.

While the baseline serves as an excellent reference point, projects can still become derailed, resulting in continuous changes to the PMB. Typical causes include:

● Failing to administer the work orders correctly ● Failing to control the budget ● Having a project management information system that does not provide

meaningful data ● Poor understanding and use of the earned-value measurement system ● Improper use of the management reserve ● Constant replanning and baseline fluctuations ● Unnecessary or unwanted changes by management

Previously, we discussed three baselines: the scope baseline, also known as the technical baseline; the cost baseline; and the schedule

baseline. However, based up the firm’s business practices and the type of industry, there can be other baselines. A brief list of these might include:

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Types of Baselines

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● Functional Baseline: System and/or functional requirements such as specifica- tions, contracts, etc.

● Allocated Baseline: State of the work products once requirements are approved ● Developmental Baseline: State of work and products during development ● Product Baseline: Functional and physical characteristics of the project ● Resources Baseline: Number and quality of the resources over the project’s

duration ● Fixed Baseline: A baseline that remains fixed for the lifetime of the project ● Revisable Baseline: A baseline that is allowed to vary over the life of the project ● Project-Specific Baseline: A baseline designed for one and only one project ● Multiproject Baseline: A baseline that can be applied to a number of similar pro-

jects

11.28 VERIFICATION AND VALIDATION

The terms verification and validation (V&V) are often used in conjunction with the PMB. According to Wikipedia, the free encyclopedia, the process of verification and validation involves checking that a product, service, or system meets specifications and fulfills its intended purpose. Sometimes, this is accomplished by a disinterested third party.

Verification is sometimes seen as a quality control process that is used to evaluate whether or not a product, service, or system complies with regulations, specifications, or conditions imposed at the start of a development phase. Verification can occur in develop- ment, scale-up, or production. This is often an internally performed assessment process.

Verification is actually the acceptance of the deliverables whereas quality control refers to the correctness of the deliverables. Sometimes, verification and quality control can be done in parallel, but it is more common for quality control to come first.

Validation is the quality assurance process of establishing evidence or assurance that a product, service, or system will accomplish its intended requirements. This often involves meeting acceptance criteria or fitness for purpose. When providing a list of the project’s requirements, stakeholders and clients may provide product acceptance criteria which state the criteria and processes for accepting completed deliverables. The accep- tance criteria can include information on:

● Target dates ● Functionality ● Appearance ● Performance levels ● Ease of use ● Capacity ● Availability ● Maintainability ● Reliability ● Operating costs ● Security

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It is sometimes said that verification can be expressed by the query “Are you building the thing right?” and validation by “Are you building the right thing?” “Building the right thing” refers back to the user’s needs, while “building it right” checks that the specifications are cor- rectly implemented by the system. In some contexts, it is required to have written require- ments for both as well as formal procedures or protocols for determining compliance.

Verification does not necessarily detect incorrect input specifications. Therefore, ver- ification and validation must be performed to ensure that the system or deliverable is oper- ational. At the completion of verification and validation we often obtain a certificate or written guarantee that the system, component, or deliverable complies with its specified requirements and is acceptable for operation use.

11.29 REQUIREMENTS TRACEABILITY MATRIX

There are many reasons why a baseline can change. If the change is the result of changing requirements, then we must identify when and why the change occurred. This is done using a traceability matrix. According to Wikipedia:

A traceability matrix is a document, usually in the form of a table that correlates any two baselined documents that require a many-to-many relationship to determine the complete-

ness of the relationship. It is often used with high-level requirements (these often consist

of marketing requirements) and detailed requirements of the software product to the

matching parts of high-level design, detailed design, test plan, and test cases.

For instance a requirements traceability matrix is used to check to see if the current project requirements are being met, and to help in the creation of a Request for Proposal,

various deliverable documents, and project plan tasks.

To ease the creation of traceability matrices, it is advisable to add the relationships to

the source documents for both backward traceability and forward traceability. In other

words, when an item is changed in one baselined document, it’s easy to see what needs to

be changed in the other.

The most common form of traceability is the Requirement Traceability Matrix. It can be

used in all phases of a project to determine whether or not requirements are being met. It

is also an important tool for the validation and verification processes.

Requirements Traceability Matrix 571

Table 11–7. Comparison of Verification and Validation

Verification Validation

Are we building the product right? Are we building the right product?

Performed internally, possibly by the project team Performed internally and by the customer

Measures conformance and compliance to Measures conformance to the customer’s specifications, requirements, regulations, and acceptance criteria other imposed conditions Use of inspections, audits, reviews, walkthroughs, Testing by the client or users on functionality and analyses of the deliverable

PMBOK® Guide, 5th Edition 5.2.3.2 Requirements Traceability

Matrix

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Previously, in the steps necessary to create a PMB, we stated the need to create a requirements traceability matrix that links the project’s requirements to the PMB and the WBS. As an example of a traceability matrix, let’s assume that you have been placed in charge of a project to create an enterprise project management methodology where employees must input their hours worked each day for the work packages they worked on. User requirements are defined as “UR” followed by a numerical designation and system requirements are numerical designations preceded by “SR.” Table 11–8 shows the user requirements and Table 11–9 shows the system requirements.

If we trace SR-22 back to the functional requirements, it is clear that a mistake has been made. We must correct the traceability or rewrite/eliminate user or system require- ments where the error occurs.

11.30 MANAGEMENT CONTROL

Because the planning phase provides the fundamental guidelines for the

remainder of the project, careful management control must be established.

In addition, since planning is an ongoing activity for a variety of different

programs, management guidelines must be established on a company-wide basis in order

to achieve unity and coherence.

All functional organizations and individuals working directly or indirectly on a pro-

gram are responsible for identifying, to the project manager, scheduling and planning

572 PLANNING

Table 11–8. User Requirements

Identification Number User Requirements Forward Traceability

UR-7 User shall process his/her hours worked against a SR-18, SR-19, SR-20, SR-22 given work package

UR-8 User shall process procurement requisitions per SR-21 work order

Table 11–9. User Requirements

Identification WBS Backward Number Number Functional Requirements Traceablity

SR-18 1-3-8 System shall accept UR-7 employee ID numbers and record hours worked on this charge number

SR-19 1-3-12 System shall calculate if the ID number is UR-7 valid for this charge number

SR-20 1-3-17 System shall calculate the dollars billed UR-7 against this charge number

SR-21 1-4-5 System shall summarize the raw material UR-8 purchases for this WBS element

SR-22 1-5-9 System shall determine profit dollars for UR-7 work packages closed out

PMBOK® Guide, 5th Edition 4.5 Integrated Change Control

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TABLE 11–10. PLANNING AND REQUIREMENTS POLICIES

Program Manager Functional Manager Relationship

Requests the preparation of the program Develops the details of the program plans Program planning and scheduling is a master schedules and provides for and requirements in conjunction with functional specialty; the program integration with the division composite the program manager. Provides manager utilizes the services of the schedules. proposal action in support of program specialist organizations. The specialists

Defines work to be accomplished through manager requirements and the retain their own channels to the preparation of the subdivided work program master schedule. general manager but must keep the description package. program manager informed.

Provides program guidance and direction With guidance furnished by the program Program planning is also a consultative for the preparation of program plans manager, participates in the operation and is provided guidelines by that establish program cost, schedule, preparation of program plans, the program manager. Functional and technical performance; and that schedules, and work release documents organizations initiate supporting plans define the major events and tasks to which cover cost, schedule, and for program manager approval, or ensure the orderly progress of the technical performance; and which react to modify plans to maintain program. define major events and tasks. Provides currency. Functional organizations also

supporting detail plans and schedules. initiate planning studies involving trade-offs and alternative courses of action for presentation to the program manager.

Establishes priorities within the program. Negotiates priorities with program The program manager and program team Obtains relative program priorities managers for events and tasks to be members are oriented to his program, between programs managed by other performed by his organization. whereas the functional organizations programs from the director, program and the functional managers are management, manager, marketing and “function” and multiprogram product development, or the general oriented. The orientation of each manager as specified by the policy. director, manager, and team member

573

(Continued)

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TABLE 11–10. PLANNING AND REQUIREMENTS POLICIES (Continued)

Program Manager Functional Manager Relationship

must be mutually recognized to preclude unreasonable demands and conflicting priorities. Priority conflicts that cannot be resolved must be referred to the general manager.

Approves program contractual data Conducts analysis of contractual data requirements. requirements. Develops data plans

including contractor data requirements list and obtains program manager approval.

Remains alert to new contract Remains alert to new contract requirements, government regulations requirements, government regulations, and directives that might affect the and directives that might affect the work, cost, or management of the work, cost, or management of his program. organization on any program.

Provides early technical requirements Provides the necessary make-or-buy Make-or-buy concurrence and approvals definitions, and substantiates make-or- data; substantiates estimates and are obtained in accordance with buy recommendations. Participates in recommendations in the area of current Policies and Procedures. the formulation of the make-or-buy functional specialty. plan for the program.

Approves the program bill of material Prepares the program bill of material. for need and compliance with program need and requirements.

Directs data management including maintenance of current and historical files on programmed contractual data requirements.

574

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The Project Manager-Line Manager Interface 575

problems that require corrective action during both the planning cycle and the operating

cycle. The program manager bears the ultimate and final responsibility for identifying

requirements for corrective actions. Management policies and directives are written specif-

ically to assist the program manager in defining the requirements. Without clear definitions

during the planning phase, many projects run off in a variety of directions.

Many companies establish planning and scheduling management policies for the

project and functional managers, as well as a brief description of how they should inter-

face. Table 11–10 identifies a typical management policy for planning and requirements,

and Table 11–11 describes scheduling management policies.

11.31 THE PROJECT MANAGER–LINE MANAGER INTERFACE

The utilization of management controls, such as those outlined in Section

11.25, does not necessarily guarantee successful project planning. Good

project planning, as well as other project functions, requires a good work-

ing relationship between the project and line managers. At this interface:

● The project manager answers these questions:

● What is to be done? (using the SOW, WBS)

TABLE 11–11. SCHEDULING POLICIES

Program Manager Functional Manager Relationship

Provides contractual data The operations directorate shall The operations directorate constructs requirements and guidance construct the program master the program master schedule with for construction of schedule. Data should include but data received from functional program master schedules. not be limited to engineering plans, organizations and direction from

manufacturing plans, procurement the program manager. Operations plans, test plans, quality plans, and shall coordinate program master provide time spans for schedule with functional accomplishment of work elements organizations and secure program defined in the work breakdown manager’s approval prior to structure to the level of definition release. visible in the planned subdivided work description package.

Concurs with detail schedules Constructs detail program schedules Program manager monitors the construction by functional and working schedules in functional organization’s detail organizations. consonance with program manager– schedules for compliance with

Provides corrective action approved program master schedule. program master schedules and decisions and direction as Secures program manager reports variance items that may required at any time a concurrence and forwards copies impact division operations to the functional organization to the program manager. director, program management. fails to meet program master schedule requirements or when, by analysis, performance indicated by detail schedule monitoring threatens to impact the program master schedule.

PMBOK® Guide, 5th Edition 1.7.1 Interpersonal Skills

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576 PLANNING

● When will the task be done? (using the summary schedule)

● Why will the task be done? (using the SOW)

● How much money is available? (using the SOW)

● The line manager answers these questions:

● How will the task be done? (i.e., technical criteria)

● Where will the task be done? (i.e., technical criteria) ● Who will do the task? (i.e., staffing)

Project managers may be able to tell line managers “how” and “where,” provided that the information appears in the SOW as a requirement for the project. Even then, the line manager can take exception based on his technical expertise.

Figures 11–16 and 11–17 show what can happen when project managers overstep their bounds. In Figure 11–16, the manufacturing manager built a brick wall to keep the project managers away from his personnel because the project managers were telling his line peo- ple how to do their job. In Figure 11–17, the subproject managers (for simplicity’s sake, equivalent to project engineers) would have, as their career path, promotions to assistant project managers (APMs). Unfortunately, the APMs still felt that they were technically

PRESIDENT

V.P. MARKETING V.P. ENGINEERING V.P.

MANUFACTURING

PROJECT MANAGERS

OTHERS PROJECT

ENGINEERING OTHERS

P.M.

FIGURE 11–16. The brick wall.

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Fast-Tracking 577

competent enough to give technical direction, and this created havoc for the engineering managers.

The simplest solution to all of these problems is for the project manager to provide the technical direction through the line managers. After all, the line managers are supposedly the true technical experts.

11.32 FAST-TRACKING

Sometimes, no matter how well we plan, something happens that causes havoc on the project. Such is the case when either the customer or man- agement changes the project’s constraints. Consider Figure 11–18 and let us assume that the execution time for the construction of the project is one

year. To prepare the working drawings and specifications down through level 5 of the WBS would require an additional 35 percent of the expected execution time, and if a feasibility study is required, then an additional 40 percent will be added on. In other words, if the exe- cution phase of the project is one year, then the entire project is almost two years.

Now, let us assume that management wishes to keep the end date fixed but the start date is delayed because of lack of adequate funding. How can this be accomplished with- out sacrificing the quality? The answer is to fast-track the project. Fast-tracking a project means that activities that are normally done in series are done in parallel. An example of

PROJECT MANAGER

ENGINEERING

A.P.M. A.P.M.

WINDOW SPM

FIGURE 11–17. Modification of the brick wall.

PMBOK® Guide, 5th Edition 2.4 Characteristics of the Project

Life Cycle

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578 PLANNING

this is when construction begins before detail design is completed. (See Chapter 2, Table 2–5 on life-cycle phases.)

Fast-tracking a job can accelerate the schedule but requires that additional risks be taken. If the risks materialize, then either the end date will slip or expensive rework will be needed. Almost all project-driven companies fast-track projects, but there is danger when fast-tracking becomes a way of life.

11.33 CONFIGURATION MANAGEMENT

A critical tool employed by a project manager is configuration management or configuration change control. As projects progress downstream through the various life-cycle phases, the cost of engineering changes can grow

boundlessly. It is not uncommon for companies to bid on proposals at 40 percent below their own cost hoping to make up the difference downstream with engineering changes. It is also quite common for executives to “encourage” project managers to seek out engineering changes because of their profitability.

Configuration management is a control technique, through an orderly process, for for- mal review and approval of configuration changes. If properly implemented, configuration management provides

● Appropriate levels of review and approval for changes ● Focal points for those seeking to make changes ● A single point of input to contracting representatives in the customer’s and con-

tractor’s office for approved changes

ECONOMIC STUDIES

CONCEPTUAL DESIGN

WORKING DRAWINGS

TENDER & AWARD

CONSTRUCTION

COMMISSION

OPERATE

FEASIBILITY PHASE

CONCEIVE DEVELOP DEFINE

IMPLEMENTATION PHASE

EXECUTE FINISH OPERATION

INFORMATION EXPLOSION DURING WORKING DRAWINGS & SPECIFICATIONS

P R

O JE

C T

B R

IE F

C O

N T

R A

C T

APPROXIMATE PERCENT OF CONSTRUCTION TIME

275 235 175 11000

100

P E

R C

E N

T O

F P

R O

J E

C T

I N

F O

R M

A T

IO N

FIGURE 11–18. The information explosion. Source: R. M. Wideman, Cost Control of Capital Projects (Vancouver, B.C.: A.E.W. Services of Canada, 1983), p. 22.

PMBOK® Guide, 5th Edition 4.5 Integrated Change Control

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Enterprise Project Management Methodologies 579

At a minimum, the configuration control committee should include representation from the customer, contractor, and line group initiating the change. Discussions should answer the following questions:

● What is the cost of the change? ● Do the changes improve quality? ● Is the additional cost for this quality justifiable? ● Is the change necessary? ● Is there an impact on the delivery date?

Changes cost money. Therefore, it is imperative that configuration management be implemented correctly. The following steps can enhance the implementation process:

● Define the starting point or “baseline” configuration ● Define the “classes” of changes ● Define the necessary controls or limitations on both the customer and contractor ● Identify policies and procedures, such as

● Board chairman ● Voters/alternatives ● Meeting time ● Agenda ● Approval forums ● Step-by-step processes ● Expedition processes in case of emergencies

Effective configuration control pleases both customer and contractor. Overall benefits include:

● Better communication among staff ● Better communication with the customer ● Better technical intelligence ● Reduced confusion for changes ● Screening of frivolous changes ● Providing a paper trail

As a final note, it must be understood that configuration control, as used here, is not a replacement for design review meetings or customer interface meetings. These meetings are still an integral part of all projects.

11.34 ENTERPRISE PROJECT MANAGEMENT METHODOLOGIES

Enterprise project management methodologies can enhance the project planning process as well as providing some degree of standardization and consistency.

Companies have come to the realization that enterprise project management method- ologies work best if the methodology is based upon templates rather than rigid policies and procedures. The International Institute for Learning has created a Unified Project

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580 PLANNING

Management Methodology (UPMM™) with templates categorized according to the PMBOK® Guide Areas of Knowledge15:

Communication Project Charter Project Procedures Document Project Change Requests Log Project Status Report PM Quality Assurance Report Procurement Management Summary Project Issues Log Project Management Plan Project Performance Report

Cost Project Schedule Risk Response Plan and Register Work Breakdown Structure (WBS) Work Package Cost Estimates Document Project Budget Project Budget Checklist

Human Resources Project Charter Work Breakdown Structure (WBS) Communications Management Plan Project Organization Chart Project Team Directory Responsibility Assignment Matrix (RAM) Project Management Plan Project Procedures Document Kickoff Meeting Checklist Project Team Performance Assessment Project Manager Performance Assessment

Integration Project Procedures Overview Project Proposal Communications Management Plan Procurement Plan

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Enterprise Project Management Methodologies 581

Project Budget Project Procedures Document Project Schedule Responsibility Assignment Matrix (RAM) Risk Response Plan and Register Scope Statement Work Breakdown Structure (WBS) Project Management Plan Project Change Requests Log Project Issues Log Project Management Plan Changes Log Project Performance Report Lessons Learned Document Project Performance Feedback Product Acceptance Document Project Charter Closing Process Assessment Checklist Project Archives Report

Procurement Project Charter Scope Statement Work Breakdown Structure (WBS) Procurement Plan Procurement Planning Checklist Procurement Statement of Work (SOW) Request for Proposal Document Outline Project Change Requests Log Contract Formation Checklist Procurement Management Summary

Quality Project Charter Project Procedures Overview Work Quality Plan Project Management Plan Work Breakdown Structure (WBS) PM Quality Assurance Report Lessons Learned Document Project Performance Feedback Project Team Performance Assessment PM Process Improvement Document

Risk Procurement Plan Project Charter

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582 PLANNING

Project Procedures Document Work Breakdown Structure (WBS) Risk Response Plan and Register

Scope Project Scope Statement Work Breakdown Structure (WBS) Work Package Project Charter

Time Activity Duration Estimating Worksheet Cost Estimates Document Risk Response Plan and Register Medium Work Breakdown Structure (WBS) Work Package Project Schedule Project Schedule Review Checklist

11.35 PROJECT AUDITS

In recent years, the necessity for a structured independent review of various parts of a busi- ness, including projects, has taken on a more important role. Part of this can be attributed to the Sarbanes–Oxley law compliance requirements. These independent reviews are audits that focus on either discovery or decision-making. The audits can be scheduled or random and can be performed by in-house personnel or external examiners.

There are several types of audits. Some common types include:

● Performance Audits: These audits are used to appraise the progress and perfor- mance of a given project. The project manager, project sponsor, or an executive steering committee can conduct this audit.

● Compliance Audits: These audits are usually performed by the project manage- ment office (PMO) to validate that the project is using the project management methodology properly. Usually the PMO has the authority to perform the audit but may not have the authority to enforce compliance.

● Quality Audits: These audits ensure that the planned project quality is being met and that all laws and regulations are being followed. The quality assurance group performs this audit.

● Exit Audits: These audits are usually for projects that are in trouble and may need to be terminated. Personnel external to the project, such as an exit champion or an executive steering committee, conduct the audits.

● Best Practices Audits: These audits can be conducted at the end of each life-cycle phase or at the end of the project. Some companies have found that project managers may not be the best individuals to perform the audit. In such situations, the company may have professional facilitators trained in conducting best practices reviews.

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Studying Tips for the PMI® Project Management Certification Exam 583

11.36 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses:

● Scope Management ● Initiation ● Planning ● Execution ● Monitoring ● Closure

Understanding the following principles is beneficial if the reader is using this text to study for the PMP® Certification Exam:

● Need for effective planning ● Components of a project plan and subsidiary plans ● Need for and components of a statement of work (both proposal and contractual) ● How to develop a work breakdown structure and advantages and disadvantages of

highly detailed levels ● Types of work breakdown structures ● Purpose of a work package ● Purpose of configuration management and role of the change control board ● Need for a project charter and components of a project charter ● Need for the project team to be involved in project-planning activities ● That changes to a plan or baseline need to be managed

In Appendix C, the following Dorale Products mini–case studies are applicable:

● Dorale Products (C) [Scope Management] ● Dorale Products (D) [Scope Management] ● Dorale Products (E) [Scope Management]

The following multiple-choice questions will be helpful in reviewing the principles of this chapter:

1. The document that officially sanctions the project is the: A. Project charter B. Project plan C. Feasibility study D. Cost-benefit analysis

2. The work breakdown structure “control points” for the management of a project are the: A. Milestones B. Work packages C. Activities D. Constraints

3. One of the most common reasons why projects undergo scope changes is: A. Poor work breakdown structure B. Poorly defined statement of work

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584 PLANNING

C. Lack of resources D. Lack of funding

4. Which of the following generally cannot be validated using a work breakdown structure? A. Schedule control B. Cost control C. Quality control D. Risk management

Answer questions 5–8 using the work breakdown structure (WBS) shown below (numbers in parentheses show the dollar value for a particular element):

1.00.00 1.1.0 ($25K)

1.1.1 1.1.2 ($12K)

1.2.0 1.2.1 ($16K) 1.2.2.0

1.2.2.1 ($20K) 1.2.2.2 ($30K)

5. The cost of WBS element 1.2.2.0 is: A. $20K B. $30K C. $50K D. Cannot be determined

6. The cost of WBS element 1.1.1 is: A. $12K B. $13K C. $25K D. Cannot be determined

7. The cost of the entire program (1.00.00) is: A. $25K B. $66K C. $91K D. Cannot be determined

8. The work packages in the WBS are at WBS level(s): A. 2 only B. 3 only C. 4 only D. 3 and 4

9. The performance measurement baseline is most often composed of three baselines: A. Cost, schedule, and risk baselines B. Cost, schedule, and scope baselines C. Cost, risk, and quality baselines D. Schedule, risk, and quality baselines

10. Which of the following is (are) the benefit(s) of developing a WBS to low levels? A. Better estimation of costs B. Better control

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Answers 585

C. Less likely that something will “fall through the cracks” D. All of the above

11. Baselines, once established, identify: A. What the customer and contractor agree to B. What the sponsor and the customer agree to C. What the customer wants done but not necessarily what the project manager plans to do D. What the project manager plans on doing but not necessarily what the customer has

asked for

12. Financial closeout, which is often part of project closure, is used to: A. Close out all charge numbers B. Close out all charge numbers for the work performed and completed C. Amend the work authorization forms D. None of the above

13. One of your contractors has sent you an e-mail requesting that they be allowed to conduct only eight tests rather than the ten tests required by the specification. What should the proj- ect manager do first? A. Change the scope baseline B. Ask the contractor to put forth a change request C. Look at the penalty clauses in the contract D. Ask your sponsor for his or her opinion

14. One of your contractors sends you an e-mail request to use high quality raw materials in your project stating that this will be value-added and improve quality. What should the proj- ect manager do first? A. Change the scope baseline B. Ask the contractor to put forth a change request C. Ask your sponsor for his or her opinion D. Change the WBS

15. What are the maximum number of subsidiary plans a program management plan can contain? A. 10 B. 15 C. 20 D. Unlimited number

16. The change control board, of which you are a member, approves a significant scope change. The first document that the project manager should updated would be the: A. Scope baseline B. Schedule C. WBS D. Budget

ANSWERS

1. A

2. B

3. B

4. C

5. C

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586 PLANNING

6. B

7. C

8. D

9. B

10. D

11. D

12. B

13. B

14. B

15. D

16. A

PROBLEMS

11–1 Under what conditions would each of the following either not be available or not be nec- essary for initial planning?

a. Work breakdown structure b. Statement of work c. Specifications d. Milestone schedules

11–2 What planning steps should precede total program scheduling? What steps are necessary?

11–3 How does a project manager determine how complex to make a program plan or how many schedules to include?

11–4 Can objectives always be identified and scheduled?

11–5 Can a WBS always be established for attaining an objective?

11–6 Who determines the work necessary to accomplish an objective?

11–7 What roles does a functional manager play in establishing the first three levels of the WBS?

11–8 Should the length of a program have an impact on whether to set up a separate project or task for administrative support? How about for raw materials?

11–9 Is it possible for the WBS to be designed so that resource allocation is easier to identify?

11–10 If the scope of effort of a project changes during execution of activities, what should be the role of the functional manager?

11–11 What types of conflicts can occur during the planning cycle, and what modes should be used for their resolution?

11–12 What would be the effectiveness of Figure 11–3 if the work packages were replaced by tasks?

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Problems 587

11–13 Under what situations or projects would work planning authorization not be necessary?

11–14 On what types of projects could hedge positions be easily identified on a schedule?

11–15 Can activities 5 and 6 of Figure 11–11 be eliminated? What risks does a project man- ager incur if these activities are eliminated?

11–16 Where in the planning cycle should responsibility charts be prepared? Can you identify this point in Figure 11–11?

11–17 For each one of the decision points in Figure 11–13, who makes the decision? Who must input information? What is the role of the functional manager and the functional team member? Where are strategic variables identified?

11–18 Consider a project in which all project planning is performed by a group. After all plan- ning is completed, including the program plan and schedules, a project manager is selected. Is there anything wrong with this arrangement? Can it work?

11–19 How do the customer and contractor know if each one completely understands the statement of work, the work breakdown structure, and the program plan?

11–20 Should a good project plan formulate methods for anticipating problems?

11–21 Some project managers schedule staff meetings as the primary means for planning and control. Do you agree with this philosophy?

11–22 Paul Mali (Management by Objectives, New York: John Wiley, 1972, p. 12) defines MBO as a five-step process:

● Finding the objective ● Setting the objective ● Validating the objective ● Implementing the objective ● Controlling and reporting status of the objective

How can the work breakdown structure be used to accomplish each of the above steps? Would you agree or disagree that the more levels the WBS contains, the greater the understanding and clarity of those steps necessary to complete the objectives?

11–23 Many textbooks on management state that you should plan like you work, by doing one thing at a time. Can this same practice be applied at the project level, or must a project man- ager plan all activities at once?

11–24 Is it true that project managers set the milestones and functional managers hope they can meet them?

11–25 You have been asked to develop a work breakdown structure for a project. How should you go about accomplishing this? Should the WBS be time-phased, department-phased, division-phased, or some combination?

11–26 You have just been instructed to develop a schedule for introducing a new product into the marketplace. Below are the elements that must appear in your schedule. Arrange these ele- ments into a work breakdown structure (down through level 3), and then draw the arrow diagram. You may feel free to add additional topics as necessary.

● Production layout ● Review plant costs ● Market testing ● Select distributors

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588 PLANNING

● Analyze selling cost ● Lay out artwork ● Analyze customer reactions ● Approve artwork ● Storage and shipping costs ● Introduce at trade show ● Select salespeople ● Distribute to salespeople ● Train salespeople ● Establish billing procedure ● Train distributors ● Establish credit procedure ● Literature to salespeople ● Revise cost of production ● Literature to distributors ● Revise selling cost ● Print literature ● Approvals* ● Sales promotion ● Review meetings* ● Sales manual ● Final specifications ● Trade advertising ● Material requisitions (* Approvals and review meetings can appear several times.)

11–27 Once a project begins, a good project manager will set up checkpoints. How should this be accomplished? Will the duration of the project matter? Can checkpoints be built into a schedule? If so, how should they be identified?

11–28 Detailed schedules (through WBS levels 3, 4, 5, . . .) are prepared by the functional managers. Should these schedules be shown to the customer?

11–29 The project start-up phase is complete, and you are now ready to finalize the opera- tional plan. Below are six steps that are often part of the finalization procedure. Place them in the appropriate order.

1. Draw diagrams for each individual WBS element. 2. Establish the work breakdown structure and identify the reporting elements and

levels. 3. Create a coarse (arrow-diagram) network and decide on the WBS. 4. Refine the diagram by combining all logic into one plan. Then decide on the work

assignments. 5. If necessary, try to condense the diagram as much as possible without losing clarity. 6. Integrate diagrams at each level until only one exists. Then begin integration into

higher WBS levels until the desired plan is achieved.

11–30 Below are seven factors that must be considered before finalizing a schedule. Explain how a base case schedule can change as a result of each of these:

11–31 You are the project manager of a nine-month effort. You are now in the fifth month of the project and are more than two weeks behind schedule, with very little hope of catching up. The dam breaks in a town near you, and massive flooding and mudslides take place. Fifteen of your key functional people request to take off three days from the following week to help fel- low church members dig out. Their functional managers, bless their hearts, have left the entire decision up to you. Should you let them go?

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Problems 589

11–32 Once the functional manager and project manager agree on a project schedule, who is responsible for getting the work performed? Who is accountable for getting the work per- formed? Why the difference, if any?

11–33 Discuss the validity of the following two statements on authority:

a. A good project manager will have more authority than his responsibility calls for. b. A good project manager should not hold a subordinate responsible for duties that he

(the project manager) does not have the authority to enforce.

11–34 Below are twelve instructions. Which are best described as planning, and which are best described as forecasting?

a. Give a complete definition of the work. b. Lay out a proposed schedule. c. Establish project milestones. d. Determine the need for different resources. e. Determine the skills required for each WBS task or element. f. Change the scope of the effort and obtain new estimates. g. Estimate the total time to complete the required work. h. Consider changing resources. i. Assign appropriate personnel to each WBS element. j. Reschedule project resources. k. Begin scheduling the WBS elements. l. Change the project priorities.

11–35 A major utility company has a planning group that prepares budgets (with the help of functional groups) and selects the projects to be completed within a given time period. You are assigned as a project manager on one of the projects and find out that it should have been started “last month” in order to meet the completion date. What can you, the project manager, do about this? Should you delay the start of the project to replan the work?

11–36 The director of project management calls you into his office and informs you that one of your fellow project managers has had a severe heart attack midway through a project. You will be taking over his project, which is well behind schedule and overrunning costs. The director of project management then “orders” you to complete the project within time and cost. How do you propose to do it? Where do you start? Should you shut down the project to replan it?

11–37 Planning is often described as establishing, budgeting, scheduling, and resource allo- cation. Identify these four elements in Figure 11–1.

11–38 A company is undertaking a large development project that requires that a massive “blueprint design tree” be developed. What kind of WBS outline would be best to minimize the impact of having two systems, one for blueprints and one for WBS work?

11–39 A company allows each line organization to perform its own procurement activities (through a centralized procurement office) as long as the procurement funds have been allo- cated during the project planning phase. The project office does not sign off on these functional procurement requisitions and may not even know about them. Can this system work effec- tively? If so, under what conditions?

11–40 As part of a feasibility study, you are asked to prepare, with the assistance of functional managers, a schedule and cost summary for a project that will occur three years downstream,

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if the project is approved at all. Suppose that three years downstream the project is approved. How does the project manager get functional managers to accept the schedule and cost sum- mary that they themselves prepared three years before?

11–41 “Expecting trouble.” Good project managers know what type of trouble can occur at the various stages in the development of a project. The activities in the numbered list below indi- cate the various stages of a project. The lettered list that follows identifies major problems. For each project stage, select and list all of those problems that are applicable.

1. Request for proposal ___________________ 2. Submittal to customer __________________ 3. Contract award ________________________ 4. Design review meetings _________________ 5. Testing the product_____________________ 6. Customer acceptance ___________________

a. Engineering does not request e. The project–functional interface manufacturing input for end-item definition is poor. producibility. f. Improper systems integration has

b. The work breakdown created conflicts and a structure is poorly defined. communications breakdown.

c. Customer does not fully realize the g. Several functional managers did impact that a technical change will not realize that they were have upon cost and schedule. responsible for certain risks.

d. Time and cost constraints are not h. The impact of design changes is compatible with the state of the art. not systematically evaluated.

11–42 Table 11–12 identifies twenty-six steps in project planning and control. Below is a description of each of the twenty-six steps. Using this information, fill in columns 1 and 2 (col- umn 2 is a group response). After your instructor provides you with column 3, fill in the remainder of the table.

1. Develop the linear responsibility chart. This chart identifies the work breakdown structure and assigns specific authority/responsibility to various individuals as groups in order to be sure that all WBS elements are accounted for. The linear responsibility chart can be prepared with either the titles or names of individuals. Assume that this is prepared after you negotiate for qualified personnel, so that you know either the names or capabilities of those individuals who will be assigned.

2. Negotiate for qualified functional personnel. Once the work is decided on, the project manager tries to identify the qualifications for the desired personnel. This then becomes the basis for the negotiation process.

3. Develop specifications. This is one of the four documents needed to initially define the requirements of the project. Assume that these are either performance or mate- rial specifications, and are provided to you at the initial planning stage by either the customer or the user.

4. Determine the means for measuring progress. Before the project plan is finalized and project execution can begin, the project manager must identify the means for measuring progress; specifically, what is meant by an out-of-tolerance condition and what are the tolerances/variances/thresholds for each WBS base case element?

5. Prepare the final report. This is the final report to be prepared at the termination of the project.

590 PLANNING

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Problems 591

TABLE 11–12. STEPS IN PROJECT PLANNING AND CONTROL

Description

1. Develop linear responsibility chart

2. Negotiate for qualified functional personnel

3. Develop specifications

4. Determine means for measuring progress

5. Prepare final report

6. Authorize departments to begin work

7. Develop work breakdown structure

8. Close out functional work orders

9. Develop scope statement and set objectives

10. Develop gross schedule

11. Develop priorities for each project element

12. Develop alternative courses of action

13. Develop PERT network

14. Develop detailed schedules

15. Establish functional personnel qualifications

16. Coordinate ongoing activities

17. Determine resource requirements

18. Measure progress

19. Decide upon a basic course of action

20. Establish costs for each WBS element

(continues)

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592 PLANNING

6. Authorize departments to begin work. This step authorizes departments to begin the actual execution of the project, not the planning. This step occurs generally after the project plan has been established, finalized, and perhaps even approved by the customer or user group. This is the initiation of the work orders for project implementation.

7. Develop the work breakdown structure. This is one of the four documents required for project definition in the early project planning stage. Assume that WBS is constructed using a bottom-up approach. In other words, the WBS is constructed from the logic network (arrow diagram) and checkpoints which will eventually become the basis for the PERT/CPM charts (see Activity 25).

8. Close out functional work orders. This is where the project manager tries to prevent exces- sive charging to his project by closing out the functional work orders (i.e., Activity 6) as work terminates. This includes canceling all work orders except those needed to adminis- ter the termination of the project and the preparation of the final report.

9. Develop scope statement and set objectives. This is the statement of work and is one of the four documents needed in order to identify the requirements of the project. Usually, the WBS is the structuring of the statement of work.

10. Develop gross schedule. This is the summary or milestone schedule needed at project initiation in order to define the four requirements documents for the project. The gross schedule includes start and end dates (if known), other major milestones, and data items.

11. Develop priorities for each project element. After the base case is identified and alternative courses of action are considered (i.e., contingency planning), the project team performs a sensitivity analysis for each element of the WBS. This may require

TABLE 11–12. STEPS IN PROJECT PLANNING AND CONTROL (Continued)

Description

21. Review WBS costs with each functional manager

22. Establish a project plan

23. Establish cost variances for base case elements

24. Price out WBS

25. Establish logic network with checkpoints

26. Review base case costs with director

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Problems 593

assigning priorities for each WBS element, and the highest priorities may not necessarily be assigned to elements on the critical path.

12. Develop alternative courses of action. Once the base case is known and detailed courses of action (i.e., detailed scheduling) are prepared, project managers conduct “what if” games to develop possible contingency plans.

13. Develop PERT network. This is the finalization of the PERT/CPM network and becomes the basis from which detailed scheduling will be performed. The logic for the PERT network can be conducted earlier in the planning cycle (see Activity 25), but the finalization of the network, together with the time durations, are usually based on who has been (or will be) assigned, and the resulting authority/responsi- bility of the individual. In other words, the activity time duration is a function not only of the performance standard, but also of the individual’s expertise and authority/ responsibility.

14. Develop detailed schedules. These are the detailed project schedules, and are con- structed from the PERT/CPM chart and the capabilities of the assigned individuals.

15. Establish functional personnel qualifications. Once senior management reviews the base case costs and approves the project, the project manager begins the task of con- version from rough to detail planning. This includes identification of the required resources, and then the respective qualifications.

16. Coordinate ongoing activities. These are the ongoing activities for project execution, not project planning. These are the activities that were authorized to begin in Activity 6.

17. Determine resource requirements. After senior management approves the estimated base case costs obtained during rough planning, detailed planning begins by deter- mining the resource requirements, including human resources.

18. Measure progress. As the project team coordinates ongoing activities during project execution, the team monitors progress and prepares status reports.

19. Decide on a basic course of action. Once the project manager obtains the rough cost estimates for each WBS element, the project manager puts together all of the pieces and determines the basic course of action.

20. Establish costs for each WBS element. After deciding on the base case, the project manager establishes the base case cost for each WBS element in order to prepare for the senior management pricing review meeting. These costs are usually the same as those that were provided by the line managers.

21. Review WBS costs with each functional manager. Each functional manager is pro- vided with the WBS and told to determine his role and price out his functional involvement. The project manager then reviews the WBS costs to make sure that everything was accounted for and without duplication of effort.

22. Establish a project plan. This is the final step in detail planning. Following this step, project execution begins. (Disregard the situation where project plan development can be run concurrently with project execution.)

23. Establish cost variances for the base case elements. Once the priorities are known for each base case element, the project manager establishes the allowable cost vari- ances that will be used as a means for measuring progress. Cost reporting is mini- mum as long as the actual costs remain within these allowable variances.

24. Price out the WBS. This is where the project manager provides each functional man- ager with the WBS for initial activity pricing.

25. Establish logic network with checkpoints. This is the bottom-up approach that is often used as the basis for developing both the WBS and later the PERT/CPM network.

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594 PLANNING

26. Review base case costs with director. Here the project manager takes the somewhat rough costs obtained during the WBS functional pricing and review and seeks man- agement’s approval to begin detail planning.

11–43 Consider the work breakdown structure shown in Figure 11–19. Can the project be managed from this one sheet of paper assuming that, at the end of each month, the project man- ager also receives a cost and percent-complete summary?

11–44 During 1992 and 1993, General Motors saved over $2 billion due to the cost-cutting efforts of Mr. Lopez. Rumors spread throughout the auto industry that General Motors was con- sidering a plan to offer subcontractors ten-year contracts in exchange for a 20 percent cost reduction.

These long-term contracts provided both GM and the subcontractors the chance to develop an informal project management relationship based on trust, effective communications, and minimum documentation requirements.

a. Is it conceivable that the cost savings of 20 percent could have been realized entirely from the decrease in formalized documentation?

b. Philosophically, what do you think happened when Mr. Lopez departed GM in the spring of 1993 for a senior position at Volkswagen? Did his informal project man- agement system continue without him? Explain your answer.

11–45 During the recession of 1989–1993, the auto industry began taking extreme cost- cutting measures by downsizing its organizations. The downsizing efforts created project

2000 2001

PROJECT I. M.P.S.

TASK I. SYSTEM OVERVIEW

II. SYSTEM DESIGN SPEC.

III. PROGRAM SPECS.

IV. PROGRAMMING & TESTING

V. IMPLEMENTATION AND

TRAINING

PROJECT II. SHOP CONTROL

TASK I. SYSTEM OVERVIEW

II. SYSTEM DESIGN SPEC.

III. PROGRAM SPECS.

IV. PROGRAMMING & TESTING

V. IMPLEMENTATION AND

TRAINING

PROJECT III. STACKER

TASK I. SYSTEM OVERVIEW

II. SYSTEM DESIGN SPEC.

III. PROGRAM SPECS.

IV. PROGRAMMING & TESTING

V. IMPLEMENTATION AND

TRAINING

A P

R IL

M A

J U

N E

J U

A U

G .

O C

T .

N O

V .

D E

C .

J A

N .

F E

B .

M A

R .

M A

J U

N E

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A P

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P T .

FIGURE 11–19. Work breakdown structure.

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Problems 595

management problems for the project engineers in the manufacturing plants. With fewer resources available, more and more of the work had to be outsourced, primarily for services. The manufacturing plants had years of experience in negotiations for parts, but limited experi- ence in negotiations for services. As a result, the service contracts were drastically overrun with engineering changes and schedule slippages. What is the real problem and your recommenda- tion for a solution?

11–46 When to bring the project manager on board has always been a problem. For each of the following situations, identify the advantages and disadvantages.

a. The project manager is brought on board at the beginning of the conceptual phase but acts only as an observer. The project manager neither answers questions nor provides his ideas until the brainstorming session is completed.

b. When brainstorming is completed during the conceptual phase, senior management appoints one of the brainstorming team members to serve as the project manager.

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Network Scheduling Techniques

597

4th Edition) Study Guide, 11th Edition) Certification Exam

• Crosby Manufacturing • Crashing the Effort • Time Management Corporation* • Multiple Choice Exam

• The Invisible • Crossword Puzzle on Time Sponsor* (Schedule) Management

12.0 INTRODUCTION

Management is continually seeking new and better control techniques to cope with the complexities, masses of data, and tight deadlines that are characteristic of highly competitive industries. Managers also want better methods for presenting technical and cost data to customers.

Scheduling techniques help achieve these goals. The most common techniques are:

● Gantt or bar charts

*Case Study also appears at end of chapter.

PMBOK® Guide, 5th Edition Chapter 6 Project Time

Management

PMBOK® Guide, 5th Edition 6.2.3.3 Milestone Lists

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● Milestone charts ● Line of balance1

● Networks ● Program Evaluation and Review Technique (PERT) ● Arrow Diagram Method (ADM) [Sometimes called the Critical Path Method (CPM)]2

● Precedence Diagram Method (PDM) ● Graphical Evaluation and Review Technique (GERT)

Advantages of network scheduling techniques include:

● They form the basis for all planning and predicting and help management decide how to use its resources to achieve time and cost goals.

● They provide visibility and enable management to control “one-of-a-kind” programs. ● They help management evaluate alternatives by answering such questions as how time delays will

influence project completion, where slack exists between elements, and what elements are crucial to meet the completion date.

● They provide a basis for obtaining facts for decision-making. ● They utilize a so-called time network analysis as the basic method to determine manpower, mate-

rial, and capital requirements, as well as to provide a means for checking progress. ● They provide the basic structure for reporting information. ● They reveal interdependencies of activities. ● They facilitate “what if ” exercises. ● They identify the longest path or critical paths. ● They aid in scheduling risk analysis.

PERT was originally developed in 1958 and 1959 to meet the needs of the “age of massive engineering” where the techniques of Taylor and Gantt were inapplicable. The Special Projects Office of the U.S. Navy, con- cerned with performance trends on large military development programs, introduced PERT on its Polaris Weapon System in 1958, after the technique had been developed with the aid of the management consulting firm of Booz, Allen, and Hamilton. Since that time, PERT has spread rapidly throughout almost all industries. At about the same time, the DuPont Company initiated a similar technique known as the critical path method (CPM), which also has spread widely, and is particularly concentrated in the construction and process industries.

In the early 1960s, the basic requirements of PERT/time as established by the Navy were as follows:

● All of the individual tasks to complete a program must be clear enough to be put down in a net- work, which comprises events and activities; i.e., follow the work breakdown structure.

● Events and activities must be sequenced on the network under a highly logical set of ground rules

that allow the determination of critical and subcritical paths. Networks may have more than one hundred events, but not fewer than ten.

598 NETWORK SCHEDULING TECHNIQUES

1. Line of balance is more applicable to manufacturing operations for production line activities. However, it can be used for project management activities where a finite number of deliverables must be produced in a given time period. The reader need only refer to the multitude of texts on production management for more information on this technique.

2. The text uses the term CPM instead of ADM. The reader should understand that they are interchangeable.

PMBOK® Guide, 5th Edition 6.3 Activity Sequencing

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● Time estimates must be made for each activity on a three-way basis. Optimistic, most likely, and

pessimistic elapsed-time figures are estimated by the person(s) most familiar with the activity.

● Critical path and slack times are computed. The critical path is that sequence of activities and

events whose accomplishment will require the greatest time.

A big advantage of PERT lies in its extensive planning. Network development and critical path analy-

sis reveal interdependencies and problems that are not obvious with other planning methods. PERT there-

fore determines where the greatest effort should be made to keep a project on schedule.

The second advantage of PERT is that one can determine the probability of meeting deadlines by devel-

opment of alternative plans. If the decision maker is statistically sophisticated, he can examine the standard

deviations and the probability of accomplishment data. If there exists a minimum of uncertainty, one may

use the single-time approach, of course, while retaining the advantage of network analysis.

A third advantage is the ability to evaluate the effect of changes in the program. For example, PERT can

evaluate the effect of a contemplated shift of resources from the less critical activities to the activities identi-

fied as probable bottlenecks. PERT can also evaluate the effect of a deviation in the actual time required for

an activity from what had been predicted.

Finally, PERT allows a large amount of sophisticated data to be presented in a well-organized diagram

from which contractors and customers can make joint decisions.

PERT, unfortunately, is not without disadvantages. The complexity of PERT adds to implementation

problems. There exist more data requirements for a PERT-organized reporting system than for most others.

PERT, therefore, becomes expensive to maintain and is utilized most often on large, complex programs.

Many companies have taken a hard look at the usefulness of PERT on small projects. The result has

been the development of PERT/LOB procedures, which can do the following:

● Cut project costs and time

● Coordinate and expedite planning

● Eliminate idle time

● Provide better scheduling and control of subcontractor activities

● Develop better troubleshooting procedures

● Cut the time required for routine decisions, but allow more time for decision-making

Even with these advantages, many companies should ask whether they actually need PERT because

incorporating it may be difficult and costly, even with canned software packages. Criticism of PERT includes:

● Time and labor intensive

● Decision-making ability reduced

● Lacks functional ownership in estimates

● Lacks historical data for time–cost estimates

● Assumes unlimited resources

● Requires too much detail

An in-depth study of PERT would require a course or two by itself. The intent of this chapter is to

familiarize the reader with the terminology, capability, and applications of networks.

Introduction 599

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12.1 NETWORK FUNDAMENTALS

The major discrepancy with Gantt, milestone, or bubble charts is the inability to show the interdependencies between events and activities. These interdependencies must be identified so that a master plan can be developed that provides an up-to-date picture of operations at all times.

Interdependencies are shown through the construction of networks. Network analysis can provide valuable information for planning, integration of plans, time studies, scheduling, and resource management. The primary purpose of network planning is to eliminate the need for crisis management by providing a pictorial representation of the total program. The following management information can be obtained from such a representation:

● Interdependencies of activities ● Project completion time ● Impact of late starts ● Impact of early starts ● Trade-offs between resources and time ● “What if” exercises ● Cost of a crash program ● Slippages in planning/performance ● Evaluation of performance

Networks are composed of events and activities. The following terms are helpful in understanding networks:

● Event: Equivalent to a milestone indicating when an activity starts or finishes. ● Activity: The element of work that must be accomplished. ● Duration: The total time required to complete the activity. ● Effort: The amount of work that is actually performed within the duration. For

example, the duration of an activity could be one month but the effort could be just a two-week period within the duration.

● Critical Path: This is the longest path through the network and determines the duration of the project. It is also the shortest amount of time necessary to accom- plish the project.

Figure 12–1 shows the standard nomenclature for PERT networks. The circles represent events, and arrows represent activities. The numbers in the circles signify the specific events or accomplishments. The number over the arrow specifies the time needed (hours, days, months), to go from event 6 to event 3. The events need not be numbered in any specific order. However, event 6 must take place before event 3 can be completed (or begun). In Figure 12–2A, event 26 must take place prior to events 7, 18, and 31. In Figure 12–2B, the opposite holds true, and events 7, 18, and 31 must take place prior to event 26. Figure 12–2B is similar to “and gates” used in logic diagrams.3

600 NETWORK SCHEDULING TECHNIQUES

3. PERT diagrams can, in fact, be considered as logic diagrams. Many of the symbols used in PERT have been adapted from logic flow nomenclature.

PMBOK® Guide, 5th Edition 6.3 Activity Sequencing

6.3.2 Activity Sequencing Tools

and Techniques

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In this chapter’s introduction we have summarized the advantages and disadvan- tages of Gantt and milestone charts. These charts, however, can be used to develop the PERT network, as shown in Figure 12–3. The bar chart in Figure 12–3A can be con- verted to the milestone chart in Figure 12–3B. By then defining the relationship between the events on different bars in the milestone chart, we can construct the PERT chart in Figure 12–3C.

PERT is basically a management planning and control tool. It can be considered as a road map for a particular program or project in which all of the major elements (events)

Network Fundamentals 601

6 3 3 WEEKS

COMPLETE TESTING COMPLETE FINAL REPORT

LEGEND

EVENT

ACTIVITY

FIGURE 12–1. Standard PERT nomenclature.

26 18

(A) BURST POINT

2618

(B) SINK

FIGURE 12–2. PERT sources (burst points) and sinks.

PMBOK® Guide, 5th Edition 6.3.2.2 Dependency Determination

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have been completely identified, together with their corresponding interrelations.4 PERT charts are often constructed from back to front because, for many projects, the end date is fixed and the contractor has front-end flexibility.

One of the purposes of constructing the PERT chart is to determine how much time is needed to complete the project. PERT, therefore, uses time as a common denominator to analyze those elements that directly influence the success of the project, namely, time, cost, and performance. The construction of the network requires two inputs. First, do events represent the start or the completion of an activity? Event completions are gener- ally preferred. The next step is to define the sequence of events, as shown in Table 12–1,

602 NETWORK SCHEDULING TECHNIQUES

1 2

6 7

3 4 5

(A) GANTT CHART

(B) MILESTONE CHART

TIME

1 2

43 5

6 7

6 7 4

1 1

2 2

FIGURE 12–3. Conversion from bar chart to PERT chart.

4. These events in the PERT charts should be broken down to at least the same reporting levels as defined in the work breakdown structure.

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which relates each event to its immediate predecessor. Large projects can easily be con- verted into PERT networks once the following questions are answered:

● What job immediately precedes this job? ● What job immediately follows this job? ● What jobs can be run concurrently?

Figure 12–4 shows a typical PERT network. The bold line in Figure 12–4 represents the critical path, which is established by the longest time span through the total system of events. The critical path is composed of events 1–2–3–5–6–7–8–9. The critical path is vital for successful control of the project because it tells management two things:

● Because there is no slack time in any of the events on this path, any slippage will cause a corresponding slippage in the end date of the program unless this slippage can be recovered during any of the downstream events (on the critical path).

● Because the events on this path are the most critical for the success of the project, management must take a hard look at these events in order to improve the total program.

Using PERT we can now identify the earliest possible dates on which we can expect an event to occur, or an activity to start or end. There is nothing overly mysterious about this type of calculation, but without a network analysis the information might be hard to obtain.

PERT charts can be managed from either the events or the activities. For levels 1–3 of the Work Breakdown Structure (WBS), the project manager’s prime concerns are the mile- stones, and therefore, the events are of prime importance. For levels 4–6 of the WBS, the project manager’s concerns are the activities.

The principles that we have discussed thus far also apply to CPM. The nomenclature is the same and both techniques are often referred to as arrow diagramming methods, or activity-on-arrow networks. The differences between PERT and CPM are:

● PERT uses three time estimates (optimistic, most likely, and pessimistic as shown in Section 12.7) to derive an expected time. CPM uses one time estimate that rep- resents the normal time (i.e., better estimate accuracy with CPM).

Network Fundamentals 603

TABLE 12–1. SEQUENCE OF EVENTS

Immediate Activity Activity Title Predecessors Time, Weeks

1–2 A — 1 2–3 B A 5 2–4 C A 2 3–5 D B 2 3–7 E B 2 4–5 F C 2 4–8 G C 3 5–6 H D,F 2 6–7 I H 3 7–8 J E,I 3 8–9 K G,J 2

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● PERT is probabilistic in nature, based on a beta distribution for each activity time and a normal distribution for expected time duration (see Section 12.7). This allows us to calculate the “risk” in completing a project. CPM is based on a single time estimate and is deterministic in nature.

● Both PERT and CPM permit the use of dummy activities in order to develop the logic. ● PERT is used for R&D projects where the risks in calculating time durations have

a high variability. CPM is used for construction projects that are resource depen- dent and based on accurate time estimates.

● PERT is used on those projects, such as R&D, where percent complete is almost impossible to determine except at completed milestones. CPM is used for those projects, such as construction, where percent complete can be determined with reason- able accuracy and customer billing can be accomplished based on percent complete.

12.2 GRAPHICAL EVALUATION AND REVIEW TECHNIQUE (GERT)

Graphical evaluation and review techniques are similar to PERT but have the distinct advantages of allowing for looping, branching, and multiple project end results. With PERT one cannot easily show that if a test fails,

604 NETWORK SCHEDULING TECHNIQUES

1 1

6 2

7 3

8 3

9 2

1 CONTRACT NEGOTIATED (START)

2 CONTRACT SIGNED

3 LONG LEAD PROCUREMENT

4 MANUFACTURING SCHEDULES

EVENT CODE

5 BILL OF MATERIALS

6 SHORT LEAD PROCUREMENT

7 MANUFACTURING PLANS

8 MATERIAL SPECIFICATION

9 START- UP ACTIVITY

EVENT

ACTIVITY

CRITICAL PATH

LEGEND

TIME 5 WEEKS

FIGURE 12–4. Simplified PERT network.

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we may have to repeat the test several times. With PERT, we cannot show that, based upon the results of a test, we can select one of several different branches to continue the project. These problems are easily overcome using GERT. [For additional information on the GERT technique, see Jack R. Meredith and Samuel J. Mantel, Jr., Project Management, 3rd ed. (New York: Wiley; 1995); pp. 364–367.]

12.3 DEPENDENCIES

There are three basic types of interrelationships or dependencies:

● Mandatory dependencies (i.e., hard logic): These are dependencies that cannot change, such as erecting the walls of a house before putting up the roof.

● Discretionary dependencies (i.e., soft logic): These are dependencies that may be at the discretion of the project manager or may simply change from project to project. As an example, one does not need to complete the entire bill of materials prior to beginning procurement.

● External dependencies: These are dependencies that may be beyond the control of the project manager such as having contractors sit on your critical path.

Sometimes, it is impossible to draw network dependencies without including dummy activities. Dummy activities are artificial activities, represented by a dotted line, and do not consume resources or require time. They are added into the network simply to complete the logic.

In Figure 12–5, activity C is preceded by activity B only. Now, let’s assume that there exists an activity D that is preceded by both activities A and B. Without drawing a dummy activity (i.e., the dashed line), there is no way to show that activity D is preceded by both activ- ities A and B. Using two dummy activities, one from activity A to activity D and another one from activity B to activity D, could also accomplish this representation. Software programs insert the minimum number of dummy activities, and the direction of the arrowhead is impor- tant. In Figure 12–5, the arrowhead must be pointed upward.

Dependencies 605

DUMMY

FIGURE 12–5. Dummy activity.

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6.3.2.2 Dependency Determination

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12.4 SLACK TIME

Since there exists only one path through the network that is the longest, the other paths must be either equal in length to or shorter than that path. Therefore, there must exist events and activities that can be completed before the time when they are actually needed. The time differential

between the scheduled completion date and the required date to meet critical path is referred to as the slack time. In Figure 12–4, event 4 is not on the crucial path. To go from event 2 to event 5 on the critical path requires seven weeks taking the route 2–3–5. If route 2–4–5 is taken, only four weeks are required. Therefore, event 4, which requires two weeks for com- pletion, should begin anywhere from zero to three weeks after event 2 is complete. During these three weeks, management might find another use for the resources of people, money, equipment, and facilities required to complete event 4.

The critical path is vital for resource scheduling and allocation because the project manager, with coordination from the functional manager, can reschedule those events not on the critical path for accomplishment during other time periods when maximum utiliza- tion of resources can be achieved, provided that the critical path time is not extended. This type of rescheduling through the use of slack times provides for a better balance of resources throughout the company, and may possibly reduce project costs by eliminating idle or waiting time.

Slack can be defined as the difference between the latest allowable date and the earli- est expected date based on the nomenclature below:

TE 5 the earliest time (date) on which an event can be expected to take place TL 5 the latest date on which an event can take place without extending the comple-

tion date of the project Slack time 5 TL 2 TE

The calculation for slack time is performed for each event in the network, as shown in Figure 12–6, by identifying the earliest expected date and the latest starting date. For event 1, TL 2 TE 5 0. Event 1 serves as the reference point for the network and could just as easily have been defined as a calendar date. As before, the critical path is represented as a bold line. The events on the critical path have no slack (i.e., TL 5 TE) and provide the boundaries for the noncritical path events.5 Since event 2 is critical, TL 5 TE 5 3 1 7 5 10 for event 5. Event 6 terminates the critical path with a completion time of fifteen weeks.

The earliest time for event 3, which is not on the critical path, would be two weeks (TE 5 0 1 2 5 2), assuming that it started as early as possible. The latest allowable date is obtained by subtracting the time required to complete the activity from events 3 to 5 from the latest starting date of event 5. Therefore, TL (for event 3) 5 10 2 5 5 5 weeks. Event 3 can now occur anywhere between weeks 2 and 5 without interfering with the scheduled completion date of the project. This same procedure can be applied to event 4, in which case TE 5 6 and TL 5 9.

606 NETWORK SCHEDULING TECHNIQUES

5. There are special situations where the critical path may include some slack. These cases are not considered here.

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6.6.2.2 Critical Path Method

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Figure 12–6 contains a simple PERT network, and therefore the calculation of slack time is not too difficult. For complex networks containing multiple paths, the earliest start- ing dates must be found by proceeding from start to finish through the network, while the latest allowable starting date must be calculated by working backward from finish to start.

The importance of knowing exactly where the slack exists cannot be overstated. Proper use of slack time permits better technical performance. Donald Marquis has observed that those companies making proper use of slack time were 30 percent more successful than the average in completing technical requirements.6

Because of these slack times, PERT networks are often not plotted with a time scale. Planning requirements, however, can require that PERT charts be reconstructed with time scales, in which case a decision must be made as to whether we wish early or late time requirements for slack variables. This is shown in Figure 12–7 for comparison with total program costs and manpower planning. Early time requirements for slack variables are uti- lized in this figure.

The earliest times and late times can be combined to determine the probability of suc- cessfully meeting the schedule. A sample of the required information is shown in Table 12–2. The earliest and latest times are considered as random variables. The original sched- ule refers to the schedule for event occurrences that were established at the beginning of the project. The last column in Table 12–2 gives the probability that the earliest time will not be greater than the original schedule time for this event. The exact method for deter- mining this probability, as well as the variances, is described in Section 12.5.

In the example shown in Figure 12–6, the earliest and latest times were calculated for each event. Some people prefer to calculate the earliest and latest times for each activity instead. Also, the earliest and latest times were identified simply as the time or date when

Slack Time 607

3 4

5 5

T 5E 0

T 5L 0

T 5E 3

T 5L 3

T 5E 6

T 5L 9

T 5E 2

T 5L 5

T 5E 10

T 5L 10

T 5E 15

T 5L 15

FIGURE 12–6. Network with slack time.

6. Donald Marquis, “Ways of Organizing Projects,” Innovation, 1969.

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an event can be expected to take place. To make full use of the capabilities of PERT/CPM, we could identify four values:

● The earliest time when an activity can start (ES) ● The earliest time when an activity can finish (EF) ● The latest time when an activity can start (LS) ● The latest time when an activity can finish (LF)

Figure 12–8 shows the earliest and latest times identified on the activity. To calculate the earliest starting times, we must make a forward pass through the net-

work (i.e., left to right). The earliest starting time of a successor activity is the latest of the earliest finish dates of the predecessors. The earliest finishing time is the total of the ear- liest starting time and the activity duration.

608 NETWORK SCHEDULING TECHNIQUES

PREDICTED ACTUAL

M A

N -M

O N

T H

100

SLACK TIME ACTIVITY CRITICAL PATH

T O

TA L

E X

P E

N D

IT U

R E

S (

1 ,0

0 0

's )

TIME, WEEKS 2 4 6 8 10 12 14 16

3 5

FIGURE 12–7. Comparison models for a time-phase PERT chart.

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TABLE 12–2. PERT CONTROL OUTPUT INFORMATION

Earliest Time Latest Time Original Probability of

Event Number Expected Variance Expected Variance Slack Schedule Meeting Schedule

609

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To calculate the latest times, we must make a backward pass through the network by calculating the latest finish time. Since the activity time is known, the latest starting time can be calculated by subtracting the activity time from the latest finishing time. The lat- est finishing time for an activity entering a node is the earliest starting time of the activities exiting the node. Figure 12–9 shows the earliest and latest starting and finishing times for a typical network.

The identification of slack time can function as an early warning system for the project manager. As an example, if the total slack time available begins to decrease from one reporting period to the next, that could indicate that work is taking longer than antic- ipated or that more highly skilled labor is needed. A new critical path could be forming.

Looking at the earliest and latest start and finish times can identify slack. As an example, look at the two situations below:

Situation a Situation b

[30, 36] } [25, 31]

[20, 26] } [24, 30]

610 NETWORK SCHEDULING TECHNIQUES

C (8, 10)

2 (15, 17)

EARLIEST START TIME

EARLIEST FINISH TIME

ACTIVITY IDENTIFICATION

ACTIVITY TIME LATEST START TIME

LATEST FINISH TIME

FIGURE 12–8. Slack identification.

I (18, 21)

3 (19, 22)

C (6, 11)

5 (14, 19)

A (0, 6)

6 (0, 6)

E (15, 18)

3 (16, 19)B ( 6,

1 5)

9 (6

, 1 5)

G ( 12

, 1 4)

2 (1

7, 1

D (6, 12)

6 (11, 17)

F (15, 22) 7 (15, 22)

H ( 12

, 1 6)

4 ( 18

, 2 2)

FIGURE 12–9. A typical PERT chart with slack times.

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In Situation a, the slack is easily identified as four work units, where the work units can be expressed in hours, days, weeks, or even months. In Situation b, the slack is negative five units of work. This is referred to as negative slack or negative float.

What can cause the slack to be negative? Look at Figure 12–10. When performing a forward pass through a network, we work from left to right beginning at the customer’s starting milestone (position 1). The backward pass, however, begins at the customer’s end date milestone (position 2), not (as is often taught in the classroom) where the forward pass ends. If the forward pass ends at position 3, which is before the customer’s end date, it is possible to have slack on the critical path. This slack is often called reserve time and may be added to other activities or filled with activities such as report writing so that the for- ward pass will extend to the customer’s completion date.

Negative slack usually occurs when the forward pass extends beyond the customer’s end date, as shown by position 4 in the figure. However, the backward pass is still mea- sured from the customer’s completion date, thus creating negative slack. This is most likely to result when:

● The original plan was highly optimistic, but unrealistic ● The customer’s end date was unrealistic ● One or more activities slipped during project execution ● The assigned resources did not possess the correct skill levels ● The required resources would not be available until a later date

In any event, negative slack is an early warning indicator that corrective action is needed to maintain the customer’s end date.

At this point, it is important to understand the physical meaning of slack. Slack mea- sures how early or how late an event can start or finish. In Figure 12–6, the circles repre- sented events and the slack was measured on the events. Most networks today, however,

Slack Time 611

Forward Pass

Backward Pass

Customer’s Start Date

Customer’s Finish Date

1 2

3 4

FIGURE 12–10. Slack time.

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focus on the activity rather than the event, as shown in Figure 12–9. When slack is calcu- lated on the activity, it is usually referred to as float rather than slack, but most project managers use the terms interchangeably. For activity C in Figure 12–9, the float is eight units. If the float in an activity is zero, then it is a critical path activity, such as seen in activity F. If the slack in an event is zero, then the event is a critical path event.

Another term is maximum float. The equation for maximum float is:

Maximum float 5 latest finish 2 earliest start 2 duration

For activity H in Figure 12–9, the maximum float is six units.

12.5 NETWORK REPLANNING

Once constructed, the PERT/CPM charts provide the framework from which detailed planning can be initiated and costs can be controlled and tracked. Many iterations, however, are normally made during the planning phase before the PERT/CPM chart is finished. Figure 12–11 shows this

iteration process. The slack times form the basis from which additional iterations, or net- work replanning, can be performed. Network replanning is performed either at the concep- tion of the program in order to reduce the length of the critical path, or during the program, should the unexpected occur. If all were to go according to schedule, then the original PERT/CPM chart would be unchanged for the duration of the project. But, how many pro- grams or projects follow an exact schedule from start to finish?

Suppose that activities 1–2 and 1–3 in Figure 12–6 require manpower from the same functional unit. Upon inquiry by the project manager, the functional manager asserts that he can reduce activity 1–2 by one week if he shifts resources from activity 1–3 to activity 1–2. Should this happen, however, activity 1–3 will increase in length by one week. Reconstructing the PERT/CPM network as shown in Figure 12–12, the length of the crit- ical path is reduced by one week, and the corresponding slack events are likewise changed.

There are two network replanning techniques based almost entirely upon resources: resource leveling and resource allocation.

● Resource leveling is an attempt to eliminate the manpower peaks and valleys by smoothing out the period-to-period resource requirements. The ideal situation is to do this without changing

the end date. However, in reality, the end date moves out and additional costs are incurred.

● Resource allocation (also called resource-limited planning) is an attempt to find the shortest possible critical path based upon the available or fixed resources. The prob- lem with this approach is that the employees may not be qualified technically to per- form on more than one activity in a network.

Unfortunately, not all PERT/CPM networks permit such easy rescheduling of resources. Project managers should make every attempt to reallocate resources to reduce the critical path, provided that the slack was not intentionally planned as a safety valve.

612 NETWORK SCHEDULING TECHNIQUES

PMBOK® Guide, 5th Edition 6.6.2 Schedule Development

6.6.2.7 Schedule Compression

PMBOK® Guide, 5th Edition 6.6.2.4 Resource Leveling

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Network Replanning 613

MANAGEMENT REVIEW

PLAN AND SCHEDULE

ACCEPTABLE

DEVELOP PERT SCHEDULE

RESOURCE CONTROL

COST WITHIN

BUDGET

TIME SPAN

ACCEPTABLE

RESOURCES AVAILABLE

YES

DOCUMENT PLANS AND SCHEDULES

FIGURE 12–11. Iteration process for PERT schedule development.

7 6

TE 5 0

TL 5 0

TE 5 2

TL 5 2

TE 5 5

TL 5 8

TE 5 3

TL 5 4

TE 5 9

TL 5 9

TE 5 14

TL 5 14

FIGURE 12–12. Network replanning of Figure 12–6.

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Transferring resources from slack paths to more critical paths is only one method for reducing expected project time. Several other methods are available:

● Elimination of some parts of the project ● Addition of more resources (i.e., crashing) ● Substitution of less time-consuming components or activities ● Parallelization of activities ● Shortening critical path activities ● Shortening early activities ● Shortening longest activities

● Shortening easiest activities ● Shortening activities that are least costly to speed up ● Shortening activities for which you have more resources ● Increasing the number of work hours per day

Under the ideal situation, the project start and end dates are fixed, and performance within this time scale must be completed within the guidelines described by the statement of work. Should the scope of effort have to be reduced in order to meet other requirements, the contractor incurs a serious risk that the project may be canceled, or performance expec- tations may no longer be possible.

Adding resources is not always possible. If the activities requiring these added resources also call for certain expertise, then the contractor may not have qualified or expe- rienced employees, and may avoid the risk. The contractor might still reject this idea, even if time and money were available for training new employees, because on project termina- tion he might not have any other projects for these additional people. However, if the pro- ject is the construction of a new facility, then the labor-union pool may be able to provide additional experienced manpower.

Parallelization of activities can be regarded as accepting a risk by assuming that a cer- tain event can begin in parallel with a second event that would normally be in sequence with it. This is shown in Figure 12–13. One of the biggest headaches at the beginning of any project is the purchasing of tooling and raw materials. As shown in Figure 12–13, four weeks can be saved by sending out purchase orders after contract negotiations are com- pleted, but before the one-month waiting period necessary to sign the contract. Here the contractor incurs a risk. Should the effort be canceled or the statement of work change prior to the signing of the contract, the customer incurs the cost of the termination expenses from the vendors. This risk is normally overcome by the issuance of a long-lead procurement letter immediately following contract negotiations.

There are two other types of risk that are common. In the first situation, engineering has not yet finished the prototype, and manufacturing must order the tooling in order to keep the end date fixed. In this case, engineering may finally design the prototype to fit the tool- ing. In the second situation, the subcontractor finds it difficult to perform according to the original blueprints. In order to save time, the customer may allow the contractor to work without blueprints, and the blueprints are then changed to represent the as-built end-item.

Because of the complexities of large programs, network replanning becomes an almost impossible task when analyzed on total program activities. It is often better to have each department or division develop its own PERT/CPM networks, on approval by the

614 NETWORK SCHEDULING TECHNIQUES

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Network Replanning 615

4 16 1 2 3SERIES:

PARALLEL:

TIME 5 20 WEEKS

TIME 5 16 WEEKS

NOTE: EVENT 4 IS A DUMMY EVENT AND IS INCLUDED WITH A ZERO ACTIVITY TIME

IN ORDER TO CONSTRUCT A COMPLETE NETWORK

CONTRACT NEGOTIATIONS COMPLETED

2 CONTRACT SIGNED

3 MATERIAL / TOOLING PURCHASED

4 DUMMY EVENT

LEGEND

FIGURE 12–13. Parallelization of PERT activities.

A 26

28 43

A C F G

B E

41 49 53

3 1

5 3

PERT CHART FOR DEPARTMENT D

MASTER PERT CHART

FIGURE 12–14. Master PERT chart breakdown by department.

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Project Life Cycle

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project office, and based on the work breakdown structure. The individual PERT charts are then integrated into one master chart to identify total program critical paths, as shown in Figure 12–14. The reader should not infer from Figure 12–14 that department D does not interact with other departments or that department D is the only participant for this ele- ment of the project.

Segmented PERT charts can also be used when a number of contractors work on the same program. Each contractor (or subcontractor) develops his own PERT chart. It then becomes the responsibility of the prime contractor to integrate all of the subcontractors’ PERT charts to ensure that total program requirements can be met.

12.6 ESTIMATING ACTIVITY TIME

Determining the elapsed time between events requires that responsible functional managers evaluate the situation and submit their best estimates. The calculations for critical paths and slack times in the previous sections

were based on these best estimates. In this ideal situation, the functional manager would have at his disposal a large vol-

ume of historical data from which to make his estimates. Obviously, the more historical data available, the more reliable the estimate. Many programs, however, include events and activities that are nonrepetitive. In this case, the functional managers must submit their estimates using three possible completion assumptions:

● Optimistic completion time. This time assumes that everything will go according to plan and with minimal difficulties. This should occur approximately 1 percent of the time.

● Pessimistic completion time. This time assumes that everything will not go accord- ing to plan and maximum difficulties will develop. This should also occur approxi- mately 1 percent of the time.

● Most likely completion time. This is the time that, in the mind of the functional man- ager, would most often occur should this effort be reported over and over again.7

Before these three times can be combined into a single expression for expected time, two assumptions must be made. The first assumption is that the standard deviation, s, is one-sixth of the time requirement range. This assumption stems from probability theory, where the end points of a curve are three standard deviations from the mean. The second assumption requires that the probability distribution of time required for an activity be expressible as a beta distribution.8

616 NETWORK SCHEDULING TECHNIQUES

7. It is assumed that the functional manager performs all of the estimating. The reader should be aware that there are exceptions where the program or project office would do their own estimating.

8. See F. S. Hillier and G. J. Lieberman, Introduction to Operations Research (San Francisco: Holden-Day, 1967), p. 229.

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PMBOK® Guide, 5th Edition 6.5.2.4 Three-Point Estimates

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The expected time between events can be found from the expression:

te 5

where te 5 expected time, a 5 most optimistic time, b 5 most pessimistic time, and m 5 most likely time.

As an example, if a 5 3, b 5 7, and m 5 5 weeks, then the expected time, te, would be 5 weeks. This value for te would then be used as the activity time between two events in the construction of a PERT chart. This method for obtaining best estimates contains a large degree of uncertainty. If we change the variable times to a 5 2, b 5 12, and m 5 4 weeks, then te will still be 5 weeks. The latter case, however, has a much higher degree of uncertainty because of the wider spread between the optimistic and pessimistic times. Care must be taken in the evaluation of risks in the expected times.

12.7 ESTIMATING TOTAL PROJECT TIME

In order to calculate the probability of completing the project on time, the standard deviations of each activity must be known. This can be found from the expression:

ste 5

where ste is the standard deviation of the expected time, te. Another useful expression is the variance, y, which is the square of the standard deviation. The variance is primarily useful for comparison to the expected values. However, the standard deviation can be used just as easily, except that we must identify whether it is a one, two, or three sigma limit deviation. Figure 12–15 shows the critical path of Figure 12–6, together with the corre- sponding values from which the expected times were calculated, as well as the standard

b 2 a }

a 1 4m 1 b 6

Estimating Total Project Time 617

2,3,4 4,7,10 1 2 5

3,5,7 6

te 5 3 te 5 7 te 5 5

ste 5 0.33 ste 5 1.0 ste 5 0.67

MOST OPTIMISTIC TIME, a

MOST LIKELY TIME, m

MOST PESSIMISTIC TIME, b

FIGURE 12–15. Expected time analysis for critical path events in Figure 12–6.

PMBOK® Guide, 5th Edition 6.5.2.4 Three-Point Estimates

PMBOK® Guide, 5th Edition 6.5 Activity Duration Estimates

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deviations. The total path standard deviation is calculated by the square root of the sum of the squares of the activity standard deviations using the following expression:

stotal 5 �s12–2 1� s22–5 1� s52–6�

5 �(0.33)2� 1 (1.0�)2 1 (0�.67)2�

5 1.25

The purpose of calculating s is that it allows us to establish a confidence interval for each activity and the critical path. From statistics, using a normal distribution, we know that there is a 68 percent chance of completing the project within one standard deviation, a 95 percent chance within two standard deviations, and a 99.73 percent chance within three standard deviations.

This type of analysis can be used to measure the risks in the estimates, the risks in completing each activity, and the risks in completing the entire project. In other words, the standard deviation, s, serves as a measurement of the risk. This analysis, however, assumes that normal distribution applies, which is not always the case.

As an example of measuring risk, consider a network that has only three activities on the critical path as shown below (all times in weeks):

618 NETWORK SCHEDULING TECHNIQUES

Optimistic Most Likely Pessimistic Activity Time Time Time Tex s s

A 3 4 5 4 2⁄6 4⁄36

B 4 4.5 8 5 4⁄6 16⁄36

C 4 6 8 6 4⁄6 16⁄36

15 1.0

From the above table, the length of the critical path is 15 weeks. Since the variance (i.e., s2) is 1.0, then spath, which is the square root of the variance, must be 1 week.

We can now calculate the probability of completing the project within certain time limits:

● The probability of getting the job done within 16 weeks is

50% 1 (1⁄2)3(68%), or 84%. ● Within 17 weeks, we have 50% 1 (1⁄2)3(95%), or 97.5%. ● Within 14 weeks, we have 50% 2 (1⁄2)3(68%), or 16%. ● Within 13 weeks, we have 50% 2 (1⁄2)3(95%), or 2.5%.

12.8 TOTAL PERT/CPM PLANNING

Before we continue, it is necessary to discuss the methodology for preparing PERT schedules. PERT scheduling is a six-step process. Steps one and two begin with the project manager

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laying out a list of activities to be performed and then placing these activities in order of precedence, thus identifying the interrelationships. These charts drawn by the project man- ager are called either logic charts, arrow diagrams, work flow, or simply networks. The arrow diagrams will look like Figure 12–6 with two exceptions: The activity time is not identified, and neither is the critical path.

Step three is reviewing the arrow diagrams with the line managers (i.e., the true experts) in order to obtain their assurance that neither too many nor too few activities are identified, and that the interrelationships are correct.

In step four the functional manager converts the arrow diagram to a PERT chart by identifying the time duration for each activity. It should be noted here that the time esti- mates that the line managers provide are based on the assumption of unlimited resources because the calendar dates have not yet been defined.

Step five is the first iteration on the critical path. It is here that the project manager

looks at the critical calendar dates in the definition of the project’s requirements. If the crit-

ical path does not satisfy the calendar requirements, then the project manager must try to

shorten the critical path using methods explained in Section 12.3 or by asking the line man-

agers to take the “fat” out of their estimates.

Step six is often the most overlooked step. Here the project manager places calendar

dates on each event in the PERT chart, thus converting from planning under unlimited

resources to planning with limited resources. Even though the line manager has given you a time estimate, there is no guarantee that the correct resources will be available when

needed. That is why this step is crucial. If the line manager cannot commit to the calendar

dates, then replanning will be necessary. Most companies that survive on competitive bid-

ding lay out proposal schedules based on unlimited resources. After contract award, the

schedules are analyzed again because the company now has limited resources. After all,

how can a company bid on three contracts simultaneously and put a detailed schedule into

each proposal if it is not sure how many contracts, if any, it will win? For this reason cus-

tomers require that formal project plans and schedules be provided thirty to ninety days

after contract award.

Finally, PERT replanning should be an ongoing function during project execution.

The best project managers continually try to assess what can go wrong and perform

perturbation analysis on the schedule. (This should be obvious because the constraints

and objectives of the project can change during execution.) Primary objectives on a

schedule are:

● Best time

● Least cost

● Least risk

Secondary objectives include:

● Studying alternatives

● Optimum schedules

● Effective use of resources

Total PERT/CPM Planning 619

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● Communications

● Refinement of the estimating process

● Ease of project control

● Ease of time or cost revisions

Obviously, these objectives are limited by such constraints as:

● Calendar completion

● Cash or cash flow restrictions

● Limited resources

● Management approvals

12.9 CRASH TIMES

In the preceding sections, no distinction was made between PERT and CPM. The basic difference between PERT and CPM lies in the ability to calculate percent complete. PERT is used in R&D or just development activities, where a percent-complete determination is almost impossible.

Therefore, PERT is event oriented rather than activity oriented. In PERT, funding is nor- mally provided for each milestone (i.e., event) achieved because incremental funding along the activity line has to be based on percent complete. CPM, on the other hand, is activity oriented because, in activities such as construction, percent complete along the activity line can be determined. CPM can be used as an arrow diagram network without PERT. The dif- ference between the two methods lies in the environments in which they evolved and how they are applied. According to Archibald and Villoria9:

The environmental factors which had an important role in determining the elements of the

CPM techniques were:

(a) Well-defined projects

(b) One dominant organization

(d) One geographical location for a project

The CPM (activity-type network) has been widely used in the process industries, in con- struction, and in single-project industrial activities. Common problems include no place to store early arrivals of raw materials and project delays for late arrivals.

Using strictly the CPM approach, project managers can consider the cost of speeding up, or crashing, certain phases of a project. In order to accomplish this, it is necessary to

620 NETWORK SCHEDULING TECHNIQUES

9. R. D. Archibald and R. L. Villoria, Network-Based Management Systems (PERT/CPM) (New York: Wiley, 1967), p. 14.

PMBOK® Guide, 5th Edition 6.6.2.7 Schedule Compression

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calculate a crashing cost per unit time as well as the normal expected time for each activ- ity. CPM charts, which are closely related to PERT charts, allow visual representation of the effects of crashing. There are these requirements:

● For a CPM chart, the emphasis is on activities, not events. Therefore, the PERT chart should be redrawn with each circle representing an activity rather than an event.

● In CPM, both time and cost of each activity are considered.10

● Only those activities on the critical path are considered, starting with the activities for which the crashing cost per unit time is the lowest.

Figure 12–16 shows a CPM network with the corresponding crash time for all activi- ties on and off the critical path. The activities are represented by circles and include an activity identification number and the estimated time. The costs expressed in the figure are usually direct costs only.

Crash Times 621

10,000

30,000

8,000

12,000

40,000

20,000

14,000

42,500

9,500

18,000

52,000

29,000

2,000

12,500

1,500

6,000

3,000

ACTIVITY NORMAL NORMALCRASH CRASH

CRASHING COST PER WEEK, $

COST $TIME REQUIRED, WEEKS

A.4

B.6

C.2 E.7

D.2

F.6

LEGEND

5 ACTIVITYA.4

TIME REQUIRED ACTIVITY IDENTIFICATION

FIGURE 12–16. CPM network.

10. Although PERT considers mainly time, modifications through PERT/cost analysis can be made to consider the cost factors.

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622 NETWORK SCHEDULING TECHNIQUES

160,000

150,000

140,000

130,000

120,000

110,000 10 12 14 16 18 20 22 24

NORMAL OPERATIONS

P R

O G

R A

M C

O S

T ,

PROGRAM COMPLETION TIME, WEEKS

ALL ACTIVITIES CRASH

MINIMUM COST TOTAL CRASH CRASH B

CRASH E

CRASH F

CRASH A

FIGURE 12–17. CPM crashing costs.

To determine crashing costs we begin with the lowest weekly crashing cost, activity A, at $2,000 per week. Although activity C has a lower crashing cost, it is not on the crit- ical path. Only critical path activities are considered for crashing. Activity A will be the first to be crashed for a maximum of two weeks at $2,000 per week. The next activity to be considered would be F at $3,000 per week for a maximum of three weeks. These crash- ing costs are additional expenses above the normal estimates.

A word of caution concerning the selection and order of the activities that are to crash: There is a good possibility that as each activity is crashed, a new critical path will be devel- oped. This new path may or may not include those elements that were bypassed because they were not on the original critical path.

Returning to Figure 12–16 (and assuming that no new critical paths are developed), activities A, F, E, and B would be crashed in that order. The crashing cost would then be an increase of $37,500 from the base of $120,000 to $157,500. The corresponding time would then be reduced from twenty-three weeks to fifteen weeks. This is shown in Figure 12–17 to illustrate how a trade-off between time and cost can be obtained. Also shown in Figure 12–17 is the increased cost of crashing elements not on the critical path. Crashing these elements would result in a cost increase of $7,500 without reducing the total project time. There is also the possibility that this figure will represent unrealistic conditions because sufficient resources are not or cannot be made available for the crash- ing period.

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PERT/CPM Problem Areas 623

RL Y

ST AR

T O F A

CT IVI

TIE S

LA TE

ST AR

T O F A

CT IVI

TIE S

REGION OF FEASIBLE BUDGETS

C O

S T

S $

TIME

FIGURE 12–18. Region of feasible budgets.

The purpose behind balancing time and cost is to avoid wasting resources. If the direct and indirect costs can be accurately obtained, then a region of feasible budgets can be found, bounded by the early-start (crash) and late-start (or normal) activities. This is shown in Figure 12–18.

Since the direct and indirect costs are not necessarily expressible as linear functions, time–cost trade-off relationships are made by searching for the lowest possible total cost (i.e., direct and indirect) that likewise satisfies the region of feasible budgets. This method is shown in Figure 12–19.

Like PERT, CPM also contains the concept of slack time, the maximum amount of time that a job may be delayed beyond its early start without delaying the project com- pletion time. Figure 12–20 shows a typical representation of slack time using a CPM chart. In addition, the figure shows how target activity costs can be identified. Figure 12–20 can be modified to include normal and crash times as well as normal and crash costs. In this case, the cost box in the figure would contain two numbers: The first number would be the normal cost, and the second would be the crash cost. These numbers might also appear as running totals.

12.10 PERT/CPM PROBLEM AREAS

PERT/CPM models are not without their disadvantages and problems. Even the largest organizations with years of experience in using PERT and CPM have the same ongoing problems as newer or smaller companies.

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624 NETWORK SCHEDULING TECHNIQUES

C O

S T

S $

TIME

TOTAL COSTS

OPTIMUM PROJECT DURATION TIME FOR MINIMUM TOTAL COSTS

IND IRE

CT CO

ST S

DIRECT COSTS

FIGURE 12–19. Determining project duration.

4;10

0;4

4;6 8;10 10;17 10;17

10;12 15;17

8 40

C.2

0;4

4;10 10;12 15;17

17;23 17;23

30 12

EARLY START

EARLY LATE

EARLY FINISH

LATE FINISH

LATE START

NORMAL COST (1000’S)

LEGEND

D.2

C.2

A.4 F.6

B.6 D.2

E.7

FIGURE 12–20. CPM network with slack.

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Many companies have a difficult time incorporating PERT systems because PERT is end-item oriented. Many upper-level managers feel that the adoption of PERT/CPM removes a good part of their power and ability to make decisions. This is particularly evident in com- panies that have been forced to accept PERT/CPM as part of contractual requirements.

In PERT systems, there are planners and doers. In most organizations PERT planning is performed by the program office and functional management. Yet once the network is con- structed, the planners and managers become observers and rely on the doers to accomplish the job within time and cost limitations. Management must convince the doers that they have an obligation to the successful completion of the established PERT/CPM plans.

Unless the project is repetitive, there is usually little historical information on which to base the cost estimates of most optimistic, most pessimistic, and most likely times. Problems can also involve poor predictions for overhead costs, other indirect costs, material and labor escalation factors, and crash costs. It is also possible that each major functional division of the organization has its own method for estimating costs. Engineering, for example, may use historical data, whereas manufacturing operations may prefer learning curves. PERT works best if all organizations have the same method for predicting costs and performance.

PERT networks are based on the assumption that all activities start as soon as possi- ble. This assumes that qualified personnel and equipment are available. Regardless of how well we plan, there are almost always differences in performance times from what would normally be acceptable. For the selected model, time and cost should be well-considered estimates, not spur-of-the-moment decisions.

Cost control problems arise when the project cost and control system is not compatible with company policies. Project-oriented costs may be meshed with non-PERT-controlled jobs in order to develop the annual budget. This becomes a difficult chore for cost reporting, espe- cially when each project may have its own method for analyzing and controlling costs.

Many people have come to expect too much of PERT-type networks. Figure 12–21 illustrates a PERT/CPM network broken down by work packages with identification of the

PERT/CPM Problem Areas 625

WORK PACKAGE 02-03-01

WORK PACKAGE 02-03-02

WORK PACKAGE 02-03-03

LEGEND

3/11563

5/11110

8/11102

3/11031

2/11033

2/11063

4/11037

3/11107

4/11191

6/11118

CHARGE NUMBER ESTIMATED ACTIVITY TIME

FIGURE 12–21. Using PERT for work package control.

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charge numbers for each activity. Large projects may contain hundreds of charge numbers. Subdividing work packages (which are supposedly the lowest element) even further by identifying all subactivities has the advantage that direct charge numbers can be easily identified, but the time and cost for this form of detail may be prohibitive. PERT/CPM net- works are tools for program control, and managers must be careful that the original game plan of using networks to identify prime and supporting objectives is still met. Additional detail may mask this all-important purpose. Remember, networks are constructed as a means for understanding program reports. Management should not be required to read reports in order to understand PERT/CPM networks.

12.11 ALTERNATIVE PERT/CPM MODELS

Because of the many advantages of PERT/time, numerous industries have found applica- tions for this form of network. A partial list of these advantages includes capabilities for:

● Trade-off studies for resource control ● Providing contingency planning in the early stages of the project ● Visually tracking up-to-date performance ● Demonstrating integrated planning ● Providing visibility down through the lowest levels of the work breakdown structure ● Providing a regimented structure for control purposes to ensure compliance with

the work breakdown structure and the statement of work ● Increasing functional members’ ability to relate to the total program, thus provid-

ing participants with a sense of belonging

Even with these advantages, in many situations PERT/time has proved ineffective in controlling resources. In the beginning of this chapter we defined three parameters necessary for the control of resources: time, cost, and performance. With these factors in mind, companies began reconstructing PERT/time into PERT/cost and PERT/performance models.

PERT/cost is an extension of PERT/time and attempts to overcome the problems asso- ciated with the use of the most optimistic and most pessimistic time for estimating com- pletion. PERT/cost can be regarded as a cost accounting network model based on the work breakdown structure and capable of being subdivided down to the lowest elements, or work packages. The advantages of PERT/cost are that it:

● Contains all the features of PERT/time ● Permits cost control at any WBS level

The primary reason for the development of PERT/cost was so that project managers could identify critical schedule slippages and cost overruns in time to correct them.

626 NETWORK SCHEDULING TECHNIQUES

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Many attempts have been made to develop effective PERT/schedule models. In almost all cases, the charts are constructed from left to right.11 An example of such current attempts is the accomplishment/cost procedure (ACP). As described by Block12:

ACP reports cost based on schedule accomplishment, rather than on the passage of time.

To determine how an uncompleted task is progressing with respect to cost, ACP compares

(a) cost/progress relationship budgeting with (b) the cost/progress relationship expended

for the task. It utilizes data accumulated from periodic reports and from the same data base

generates the following:

● The relationship between cost and scheduled performance

● The accounting relationships between cost and fiscal accounting requirements

● The prediction of corporate cash flow needs

Unfortunately, the development of PERT/schedule techniques is still in its infancy. Although their applications have been identified, many companies feel locked in with their present method of control, whether it be PERT, CPM, or some other technique.

12.12 PRECEDENCE NETWORKS

In recent years there has been an explosion in project management soft- ware packages. Small packages may sell for a few thousand dollars, whereas the price for larger packages may be tens of thousands of dollars.

Computerized project management can provide answers to such questions as:

● How will the project be affected by limited resources? ● How will the project be affected by a change in the requirements? ● What is the cash flow for the project (and for each WBS element)? ● What is the impact of overtime? ● What additional resources are needed to meet the constraints of the project? ● How will a change in the priority of a certain WBS element affect the total project?

The more sophisticated packages can provide answers to schedule and cost based on:

● Adverse weather conditions ● Weekend activities ● Unleveled manpower requirements

Precedence Networks 627

11. See Gary E. Whitehouse, “Project Management Techniques,” Industrial Engineering, March 1973, pp. 24–29, for a description of the technique.

12. Reprinted by permission of Harvard Business Review. From Ellery B. Block, “Accomplishment/Cost: Better Project Control,” Harvard Business Review, May–June 1971, pp. 110–124. Copyright © 1971 by the Harvard Business School Publishing Corporation; all rights reserved.

PMBOK® Guide, 5th Edition 6.3.2.1 PDM

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● Variable crew size ● Splitting of activities ● Assignment of unused resources

Regardless of the sophistication of computer systems, printers and plotters prefer to draw straight lines rather than circles. Most software systems today use precedence net- works, as shown in Figure 12–22, which attempt to show interrelationships on bar charts. In Figure 12–22, task 1 and task 2 are related because of the solid line between them. Task 3 and task 4 can begin when task 2 is half finished. (This cannot be shown easily on PERT without splitting activities.) The dotted lines indicate slack. The critical path can be iden- tified by putting an asterisk (*) beside the critical elements, or by putting the critical con- nections in a different color or boldface.

The more sophisticated software packages display precedence networks in the format shown in Figure 12–23. In each of these figures, work is accomplished during the activity. This is sometimes referred to as the activity-on-node method. The arrow represents the relationship or constraint between activities.

Figure 12–23A illustrates a finish-to-start constraint. In this figure, activity 2 can start no earlier than the completion of activity 1. All PERT charts are finish-to-start constraints. Figure 12–23B illustrates a start-to-start constraint. Activity 2 cannot start prior to the start of activity 1. Figure 12-23C illustrates a finish-to-finish constraint. In this figure, activity 2 cannot finish until activity 1 finishes. Figure 12-23D illustrates a start-to-finish constraint.

628 NETWORK SCHEDULING TECHNIQUES

TASKS

MONTHS AFTER GO AHEAD

1 2 3 4 5

FIGURE 12–22. Precedence network.

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An example might be that you must start studying for an exam some time prior to the com- pletion of the exam. This is the least common type of precedence chart. Figure 12-23E illustrates a percent complete constraint. In this figure, the last 20 percent of activity 2 can- not be started until 50 percent of activity 1 has been completed.13

Precedence Networks 629

(B) START-TO-START ACTIVITY 1

ACTIVITY 2

CONSTRAINT

START

ACTIVITY 1

ACTIVITY 2

CONSTRAINT

FINISH START

(A) FINISH-TO-START

ACTIVITY 1

ACTIVITY 2

CONSTRAINT

FINISH

FINISH (C) FINISH-TO-FINISH

ACTIVITY 1 ACTIVITY

(D) START-TO-FINISH

ACTIVITY 1

ACTIVITY 2

(E) PERCENT COMPLETE

CONSTRAINT50%

20%

FIGURE 12–23. Typical precedence relationships.

13. Meredith and Mantel categorize precedence relationships in three broad categories; Natural Precedences, Envir- onmental Precedences, and Preferential Precedences. For additional information on these precedence relationships, see Jack R. Meredith and Samuel J. Mantel, Jr., Project Management, 3rd ed. (New York: Wiley;1995), pp.385–386.

PMBOK® Guide, 5th Edition 6.3.2.1 PDM

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Figure 12–24 shows the typical information that appears in each of the activity boxes shown in Figure 12–23. The box identified as “responsibility cost center” could also have been identified as the name, initials, or badge number of the person responsible for this activity.

Figure 12–25 shows the comparison of three of the network techniques.

12.13 LAG

The time period between the early start or finish of one activity and the early start or finish of another activity in the sequential chain is called lag. Lag is most commonly used in conjunction with precedence networks. Figure 12–26 shows five different ways to identify lag on the constraints.

630 NETWORK SCHEDULING TECHNIQUES

PMBOK® Guide, 5th Edition 6.3.2.3 Leads and Lags

6.3.2.1 PDM

EARLY START

6/1/02

TIME DURATION

2 WEEKS

EARLY FINISH

6/14/02

TASK 4 $70000

LATE START

6/15/02

RESPONSIBILITY COST CENTER

2810

LATE FINISH

6/28/02

FIGURE 12–24. Computerized information flow.

GENERAL: ACTIVITY-ON-ARROW ACTIVITY-ON-NODE

TYPES:

LOGIC:

ADM (CPM)PERT PDM

NO. OF ESTIMATES: 13 1

CAN USE DUMMIES

USES CONSTRAINTS (WHICH MAY FUNCTION AS DUMMIES)

FIGURE 12–25. Comparison of networks.

PMBOK® Guide, 5th Edition 6.2.3.2 Activity Attributes

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Slack is measured within activities whereas lag is measured between activities. As an example, look at Figure 12–26A. Suppose that activity A ends at the end of the first week of March. Since it is a finish-to-start precedence chart, one would expect the start of activ- ity B to be the beginning of the second week in March. But if activity B cannot start until the beginning of the third week of March, that would indicate a week of lag between activ- ity A and activity B even though both activities can have slack within the activity. Simply

Lag 631

ACTIVITY B

ACTIVITY A

FS 5 6 ACTIVITY

B ACTIVITY

L 5 6

(A) FINISH-TO-START (FS) RELATIONSHIP. THE START OF B MUST LAG 6 DAYS AFTER THE FINISH OF A.

ACTIVITY B

ACTIVITY A

SF 5 30 ACTIVITY

B ACTIVITY

30 DAYS

(D) START-TO-FINISH (SF) RELATIONSHIP. THE FINISH OF B MUST LAG 30 DAYS AFTER THE START OF A.

ACTIVITY B

ACTIVITY A

FF 5 5

ACTIVITY B

ACTIVITY A

L 5 5

ACTIVITY B

ACTIVITY A

SS 5 4

ACTIVITY B

ACTIVITY A

L 5 4

(B) START-TO-START (SS) RELATIONSHIP. THE START OF B MUST LAG 4 DAYS AFTER THE START OF A.

ACTIVITY B

ACTIVITY A

SS 5 2

FF 5 2

ACTIVITY B

ACTIVITY A

L 5 2

(E) COMPOSITE START-TO-START AND FINISH-TO-FINISH RELATIONSHIP. THE START OF B MUST LAG 2 DAYS AFTER THE START OF A, AND THE FINISH OF B MUST LAG 2 DAYS AFTER THE FINISH OF A.

FIGURE 12–26. Precedence charts with lag.

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stated, slack is measured within the activities whereas lag is measured between the activ- ities. The lag may be the result of resource constraints.

Any common term is lead. Again looking at Figure 12–26A, suppose that activity A finishes on March 15 but the precedence chart shows activity B starting on March 8, seven days prior to the completion of activity A. In this case, L 5 27, a negative value, indicat- ing that the start of activity B leads the completion of activity A by seven days. To illus- trate how this can happen, consider the following example: The line manager responsible for activity B promised you that his resources would be available on March 16, the day after activity A was scheduled to end. The line manager then informs you that these resources will be available on March 8, and if you do not pick them up on your charge number at that time, they may be assigned elsewhere and not be available on the 16th. Most project managers would take the resources on the 8th and find some work for them to do even though logic says that the work cannot begin until after activity A has finished.

12.14 SCHEDULING PROBLEMS

Every scheduling technique has advantages and disadvantages. Some scheduling problems are the result of organizational indecisiveness, such as having a project sponsor that refuses to provide the project manager guidance on whether the schedule should be based upon a least time, least cost, or least risk scheduling objective. As a result, precious time is wasted in having to redo the schedules.

However, there are some scheduling problems that can impact all scheduling tech- niques. These include:

● Using unrealistic estimates for effort and duration ● Inability to handle employee workload imbalances ● Having to share critical resources across several projects ● Overcommitted resources ● Continuous readjustments to the WBS primarily from scope changes ● Unforeseen bottlenecks

12.15 THE MYTHS OF SCHEDULE COMPRESSION

Simply because schedule compression techniques may exist does not mean that they will work. There is a tendency for managers to be aggressively positive in their thinking at the onset of a project, believing that compression techniques can be applied effectively. As dis- cussed by Grey14:

632 NETWORK SCHEDULING TECHNIQUES

14. Stephen Grey, Practical Risk Assessment for Project Management (West Sussex, England: Wiley, 1995), pp. 108–109.

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There is a common tendency, especially among people who have been convinced that they must “think positive,” to be unwilling to accept that an activity might take longer than planned. To the question “What is the maximum time it could take?”, they respond with “It will be fin- ished in the planned time, it will not be allowed to take longer”, or words to that effect. The words “it will not be allowed to take longer” or “it must not take any longer” are so consistent that they must reflect a common feature of the way businesses manage their staff.

While most people are willing to accept that costs could exceed expectations, and might even take a perverse delight in recounting past examples, the same is not true of deadlines. This is probably due to the fact that cost over runs are resolved in-house, while schedule issues are open and visible to the customer.

There might be ways in which a schedule can be held no matter what happens. Study tasks are almost always finished on time because the scope of work is allowed to vary according to what the study turned up. This is the exception rather than the rule though. In general, you can only be sure that a task will finish on time if:

● The scope of work is flexible, at least to some extent.

● It will be possible to calibrate the task from the early part of the work to tell if the

planned work rate is adequate.

● You can raise the work rate and/or reduce the scope of work to bring the task back on

target in the time left after you find it is heading for an overrun.

There are five common techniques for schedule compression, and each technique has significant limitations that may make this technique more of a myth than reality. This is shown in Table 12–3.

The Myths of Schedule Compression 633

TABLE 12–3. MYTHS AND REALITIES OF SCHEDULE COMPRESSION

Compression Technique Myth Reality

Use of overtime Work will progress at the same rate The rate of progress is less on overtime; on overtime. more mistakes may occur; and

prolonged overtime may lead to burnout.

Adding more resources The performance rate will increase It takes time to find the resources; (i.e., crashing) due to the added resources. it takes time to get them up to speed;

the resources used for the training must come from the existing resources.

Reducing scope (i.e., needed. The customer always requests more The customer needs all of the tasks reducing functionality) work than actually needed. agreed to in the statement of work.

Outsourcing Numerous qualified suppliers exist. The quality of the suppliers’ work can damage your reputation; the supplier may go out of business; and the supplier may have limited concern for your scheduled dates.

Doing series work in An activity can start before the The risks increase and rework becomes parallel previous activity has finished. expensive because it may involve

multiple activities.

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12.16 UNDERSTANDING PROJECT MANAGEMENT SOFTWARE

Efficient project management requires more than good planning, it

requires that relevant information be obtained, analyzed, and reviewed in

a timely manner. This can provide early warning of pending problems and

impact assessments on other activities, which can lead to alternate plans

and management actions. Today, project managers have a large array of software avail-

able to help in the difficult task of tracking and controlling projects. While it is clear that

even the most sophisticated software package is not a substitute for competent project

leadership—and by itself does not identify or correct any task-related problems—it can be

a terrific aid to the project manager in tracking the many interrelated variables and tasks

that come into play with a project. Specific examples of these capabilities are:

● Project data summary: expenditure, timing, and activity

● Project management and business graphics capabilities

● Data management and reporting capabilities

● Critical path analysis

● Customized and standard reporting formats

● Multiproject tracking

● Subnetworking

● Impact analysis (what if . . .)

● Early-warning systems

● On-line analysis of recovering alternatives

● Graphical presentation of cost, time, and activity data

● Resource planning and analysis

● Cost analysis, variance analysis

● Multiple calendars

● Resource leveling

Further, many of the more sophisticated software packages are now available for per-

sonal computers and use mainly precedence networks. This offers large and small compa-

nies many advantages ranging from true user interaction, to ready access and availability,

to simpler and more user-friendly interfaces, to considerably lower software cost.

12.17 SOFTWARE FEATURES OFFERED

Project management software capabilities and features vary a great deal. However, the

variation is more in the depth and sophistication of the features, such as storage, display,

analysis, interoperability, and user friendliness, rather than in the type of features offered,

which are very similar for most software programs. Most project management software

packages offer the following features:

1. Planning, tracking, and monitoring. These features provide for planning and track- ing the projects’ tasks, resources, and costs. The data format for describing the

634 NETWORK SCHEDULING TECHNIQUES

PMBOK® Guide, 5th Edition 6.4.2.5 Project Management

Software

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project to the computer is usually based on standard network typologies such as the Critical Path Method (CPM), Program Evaluation and Review Technique (PERT), or Precedence Diagram Method (PDM). Task elements, with their estimated start and finish times, their assigned resources, and actual cost data, can be entered and updated as the project progresses. The software provides an analysis of the data and documents the technical and financial status of the project against its schedule and original plan. Usually, the software also provides impact assessments of plan deviations and resource and schedule projections. Many systems also provide resource leveling, a feature that averages out available resources to determine task duration and generates a leveled schedule for comparison.

2. Reports. Project reporting is usually achieved via a menu-driven report writer sys- tem that allows the user to request several standard reports in a standard format. The user can also modify these reports or create new ones. Depending on the sophistication of the system and its peripheral hardware, these reports are sup- ported by a full range of Gantt charts, network diagrams, tabular summaries, and business graphics. Reporting capabilities include:

● Budgeted cost for work scheduled (BCWS) or planned value of work (PV)

● Budgeted cost for work performed (BCWP) or earned value of work (EV)

● Actual versus planned expenditure ● Earned value analysis ● Cost and schedule performance indices ● Cash-flow ● Critical path analysis ● Change order ● Standard government reports (DoD, DoE, NASA), formatted for the perfor-

mance monitoring system (PMS)

In addition, many software packages feature a user-oriented, free-format report writer for styled project reporting.

3. Project calendar. This feature allows the user to establish work weeks based on actual workdays. Hence, the user can specify nonwork periods such as weekends, holidays, and vacations. The project calendar can be printed out in detail or in a summary for- mat and is automatically the basis for all computer-assisted resource scheduling.

4. What-if analysis. Some software is designed to make what-if analyses easy. A sep- arate, duplicate project database is established and the desired changes are entered. Then the software performs a comparative analysis and displays the new against the old project plan in tabular or graphical form for fast and easy management review and analysis.

5. Multiproject analysis. Some of the more sophisticated software packages feature a single, comprehensive database that facilitates cross-project analysis and reporting. Cost and schedule modules share common files that allow integration among projects and minimize problems of data inconsistencies and redundancies.

Software Features Offered 635

PMBOK® Guide, 5th Edition 7.4.2 Cost Control Tools and

Techniques

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12.18 SOFTWARE CLASSIFICATION

For purposes of easy classification, project management software products have been divided into three categories based on the type of functions and features they provide.15

Level I software. Designed for single-project planning, these software packages are simple, easy to use, and their outputs are easy to understand. They do provide, however, only a limited analysis of the data. They do not provide automatic rescheduling based on specific changes. Therefore, deviations from the original project plan require complete replanning of the project and a complete new data input to the computer.

Level II software. Designed for single project management, these software packages aid project leaders in the planning, tracking, and reporting of projects. They provide a com- prehensive analysis of the project, progress reports, and plan revisions, based on actual per- formance. This type of software is designed for managing projects beyond the planning stage, and for providing semiautomatic project control.

Level III software. These packages feature multiproject planning, monitoring, and control by utilizing a common database and sophisticated cross-project monitoring and reporting software.

Most software packages at levels II and III have the following extensive capabilities for project monitoring and control:

1. System capacity. The number of activities and/or number of subnetworks that may be used.

2. Network schemes. The network schemes are activity diagram (AD) and/or prece- dence relationship (PRE).

3. Calendar dates. An internal calendar is available to schedule the project’s activi- ties. The variations and options of the different calendar algorithms are numerous.

4. Gantt or bar charts. A graphic display of the output on a time scale is available if desired.

5. Flexible report generator. The user can specify within defined guidelines the for- mat of the output.

6. Updating. The program will accept revised time estimates and completion dates and recompute the revised schedule.

7. Cost control. The program accepts budgeted cost figures for each activity and then the actual cost incurred, and summarizes the budgeted and actual figures on each updating run. The primary objective is to help management produce a realistic cost plan before the project is started and to assist in the control of the project expen- ditures as the work progresses.

8. Scheduled dates. A date is specified for the completion of any of the activities for purposes of planning and control. The calculations are performed with these dates as constraints.

9. Sorting. The program lists the activities in a sequence specified by the user.

636 NETWORK SCHEDULING TECHNIQUES

15. Some standards were initially set by PC Magazine, “Project Management with the PC,” Vol. 3, No. 24, December 11, 1984.

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10. Resource allocation. The program attempts to allocate resources optimally using one of many heuristic algorithms.

11. Plotter availability. A plotter is available to plot the network diagram. 12. Machine requirements. This is the minimum hardware memory requirement for

the program (in units of bytes). 13. Cost. Indicates whether the program is sold and/or leased and the purchase price

and/or lease price (where available).

12.19 IMPLEMENTATION PROBLEMS

Generally speaking, mainframe software packages are more difficult to implement than smaller packages, because everyone is requested to use the same package, perhaps even the same way. The following are common difficulties during implementation:

● Upper-level management may not like the reality of the output. The output usually shows top management that more time and resources are needed than originally anticipated. This can also be a positive note for the project manager, who is forced to deal with severe resource constraints.

● Upper-level management may not use the packages for planning, budgeting, and decision-making. Upper-level personnel generally prefer the more traditional methods, or simply refuse to look at reality because of politics. As a result, the plans they submit to the board are based on an eye-pleasing approach for quick acceptance, rather than reality.

● Day-to-day project planners may not use the packages for their own projects. Project managers often rely on other planning methods and tools from previous assign- ments. They rely heavily on instinct and trial and error.

● Upper-level management may not demonstrate support and commitment to train- ing. Ongoing customized training is mandatory for successful implementation, even though each project may vary.

● Use of mainframe software requires strong internal communications lines for support. Managers who share resources must talk to one another continually.

● Clear, concise reports are lacking. Large mainframe packages can generate vol- umes of data, even if the package has a report writer package.

● Mainframe packages do not always provide for immediate turnabout of informa- tion. This is often the result of not understanding how to utilize the new systems.

● The business entity may not have any project management standards in place prior to implementation. This relates to a lack of WBS numbering schemes, no life-cycle phases, and a poor understanding of task dependencies.

● Implementation may highlight middle management’s inexperience in project plan- ning and organizational skills. Fear of its use is a key factor in not obtaining proper support.

● The business environment and organizational structure may not be appropriate to meet project management/planning needs. If extensive sharing of resources exists, then the organizational structure should be a formal or informal matrix.

Implementation Problems 637

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If the organization is deeply entrenched in a traditional structure, then organiza- tional mismatch exists and the software system may not be accepted.

● Sufficient/extensive resources (staff, equipment, etc.) are required. Large mainframe packages consume a significant amount of resources in the implementation phase.

● The business entity must determine the extent of, and appropriate use of, the sys- tems within the organization. Should it be used by all organizations? Should it be used only on high-priority projects?

● The system may be viewed as a substitute for the extensive interpersonal skills required by the project manager. Software systems do not replace the need for project managers with strong communications and negotiation skills.

● Software implementation is less likely to succeed if the organization does not have sufficient training in project management principles. This barrier is perhaps the underlying problem for all of the other barriers.

12.20 CRITICAL CHAIN16

The selection and completion of enough projects to improve an organization is often a matter of survival for executives. Witness the statistic by out- placement firm Drake, Beam, Morin stating that 57 percent of the 367 large corporations surveyed have replaced their CEOs in the past three years.17

Executives use projects as a primary means to meet their goals. Therefore, we can assume that many of these CEOs were unable to complete enough projects successfully in the measure- ment time period to keep their jobs.

In trying to meet their goals, executives often describe three major challenges in project management:

● Choosing the right projects from among a large pool ● Getting each project to completion more quickly ● Funneling more projects through the organization without adding resources

Critical Chain is a project management methodology designed to address the latter two goals. Critical Chain is based upon a general improvement methodology called the Theory of Constraints, which addresses the first executive goal—choosing the right pro- jects. Choosing the right projects is part of strategic planning, which is discussed in depth in other books.18

As executives attempt to release new projects into the organization, they often hear complaints that people are overloaded. Inevitably, they face a conflict between moving

638 NETWORK SCHEDULING TECHNIQUES

PMBOK® Guide, 5th Edition 6.6.2.3 Schedule Development—

Critical Chain Method

16. Section author Gerald I. Kendall, PMP, Principal, TOC International, www.tocinternational.com, email [email protected], 850-939-9006.

17. USA Today, April 8, 2002, p. B1, “Scandals, Setbacks Topple CEOs Formerly Golden Image”.

18. See Gerald I. Kendall, Viable Vision (Boca Raton, FL: J. Ross Publishing, 2004).

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resources to the new project and allowing resources to continue working on existing projects. People in the organization may also urge the executive to delay the start of the new project while the executive feels compelled to move ahead.

Most executives accept this conflict as a fact of life. They believe that their role is to push people as hard as they can to perform to high standards. As a result, the reaction of many executives to the resource conflict is to demand that existing projects be finished ear- lier so that their new projects can begin sooner. These demands leave project managers with their own huge conflict. In order to finish a project sooner, most project managers find that they are forced to either reduce scope or quality or add resources, which will exceed the budget. None of these alternatives is acceptable to executives.

The resulting behavior, which is now prevalent in many organizations, is the fodder for a new approach called Critical Chain Project Management. When project and resource managers fail to convince executives to delay the start of a new project, they often take three actions that lead to many other negative effects:

● Multitasking of resources ● Working toward cutting task estimates ● Managing people very closely to ensure that they meet their due dates

Since executives are a major part of the system of projects inside organizations, Critical Chain recognizes that executives are part of the problem. To solve the problem and have a major impact on project results, executives must therefore be part of the solution.

The Critical Chain solution to scheduling and managing projects was derived from a methodology called the Theory of Constraints. Dr. Eliyahu M. Goldratt is the individual most often credited with the creation and advancement of this methodology over the past twenty-five years. To derive the Critical Chain solution, Goldratt applied the five focusing steps, identified in his writings.19 These steps are:

1. Identify the system’s constraint. 2. Decide how to exploit the constraint. 3. Subordinate everything else to the above decision. 4. Elevate the system’s constraint. 5. If, in a previous step, the system’s constraint has been broken, go back to step 1.

Within any project, the Critical Chain is defined as the longest chain of dependent events where the dependency is either task or resource related. This definition assumes that the longest chain is the one that is most likely to impact negatively the overall duration of the project. The Critical Chain is not necessarily equivalent to the project duration since, sometimes, there are noncritical tasks that begin before the Critical Chain tasks begin.

The Critical Chain solution recognizes the Critical Chain as the leverage point for reduc- ing the project’s duration. The first focusing step, identify, recognizes that managers put prac- tices into place that block the reduction of the Critical Chain. The exploit and subordinate

Critical Chain 639

19. Eliyahu M. Goldratt, Theory of Constraints (Croton-on-Hudson, NY: North River Press, 1990).

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640 NETWORK SCHEDULING TECHNIQUES

steps implement changes to condense the Critical Chain (in other words, to shorten the amount of time it takes to complete a project).

Critical Chain implements major behavioral changes in project managers, resource managers, team members, and executives. The only way that so many people in an orga- nization can accept such fundamental changes is through a deep understanding of the cur- rent behaviors, the new behaviors required, and the benefits. This is usually accomplished through education of executives, project managers, resource managers, and team members, followed by policy and measurement changes. These changes include:

● An end to the practice of measuring people in any way on the accuracy of their estimates

● An end to the practice of measuring people on meeting due dates for individual project tasks

● A replacement of the above two practices by “the relay runner work ethic,” explained later in this chapter

● A system, agreed to by all executives and senior managers, of allowing new pro- jects to start only when a “strategic resource” is available

● The recognition of the need to strategically protect projects from task time varia- tions, by using properly placed buffers. This imbeds the philosophy of W. Edwards Deming, the great quality advocate, regarding the handling of “common cause” and “special cause” variation and predictability.

● The significant reduction of the practice of multitasking by moving toward dedi- cated work on project tasks

● The implementation of multiproject software with the data actually being used by executives, resource managers, and project managers. Critical Chain reports pre- sent a common and accurate picture of the organization’s projects and a system- atic and logical way to manage variances.

● The implementation of buffer management as a key management and executive process for identifying project problems during execution

The successful implementation of Critical Chain has resulted in major improvements in organizations, examples of which are documented in the case studies in this Chaper. In order to understand the magnitude of the cultural change and the problems to be overcome, this Section explains the fundamentals of the Critical Chain approach, in both individual project environments and throughout an organization.

12.21 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses:

● Time management ● Planning ● Controlling

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Studying Tips for the PMI® Project Management Certification Exam 641

Understanding the following principles is beneficial if the reader is using this text to study for the PMP® Certification Exam:

● How to identify the three types of scheduling techniques and their respective advantages and disadvantages

● Difference between activity-on-arrow and activity-on-node networks ● Four types of precedence networks ● Basic network terminology such as activities, events, critical path, and slack (float) ● Difference between positive and negative slack ● Schedule compression techniques and crashing and fast-tracking (concurrent

engineering)

● Importance of the work breakdown structure in network development ● The steps, and their order, for the development of a network ● Three types of dependencies ● How to perform a forward and backward pass ● Resources leveling ● Resource-limited planning ● Difference between effort and duration ● Which network technique uses optimistic, most likely, and pessimistic estimates ● Use of dummy activities ● Lag ● Difference between unlimited versus limited resource planning/scheduling

The following multiple-choice questions will be helpful in reviewing the principles of this chapter:

1. The shortest time necessary to complete all of the activities in a network is called the: A. Activity duration length B. Critical path C. Maximum slack path D. Compression path

2. Which of the following cannot be identified after performing a forward and backward pass? A. Dummy activities B. Slack time C. Critical path activities D. How much overtime is planned

3. Which of the following is not a commonly used technique for schedule compression? A. Resource reduction B. Reducing scope C. Fast-tracking activities D. Use of overtime

4. A network-based schedule has four paths, namely 7, 8, 9, and 10 weeks. If the 10-week path is compressed to 8 weeks, then: A. We now have two critical paths. B. The 9-week path is now the critical path.

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642 NETWORK SCHEDULING TECHNIQUES

C. Only the 7-week path has slack. D. Not enough information is provided to make a determination.

5. The major disadvantage of using bar charts to manage a project is that bar charts: A. Do not show dependencies between activities B. Are ineffective for projects under one year in length C. Are ineffective for projects under $1 million in size D. Do not identify start and end dates of a schedule

6. The first step in the development of a schedule is a: A. Listing of the activities B. Determination of dependencies C. Calculation of effort D. Calculation of durations

7. Reducing the peaks and valleys in manpower assignments in order to obtain a relatively smooth manpower curve is called: A. Manpower allocation B. Manpower leveling C. Resource allocation D. Resource commitment planning

8. Activities with no time duration are called: A. Reserve activities B. Dummy activities C. Zero slack activities D. Supervision activities

9. Optimistic, pessimistic, and most likely activity times are associated with: A. PERT B. GERT C. PDM D. ADM

10. The most common “constraint” or relationship in a precedence network is: A. Start-to-start B. Start-to-finish C. Finish-to-start D. Finish-to-finish

11. A network-based technique that allows for branching and looping is: A. PERT B. GERT C. PDM D. ADM

12. If an activity on the critical path takes longer than anticipated, then: A. Activities not on the critical path have additional slack. B. Activities not on the critical path have less slack. C. Additional critical path activities will appear. D. None of the above.

13. Which of the following is not one of the three types of dependencies? A. Mandatory B. Discretionary

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Problems 643

C. Internal D. External

14. You have an activity where the early start is week 6, the early finish is week 10, the latest start is week 14, and the latest finish is week 18. The slack in this activity is: A. 4 weeks B. 6 weeks C. 8 weeks D. 18 weeks

ANSWERS

1. B

2. D

3. A

4. D

5. A

6. A

7. B

8. B

9. A

10. C

11. B

12. A

13. C

14. C

PROBLEMS

12–1 Should a PERT/CPM network become a means of understanding reports and schedules, or should it be vice versa?

12–2 Before PERT diagrams are prepared, should the person performing the work have a clear definition of the requirements and objectives, both prime and supporting? Is it an absolute necessity?

12–3 Who prepares the PERT diagrams? Who is responsible for their integration?

12–4 Should PERT networks follow the work breakdown structure?

12–5 How can a PERT network be used to increase functional ability to relate to the total program?

12–6 What problems are associated with applying PERT to small programs?

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644 NETWORK SCHEDULING TECHNIQUES

12–7 Should PERT network design be dependent on the number of elements in the work breakdown structure?

12–8 Can bar charts and PERT diagrams be used to smooth out departmental manpower requirements?

12–9 Should key milestones be established at points where trade-offs are most likely to occur?

12–10 Would you agree or disagree that the cost of accelerating a project rises exponentially, especially as the project nears completion?

12–11 What are the major difficulties with PERT, and how can they be overcome?

12–12 Is PERT/cost designed to identify critical schedule slippages and cost overruns early enough that corrective action can be taken?

12–13 Draw the network and identify the critical path. Also calculate the earliest–latest start- ing and finishing times for each activity:

Activity Preceding Activity Time (Weeks)

A — 7 B — 8 C — 6 D A 6 E B 6 F B 8 G C 4 H D, E 7 I F, G, H 3

Activity Preceding Activity Time (Weeks)

A — 4 B — 6 C A, B 7 D B 8 E B 5 F C 5 G D 7 H D, E 8 I F, G, H 4

12–14 Draw the network and identify the critical path. Also calculate the earliest–latest start- ing and finishing times for each activity:

12–15 Consider the following network for a small maintenance project (all times are in days; network proceeds from node 1 to node 7):

a. Draw an arrow diagram representing the project. b. What is the critical path and associated time?

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Network

Job Activity Initial Node Final Node Estimated Time

A 1 2 2 B 1 3 3 C 1 4 3 D 2 5 3 E 2 9 3 F 3 5 1 G 3 6 2 H 3 7 3 I 4 7 5 J 4 8 3 K 5 6 3 L 6 9 4 M 7 9 4 N 8 9 3 O 9 10 2

Network

Job Initial Final Optimistic Pessimistic Most Activity Node Node Time Time Likely

A 1 2 1 3 2 B 1 4 4 6 5 C 1 3 4 6 5 D 2 6 2 4 3 E 2 4 1 3 2 F 3 4 2 4 3 G 3 5 7 15 9 H 4 6 4 6 5 I 4 7 6 14 10 J 4 5 1 3 2 K 5 7 2 4 3 L 6 7 6 14 10

c. What is the total slack time in the network? d. What is the expected time for 68, 95, and 99 percent completion limits? e. If activity G had an estimated time of fifteen days, what impact would this have on

your answer to part b?

12–16 Identify the critical path for the following network for a small MIS project (all times are in days; network proceeds from node 1 to node 10):

12–17 On May 1, Arnie Watson sent a memo to his boss, the director of project management, stating that the MX project would require thirteen weeks for completion according to the fig- ure shown at the top of page 542.

Problems 645

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646 NETWORK SCHEDULING TECHNIQUES

Arnie realized that the customer wanted the job completed in less time. After discussions with the functional managers, Arnie developed the table shown below:

START A.3 C.5

B.5

D.4

E.2 F.3 END

(Time 5 weeks)

6,000

12,000

16,000

8,000

6,000

14,000

$62,000

8,000

13,500

22,000

10,000

7,500

20,000

2,000

1,500

3,000

1,000

1,500

3,000

Activity Time

Normal Crash

Cost Time Cost Additional (Crash) Cost/Week

A C

E F 1 1

3 3

(Time 5 weeks)

a. According to the contract, there is a penalty payment of $5,000 per week for every week over six. What is the minimum amount of additional funding that Arnie should request?

b. Suppose your answer to part a gives you the same additional minimum cost for both an eight-week and a nine-week project. What factors would you consider before deciding whether to do it in eight or nine weeks?

12–18 On March 1, the project manager received three status reports indicating resource utiliza- tion to date. Shown below are the three reports as well as the PERT diagram.

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a. As of the end of week 4, how much time is required to complete the project (i.e., time to complete)?

b. At the end of week 4, are you over/under budget, and by how much, for the work (either partial or full) that has been completed to date? (This is not a cost to complete.)

c. At what point in time should the decision be made to crash activities? d. Either construct a single table by which cost and performance data are more easily

seen, or modify the above tables accordingly.

Problems 647

PERCENT-COMPLETION REPORT

Time to Activity Date Started % Completed Complete

AB 2/1 100% — AC 2/1 60% 2 AD 2/1 100% — DE* not started — 3 BF 2/14 40% 3

*Note: Because of priorities, resources for activity DE will not be available until 3/14. Management estimates that this activity can be crashed from 3 weeks to 2 weeks at an additional cost of $3,000

PROJECT PLANNING BUDGET: WEEKS AFTER GO-AHEAD

Activity 1 2 3 4 5 6 7 8 Total $

AB 2,000 2,000 2,000 — — — — — 6,000 AC 3,000 4,000 4,000 4,000 5,000 — — — 20,000 AD 2,000 3,000 2,500 — — — — — 7,500 BF — — — 2,000 3,000 4,000 3,000 3,000 15,000 CE — — — — — 2,500 — — 2,500 DE — — — 3,500 3,500 3,500 — — 10,500 EF — — — — — — 3,000 — 3,000

Total 7,000 9,000 8,500 9,500 11,500 10,000 6,000 3,000 64,500

COST SUMMARY

Week Ending Cumulative to Date

Budget (Over) Budget (Over) Activity Cost Actual Under Cost Actual Under

AB — — — 6,000 6,200 (200) AC 4,000 4,500 (500) 15,000 12,500 2,500 AD — 2,400 (2,400) 7,500 7,400 100 BF 2,000 2,800 (800) 2,000 4,500 (2,500) DE 3,500 — 3,500 3,500 — 3,500

Total 9,500 9,700 (200) 34,000 30,600 3,400

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To solve this problem, you must make an assumption about the relationship between percent complete and time/cost. In the project planning budget table, assume that percent complete is linear with time and nonlinear with cost (i.e., cost must be read from table).

12–19 Can PERT charts have more depth than the WBS?

12–20 Estimating activity time is not an easy task, especially if assumptions must be made. State whether each item identified below can be accounted for in the construction of a PERT/CPM network:

a. Consideration of weather conditions b. Consideration of weekend activities c. Unleveled manpower requirements d. Checking of resource allocations e. Variable crew size f. Splitting (or interrupting) of activities g. Assignment of unused resources h. Accounting for project priorities

12–21 Scheduling departmental manpower for a project is a very difficult task, even if slack time is available. Many managers would prefer to supply manpower at a constant rate rather than continually shuffle people in and out of a project.

a. Using the information shown below, construct the PERT network, identify the critical path, and determine the slack time for each node.

Personnel Required Activity Weeks (Full-time)

A–B 5 3 A–C 3 3 B–D 2 4 B–E 3 5 C–E 3 5 D–F 3 5 E–F 6 3

b. The network you have just created is a departmental PERT chart. Construct a weekly manpower plot assuming that all activities begin as early as possible. (Note: Overtime cannot be used to shorten the activity time.)

c. The department manager wishes to assign eight people full-time for the duration of the project. However, if an employee is no longer needed on the project, he can be assigned elsewhere. Using the base of eight people, identify the standby (or idle) time and the overtime periods.

d. Determine the standby and overtime costs, assuming that each employee is paid $300 per week and overtime is paid at time and a half. During standby time the employee draws his full salary.

e. Repeat parts c and d and try to consider slack time in order to smooth out the man- power curve. (Hint: Some activities should begin as early as possible, while others begin as late as possible.) Identify the optimum manpower level so as to minimize the standby and overtime costs. Assume all employees must work full-time.

648 NETWORK SCHEDULING TECHNIQUES

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f. Would your answer to parts d and e change if the employees must remain for the full duration of the project, even if they are no longer required?

12–22 How does a manager decide whether the work breakdown structure should be based on a “tree” diagram or the PERT diagram?

12–23 Using Table 12–4, draw the CPM chart for the project. In this case, make all identifi- cations on the arrows (activities) rather than the events. Show that the critical path is twenty- one weeks.

Using Table 12–5, draw the precedence chart for the project, showing interrelationships. Try to use a different color or shade for the critical path.

Calculate the minimum cash flow needed for the first four weeks of the project, assuming the following distribution.

Activity Total Cost for Each Activity A–H 16,960 I–P 5,160 Q–V 40,960 W 67,200 X 22,940

Furthermore, assume that all costs are linear with time, and that the activity X cost must be spent in the first two weeks. Prove that the minimum cash flow is $92,000.

Problems 649

TABLE 12–4. DATA FOR PROJECT CPM CHART

Normal Preceding Time

Activity Activity (Weeks)

A — 4 B A 6 C B,U,V,N 3 D C 2 E C 2 F C 7 G C 7 H D,E 4 I — 2 J I,R 1 K J 1 L K 2 M L 1 N M 1 O N 2 P O 1 Q — 4 R Q 1 S — 1 T — 1 U S 2 V T 2 W* — * X — 2

*Stands for total length of project. This is management support.

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650

TABLE 12–5. PROJECT PRECEDENCE CHART*

Weeks

Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

*Draw the appropriate bar charts into the figure, assuming that each activity starts as early as possible (identify slack). Try to show the interrelationships as in a precedence network.

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12–24 For the network shown in Figure P12–24 with all times indicating weeks, answer the following questions:

a. What is the impact on the end date of the project if activity B slips by two weeks? b. What is the impact on the end date of the project if activity E slips by one week? c. What is the impact on the end date of the project if activity D slips by two weeks? d. If the customer offered you a bonus for completing the project in sixteen weeks

or less, which activities would you focus on first as part of compression (“crash- ing”) analyses?

Problems 651

12–25 For the network shown in Figure P12–25 with all times indicating weeks, answer the following questions:

a. What is the impact on the end date of the project if activity F slips by seven weeks?

Figure P12–24

FINISH

START

Figure P12–25

FINISHSTART A

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b. What is the impact on the end date of the project if activity E slips by one week? c. What is the impact on activity H if activity C were to slip by two weeks? d. What is the impact on the end date of the project if activity B slips by two weeks?

12–26 For the network shown in Figure P12–26 with all times indicating weeks, answer the following questions:

a. What is the impact on the end date of the project if activity I slips by three weeks?

b. By how many weeks can activity D slip before the end date gets extended? c. If activity A slips by one week, how will the slack in activity G be impacted? d. If activity H can somehow be compressed from seven weeks to two weeks, per-

haps by adding a significant number of resources, what will be the impact, if any, on the end date of the project?

652 NETWORK SCHEDULING TECHNIQUES

Figure P12–26

FINISHSTART

5 J

12–27 A project manager discovers that his team has neglected to complete the network dia- gram for the project. The network diagram is shown in Figure P12–27. However, the project manager has some information available, specifically that each activity, labeled A–G, has a dif- ferent duration between one and seven weeks. Also, the slack time for each of the activities is known as shown in Figure P12–27 in ascending order.

Duration (weeks): 1, 2, 3, 4, 5, 6, 7

Slack time (weeks): 0, 0, 0, 2, 4, 4, 7

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Using the clues provided below, determine the duration of each activity as well as the early start, early finish, latest start and latest finish times for each activity.

Clues

1. Activity E is on the critical path. 2. The early start (ES) time for activity F is five weeks. 3. The duration of activity B is seven weeks. 4. Activity D has four weeks of slack, but activity F has a greatest amount of slack. 5. The early finish (EF) time for activity G is seventeen weeks. 6. The latest finish (LF) time for activity E is thirteen weeks.

Problems 653

Figure P12–27

B E

C F

A D

G START FINISH

Activity Duration Early Start Early Finish Latest Start Latest Finish A ________ _________ __________ _________ __________

B ________ _________ __________ _________ __________

C ________ _________ __________ _________ __________

D ________ _________ __________ _________ __________

E ________ _________ __________ _________ __________

F ________ _________ __________ _________ __________

G ________ _________ __________ _________ __________

12–28 A project manager discovers that his team has neglected to complete the network diagram for the project. The network diagram is shown in Figure P12–28. However, the project manager

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has some information available, specifically that each activity, labeled A–G, has a different duration between one and seven weeks. Also, the slack time for each of the activities is known as shown below.

Duration (weeks): 1, 2, 3, 4, 5, 6, 7

Slack time (weeks): 0, 0, 0, 1, 1, 3, 7

654 NETWORK SCHEDULING TECHNIQUES

Figure P12–28

B E

C F

A D

G START FINISH

Using the clues provided below, determine the duration of each activity as well as the early start, early finish, latest start, and latest finish times for each activity.

Clues

1. Activity E is the longest duration activity and is on the critical path, which is the unlucky number 13; also, there is only one critical path.

2. The early finish (EF) time for activity F is eleven weeks. 3. The latest start (LS) time for activity D is nine weeks. 4. If activity A slips by one week, it will be on a critical path.

Activity Duration Early Start Early Finish Latest Start Latest Finish A ________ _________ __________ _________ __________

B ________ _________ __________ _________ __________

C ________ _________ __________ _________ __________

D ________ _________ __________ _________ __________

E ________ _________ __________ _________ __________

F ________ _________ __________ _________ __________

G ________ _________ __________ _________ __________

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12–29 A project manager discovers that his team has neglected to complete the network dia- gram for the project. The network diagram is shown in Figure P12–29. However, the project manager has some information available, specifically that each activity, labeled A–G, has a dif- ferent duration between one and seven weeks. Also, the slack time for each of the activities is known as shown below:

Duration (weeks): 1, 2, 3, 4, 5, 6, 7

Slack time (weeks): 0, 0, 0, 3, 6, 8, 8

Problems 655

Figure P12–29

B E

C F

A D

G START FINISH

Activity Duration Early Start Early Finish Latest Start Latest Finish A ________ _________ __________ _________ __________

B ________ _________ __________ _________ __________

C ________ _________ __________ _________ __________

D ________ _________ __________ _________ __________

E ________ _________ __________ _________ __________

F ________ _________ __________ _________ __________

G ________ _________ __________ _________ __________

Using the clues provided below, determine the duration of each activity as well as the early start, early finish, latest start, and latest finish times for each activity.

Clues

1. There exists only one critical path, and it is the largest possible number given the possible durations shown.

2. Activity E has the smallest amount of slack that is greater than zero. 3. The early finish (EF) time for activity A is four weeks, and this does not equal the lat-

est finish (LF) time. (Note: There is no negative slack in the network.) 4. The slack in activity C is eight weeks. 5. The duration of activity F is greater than the duration of activity C by at least two weeks.

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CROSBY MANUFACTURING CORPORATION

“I’ve called this meeting to resolve a major problem with our management cost and control sys- tem (MCCS),” remarked Wilfred Livingston, president. “We’re having one hell of a time trying to meet competition with our antiquated MCCS reporting procedures. Last year we were con- sidered nonresponsive to three large government contracts because we could not adhere to the customer’s financial reporting requirements. The government has recently shown a renewed interest in Crosby Manufacturing Corporation. If we can computerize our project financial reporting procedure, we’ll be in great shape to meet the competition head-on. The customer might even waive the financial reporting requirements if we show our immediate intent to convert.”

Crosby Manufacturing was a $250-million-a-year electronics component manufacturing firm in 2005, at which time Wilfred “Willy” Livingston became president. His first major act was to reorganize the 700 employees into a modified matrix structure. This reorganization was the first step in Livingston’s long-range plan to obtain large government contracts. The matrix provided the customer focal point policy that government agencies prefer. After three years, the matrix seemed to be working. Now they could begin the second phase, an improved MCCS policy.

On October 20, 2007, Livingston called a meeting with department managers from project management, cost accounting, MIS, data processing, and planning.

Livingston: “We have to replace our present computer with a more advanced model so as to update our MCCS reporting procedures. In order for us to grow, we’ll have to develop capabilities for keeping two or even three different sets of books for our customers. Our present computer does not have this capability. We’re talking about a sizable cash outlay, not necessarily to impress our cus- tomers, but to increase our business base and grow. We need weekly, or even daily, cost data so as to better control our projects.”

MIS Manager: “I guess the first step in the design, development, and implementation process would be the feasibility study. I have prepared a list of the major topics which are normally included in a feasibility study of this sort” (see Exhibit 12–1).

656 NETWORK SCHEDULING TECHNIQUES

CASE STUDIES

Exhibit 12–1. Feasibility study

• Objectives of the study • Costs • Benefits • Manual or computer-based solution? • Objectives of the system • Input requirements • Output requirements • Processing requirements • Preliminary system description • Evaluation of bids from vendors • Financial analysis • Conclusions

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Livingston: “What kind of costs are you considering in the feasibility study?”

MIS Manager: “The major cost items include input–output demands; processing; storage capacity; rental, purchase or lease of a system; nonrecurring expenditures; recurring expendi- tures; cost of supplies; facility requirements; and training requirements. We’ll have to get a lot of this information from the EDP department.”

EDP Manager: “You must remember that, for a short period of time, we’ll end up with two computer systems in operation at the same time. This cannot be helped. However, I have pre- pared a typical (abbreviated) schedule of my own (see Exhibit 12–2). You’ll notice from the right-hand column that I’m somewhat optimistic as to how long it should take us.”

Livingston: “Have we prepared a checklist on how to evaluate a vendor?”

EDP Manager: “Besides the ‘benchmark’ test, I have prepared a list of topics that we must include in evaluation of any vendor (see Exhibit 12–3). We should plan to call on or visit other installations that have purchased the same equipment and see the system in action. Unfortunately, we may have to commit real early and begin developing software packages.

Case Studies 657

Exhibit 12–2. Typical schedule (in months)

Normal Time to Crash Time

Activity Complete to Complete

Management go-ahead 0 0 Release of preliminary system specs 6 2 Receipt of bids on specs 2 1 Order hardware and systems software 2 1 Flowcharts completed 2 2 Applications programs completed 3 6 Receipt of hardware and systems software 3 3 Testing and debugging done 2 2 Documentation, if required 2 2

Changeover completed 22 15*

*This assumes that some of the activities can be run in parallel, instead of series.

Exhibit 12–3. Vendor support evaluation factors

• Availability of hardware and software packages • Hardware performance, delivery, and past track record • Vendor proximity and service-and-support record • Emergency backup procedure • Availability of applications programs and their compatibility with our other systems • Capacity for expansion • Documentation • Availability of consultants for systems programming and general training • Who burdens training cost? • Risk of obsolescence • Ease of use

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As a matter of fact, using the principle of concurrency, we should begin developing our soft- ware packages right now.”

Livingston: “Because of the importance of this project, I’m going to violate our normal struc- ture and appoint Tim Emary from our planning group as project leader. He’s not as knowl- edgeable as you people are in regard to computers, but he does know how to lay out a schedule and get the job done. I’m sure your people will give him all the necessary support he needs. Remember, I’ll be behind this project all the way. We’re going to convene again one week from today, at which time I expect to see a detailed schedule with all major milestones, team meet- ings, design review meetings, etc., shown and identified. I’d like the project to be complete in eighteen months, if possible. If there are risks in the schedule, identify them. Any questions?”

THE INVISIBLE SPONSOR1

Some executives prefer to micromanage projects whereas other executives are fearful of making a decision because, if they were to make the wrong

decision, it could impact their career. In this case study, the president of the company assigned one of the vice presidents to act as the project sponsor on a project designed to build tooling for a client. The sponsor, however, was reluctant to make any decisions.

Moreland Company was well-respected as a tooling design-and-build company. Moreland was project-driven because all of its income came

from projects. Moreland was also reasonably mature in project management. When the previous VP for engineering retired, Moreland hired an executive from a manu-

facturing company to replace him. The new VP for engineering, Al Zink, had excellent engi- neering knowledge about tooling but had worked for companies that were not project-driven. Al had very little knowledge about project management and had never functioned as a project sponsor. Because of Al’s lack of experience as a sponsor, the president decided that Al should “get his feet wet” as quickly as possible and assigned him as the project sponsor on a medium- sized project. The project manager on this project was Fred Cutler. Fred was an engineer with more than twenty years of experience in tooling design and manufacturing. Fred reported directly to Al Zink administratively.

Fred understood the situation; he would have to train Al Zink on how to function as a project sponsor. This was a new experience for Fred because

subordinates usually do not train senior personnel on how to do their job. Would Al Zink be receptive?

Fred explained the role of the sponsor and how there are certain project documents that require the signatures of both the project manager and the project sponsor. Everything seemed

658 NETWORK SCHEDULING TECHNIQUES

Background

Assigning the VP

Fred’s Dilemma

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to be going well until Fred informed Al that the project sponsor is the person that the president eventually holds accountable for the success or failure of the project. Fred could tell that Al was quite upset over this statement.

Al realized that the failure of a project where he was the sponsor could damage his repu- tation and career. Al was now uncomfortable about having to act as a sponsor but knew that he might eventually be assigned as a sponsor on other projects. Al also knew that this project was somewhat of a high risk. If Al could function as an invisible sponsor, he could avoid making any critical decisions.

In the first meeting between Fred and Al where Al was the sponsor, Al asked Fred for a copy of the schedule for the project. Fred responded:

I’m working on the schedule right now. I cannot finish the schedule until you tell me

whether you want me to lay out the schedule based upon best time, least cost, or least risk.

Al stated that he would think about it and get back to Fred as soon as possible. During the middle of the next week, Fred and Al met in the company’s cafeteria. Al asked

Fred again, “How is the schedule coming along?” and Fred responded as before:

I cannot finish the schedule until you tell me whether you want me to lay out the schedule

based upon best time, least cost, or least risk.

Al was furious, turned around, and walked away from Fred. Fred was now getting nervous about how upset Al was and began worrying if Al might remove him as the project manager. But Fred decided to hold his ground and get Al to make a decision.

At the weekly sponsor meeting between Fred and Al, once again Al asked the same ques- tion, and once again Fred gave the same response as before. Al now became quite angry and yelled out:

Just give me a least time schedule.

Fred had gotten Al to make his first decision. Fred finalized his schedule and had it on Al’s desk two days later awaiting Al’s signature. Once again, Al procrastinated and refused to sign off on the schedule. Al believed that, if he delayed making the decision, Fred would take the initiative and begin working on the schedule without Al’s signature.

Fred kept sending e-mails to Al asking when he intended to sign off on the schedule or, if something was not correct, what changes needed to be made. As expected, Al did not respond. Fred then decided that he had to pressure Al one way or another into making timely decisions as the project sponsor. Fred then sent an e-mail to Al that stated:

I sent you the project schedule last week. If the schedule is not signed by this Friday, there

could be an impact on the end date of the project. If I do not hear from you, one way or

another, by this Friday, I will assume you approve the schedule and I can begin imple-

mentation.

The president’s e-mail address was also included in the CC location on the e-mail. The next morning, Fred found the schedule on his desk, signed by Al Zink.

Case Studies 659

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QUESTIONS

1. Why do some executives refuse to function as project sponsors? 2. Can an executive be “forced” to function as a sponsor? 3. Is it right for the sponsor to be the ultimate person responsible for the success

or failure of the project? 4. Were Al Zink’s actions that of someone trying to be an invisible sponsor? 5. Did Fred Cutler act appropriately in trying to get Al Zink to act as a sponsor? 6. What is your best guess as to what happened to the working relationship

between Al Zink and Fred Cutler?

660 NETWORK SCHEDULING TECHNIQUES

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Project Graphics

661

4th Edition) Study Guide, 11th Edition) Certification Exam

None • Multiple Choice Exam • Time Management • Communication

Management

13.0 INTRODUCTION

In Chapter 11, we defined the steps involved in establishing a formal pro- gram plan with detailed schedules to manage the total program. Any plan, schedule, drawing, or specification that will be read by more than one per- son must be expressed in a language that is understood by all recipients.

The ideal situation is to construct charts and schedules in suitable notation that can be used for both in-house control and out-of-house cus- tomer status reporting. Unfortunately, this is easier said than done.

Customers and contractors are interested mainly in the three vital control parameters:

● Time ● Cost ● Performance

PMBOK® Guide, 5th Edition Chapter 9 Time Management

Chapter 10 Communications

Management

6.7.2.4 Schedule Comparison

Bar Charts

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All schedules and charts should consider these three parameters and their relationship to corporate resources.

Information to ensure proper project evaluation is usually obtained through four methods:

● Firsthand observation ● Oral and written reports ● Review and technical interchange meetings ● Graphical displays

Firsthand observations are an excellent tool for obtaining unfiltered information, but they may not be possible on large projects. Although oral and written reports are a way of life, they often contain either too much or not enough detail, and significant information may be disguised. Review and technical interchange meetings provide face-to-face communications and can result in immediate agreement on problem defini- tions or solutions, such as changing a schedule. The difficulty is in the selection of attendees from the customer’s and the contractor’s organizations. Good graphical displays make the information easy to iden- tify and are the prime means for tracking cost, schedule, and performance. Proper graphical displays can result in:

● Cutting project costs and reducing the time scale ● Coordinating and expediting planning ● Eliminating idle time ● Obtaining better scheduling and control of subcontractor activities ● Developing better troubleshooting procedures ● Cutting time for routine decisions, but allowing more time for decision-making

13.1 CUSTOMER REPORTING

There are more than thirty visual methods for representing activities. The method chosen should depend on the intended audience. For example, upper-level management may be interested in costs and integration of

activities, with very little detail. Summary-type charts normally suffice for this purpose. Daily practitioners, on the other hand, may require considerable detail. For customers, the presentation should include cost and performance data.

When presenting cost and performance data, figures and graphs should be easily understood and diagrams should quickly convey the intended message or objective. In

many organizations, each department or division may have its own method of showing scheduling activities. Research and development organizations prefer to show the logic of activities rather than the integration of activities that would normally be representative of a manufacturing plant.

The ability to communicate is a prerequisite for successful management of a program. Program review meetings, technical interchange meetings, customer summary meetings, and in-house management control meetings all require different representative forms of cur- rent program performance status. The final form of the schedule may be bar charts, graphs, tables, bubble charts, or logic diagrams. These are described in the sections that follow.

662 PROJECT GRAPHICS

PMBOK® Guide, 5th Edition 10.2.2.5 Performance Reporting

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13.2 BAR (GANTT) CHART

The most common type of display is the bar or Gantt chart, named for Henry Gantt, who first utilized this procedure in the early 1900s. The bar chart is a means of displaying simple activities or events plotted against time or dollars. An activity represents the amount of work required to pro-

ceed from one point in time to another. Events are described as either the starting or end- ing point for either one or several activities.

Bar charts are most commonly used for exhibiting program progress or defining spe- cific work required to accomplish an objective. Bar charts often include such items as list- ings of activities, activity duration, schedule dates, and progress-to-date. Figure 13–1 shows nine activities required to start up a production line for a new product. Each bar in the figure represents a single activity. Figure 13–1 is a typical bar chart that would be developed by the program office at program inception.

Bar charts are advantageous in that they are simple to understand and easy to change. They are the simplest and least complex means of portraying progress (or the lack of it) and can easily be expanded to identify specific elements that may be either behind or ahead of schedule.

Bar charts provide only a vague description of how the entire program or project

reacts as a system, and have three major limitations. First, bar charts do not show the

interdependencies of the activities, and therefore do not represent a “network” of activ-

ities. This relationship between activities is crucial for controlling program costs.

Without this relationship, bar charts have little predictive value. For example, does the

long-lead procurement activity in Figure 13–1 require that the contract be signed before

Bar (Gantt) Chart 663

ACTIVITY

CONTRACT NEGOTIATED

CONTRACT SIGNED

LONG LEAD PROCUREMENT

MANUFACTURING SCHEDULES

BILL OF MATERIALS

SHORT LEAD PROCUREMENT

MATERIAL SPECIFICATIONS

MANUFACTURING PLANS

START-UP

0 2 4 6 8 10 12 14 16 18 20 WEEKS AFTER GO-AHEAD

FIGURE 13–1. Bar chart for single activities.

PMBOK® Guide, 5th Edition 6.7.2.4 Schedule Comparison

Bar Charts

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procurement can begin? Can the manufacturing plans be written without the material

specifications activity being completed? The second major discrepancy is that the bar

chart cannot show the results of either an early or a late start in activities. How will a

slippage of the manufacturing schedules activity in Figure 13–1 affect the completion

date of the program? Can the manufacturing schedules activity begin two weeks later

than shown and still serve as an input to the bill of materials activity? What will be the

result of a crash program to complete activities in sixteen weeks after go-ahead instead

of the originally planned nineteen weeks? Bar charts do not reflect true project status

because elements behind schedule do not mean that the program or project is behind

schedule. The third limitation is that the bar chart does not show the uncertainty involved

in performing the activity and, therefore, does not readily admit itself to sensitivity

analysis. For instance, what is the shortest time that an activity might take? What is the

longest time? What is the average or expected time to activity completion?

Even with these limitations, bar charts do, in fact, serve as useful tools for program

analysis. Some of the limitations of bar charts can be overcome by combining single activ-

ities, as shown in Figure 13–2. The weakness in this method is that the numbers repre-

senting each of the activities do not indicate whether this is the beginning or the end of the

activity. Therefore, the numbers should represent events rather than activities, together

with proper identification. As before, no distinction is made as to whether event 2 must

be completed prior to the start of event 3 or event 4. The chart also fails to define clearly

the relationship between the multiple activities on a single bar. For example, must event 3

be completed prior to event 5? Often, combined activity bar charts can be converted to

milestone bar charts by placing small triangles at strategic locations in the bars to indicate

completion of certain milestones within each activity or grouping of activities, as shown

in Figure 13–3. The exact definition of a milestone differs from company to company, but

usually implies some point where major activity either begins or ends, or cost data become

critical.

664 PROJECT GRAPHICS

ACTIVITY CODE

WEEKS AFTER GO AHEAD 2 4 6 8 10 12 14 16 18 20

1 CONTRACT NEGOTIATED 2 CONTRACT SIGNED 3 LONG LEAD PROCUREMENT 4 MANUFACTURING SCHEDULES 5 BILL OF MATERIALS

6 SHORT LEAD PROCUREMENT 7 MATERIAL SPECIFICATIONS 8 MANUFACTURING PLANS 9 START-UP

1 2

5 6 7

8 9

FIGURE 13–2. Bar chart for combined activities.

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Bar charts can be converted to partial interrelationship charts by indicating (with

arrows) the order in which activities must be performed. Figure 13–4 represents the par-

tial interrelationship of the activities in Figures 13–1 and 13–2. A full interrelationship

schedule is included under the discussion of PERT networks in Chapter 12.

The most common method of presenting data to both in-house management and the

customer is through the use of bar charts. Care must be taken not to make the figures

overly complex so that more than one interpretation can exist. A great deal of information

and color can be included in bar charts. Figure 13–5 shows a grouped bar chart for com-

parison of three projects performed during different years. When using different shading

techniques, each area must be easily definable and no major contrast should exist between

shaded areas, except for possibly the current project. When grouped bars appear on one

chart, nonshaded bars should be avoided. Each bar should have some sort of shading,

whether it be cross-hatched or color-coded.

Bar (Gantt) Chart 665

1 2 3

9 10 11

S H

O R

T L

E A

D P

R O

C U

R E

M E

N T

WEEKS AFTER GO AHEAD

MILESTONES

1 PURCHASE ORDER RELEASE 2 INVOICES RECEIVED 3 MATERIAL RECEIVED

FIGURE 13–3. Bar/milestone chart.

WEEKS AFTER GO AHEAD

1 CONTRACT NEGOTIATED 2 CONTRACT SIGNED 3 LONG LEAD PROCUREMENT 4 MANUFACTURING SCHEDULE 5 BILL OF MATERIALS

6 SHORT LEAD PROCUREMENT 7 MATERIAL SPECIFICATIONS 8 MANUFACTURING PLANS 9 START-UP

1 2

3 5 6 7

4 8 9

2 4 6 8 10 12 14 16 18

FIGURE 13–4. Partial interrelationship chart.

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Contrasting shaded to nonshaded areas is normally used for comparing projected

progress to actual progress, as shown in Figure 13–6. The tracking date line indicates the

time when the cost data/performance data were analyzed. Project 1 is behind schedule,

project 2 is ahead of schedule, and project 3 is on target. Unfortunately, the upper portion

of Figure 13–6 does not indicate the costs attributed to the status of the three projects.

666 PROJECT GRAPHICS

1999

2000

2002

PHASE I

PHASE II

TIME PERFORMANCE TRACKING LINE (DATE)

FIGURE 13–5. Grouped bar chart for performance comparison.

PROJECT 1

PROJECT 2

PROJECT 3

PROJECTED COMPLETED

TIME

PROJECTED

ACTUAL

TOTAL PROGRAM COSTS, $

OVERRUNS

TIME TRACKING DATE LINE

FIGURE 13–6. Cost and performance tracking schedule.

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By plotting the total program costs against the same time axis (as shown in Figure 13–6),

a comparison between cost and performance can be made. From the upper section of

Figure 13–6 it is impossible to tell the current program cost position. From the lower section,

however, it becomes evident that the program is heading for a cost overrun, possibly due

to project 1. It is generally acceptable to have the same shading technique represent dif-

ferent situations, provided that clear separation between the shaded regions appears, as in

Figure 13–6.

Another common means for comparing activities or projects is through the use of step

arrangement bar charts. Figure 13–7 shows a step arrangement bar chart for a cost per-

centage breakdown of the five projects included within a program. Figure 13–7 can also

be used for tracking, by shading certain portions of the steps that identify each project.

This is not normally done, however, since this type of step arrangement tends to indicate

that each step must be completed before the next step can begin.

Bar charts need not be represented horizontally. Figure 13–8 indicates the compar-

ison between the 2000 and 2002 costs for the total program and raw materials. Three-

dimensional vertical bar charts are often beautiful to behold. Figure 13–9 shows a typical

three-dimensional bar chart for direct and indirect labor and material cost breakdowns.

Bar charts can be made colorful and appealing by combining them with other graphic

techniques. Figure 13–10 shows a quantitative-pictorial bar chart for the distribution of

total program costs. Figure 13–11 shows the same cost distribution as in Figure 13–10,

but represented with the commonly used pie technique. Figure 13–12 illustrates how two

quantitative bar charts can be used side by side to create a quick comparison. The right-

hand side shows the labor hour percentages. Figure 13–12 works best if the scale of

each axis is the same; otherwise the comparisons may appear distorted when, in fact, they

are not.

The figures shown in this section do not, by any means, represent the only methods of

presenting data in bar chart format. Several other methods are shown in the sections that

follow.

Bar (Gantt) Chart 667

PROJECT 1

PROJECT 2

PROJECT 3

PROJECT 4

PROJECT 5

0 20 40 60 80 100

TOTAL DISTRIBUTION, % OF COST

20%

28%

12%

16%

24%

FIGURE 13–7. Step arrangement bar chart for total cost as a percentage of the five program projects.

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668 PROJECT GRAPHICS

FIGURE 13–8. Cost comparison, 2000 versus 2002.

FIGURE 13–9. Direct and indirect material and labor cost breakdowns for all programs per year.

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Bar (Gantt) Chart 669

LABOR

MATERIAL

PROFITS

TRANSPORTATION

DEPRECIATION OVERHEAD

10 20 30 40 50

PERCENTAGE OF TOTAL COST

FIGURE 13–10. Total program cost distribution (quantitative-pictorial bar chart).

TRANSPORTATION

LABOR

DEPRECIATION OVERHEAD

PROFITS

MATERIAL

PERCENTAGE OF COST

LABOR

TRANSPORTATION

MATERIAL

DEPRECIATION OVERHEAD

PROFITS

FIGURE 13–11. Distribution of the program dollar.

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13.3 OTHER CONVENTIONAL PRESENTATION TECHNIQUES

Bar charts serve as a useful tool for presenting data at technical meetings. Unfortunately, programs must be won competitively or organized in-house before technical meeting pre- sentations can be made. Competitive proposals or in-house project requests should contain descriptive figures and charts, not necessarily representing activities, but showing either planning, organizing, tracking, or technical procedures designed for the current program or used previously on other programs. Proposals generally contain figures that require either some interpolation or extrapolation. Figure 13–13 shows the breakdown of total pro- gram costs. Although this figure would also normally require interpretation, a monthly cost table accompanies it. If the table is not too extensive, then it can be included with the figure. This is shown in Figure 13–14. During proposal activities, the actual and cumula- tive delivery columns, as well as the dotted line in Figure 13–14, would be omitted, but would be included after updating for use in technical interchange meetings. It is normally a good practice to use previous figures and tables whenever possible because management becomes accustomed to the manner in which data are presented.

Another commonly used technique is schematic models. Organizational charts are schematic models that depict the interrelationships between individuals, organizations, or functions within an organization. One organizational chart normally cannot suffice for describing total program interrelationships. Figure 4–8 identified the Midas Program in relation to other programs within Dalton Corporation. The Midas Program is indicated by the bold lines. The program manager for the Midas Program was placed at the top of the column, even though his program may have the lowest priority. Each major unit of

670 PROJECT GRAPHICS

PERCENTAGE OF LABOR HOURS

MANUFACTURING

FINANCE

ENGINEERING

OVERHEAD

PERSONNEL

PERCENTAGE OF COST

60 40 4020 200 0

FIGURE 13–12. Divisional breakdown of costs and labor hours.

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Other Conventional Presentation Techniques 671

TIME

D O

L L A

R S

TOTAL $

FIGURE 13–13. Total program cost breakdown.

JAN FEB MAR APR MAY JUN JUL

ACTUAL DELIVERY

CONTRACT REQUIREMENTS

TRACKING LINE

DATE ACTUAL

DELIVERY CUMULATIVE

DELIVERY CONTRACT

SCHEDULED

FEB MAR APR MAY JUN

70 110 70

130 130

70 100 250 300 510

100 200 250 300 550

U N

IT S

200

400

600

800

FIGURE 13–14. Delivery schedule tracking (line of balance).

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management for the Midas Program should be placed as close as possible to top-level man- agement to indicate to the customer the “implied” relative importance of the program.

Another type of schematic representation is the work flowchart, synonymous with the application of flowcharting for computer programming. Flowcharts are designed to describe, either symbolically or pictorially, the sequence of events required to complete an activity. Figure 13–15 shows the logic flow for production of molding VZ-3. The symbols shown in Figure 13–15 are universally accepted by several industries.

Pictorial representation, although often a costly procedure, can add color and quality to any proposal, and they are easier to understand than a logic or bubble chart. Because customers may request tours during activities to relate to the pictorial figures, program management should avoid pictorial representation of activities that may be closed off to customer viewing, possibly due to security or safety.

Block diagrams can also be used to describe the flow of activities. Figures 4–8 and 4–9 are examples of block diagrams. Block diagrams can be used to show how informa- tion is distributed throughout an organization or how a process or activity is assembled. Figure 13–16 shows the testing matrix for propellant samples. Figures similar to this are

672 PROJECT GRAPHICS

PREHEAT OVEN

INSERT MOLD

REMOVE FROM OVEN

INSPECT MOLD

COOL DOWN STORAGE

REMOVE TEST PIECE

MOLD TEST PIECE

X-RAY

BLDG. K-36

PACKAGE FOR SHIPMENT

STORAGE FOR PICK-UP

BLDG. K-33

Q.A. ACCEPTANCE

OPERATION

SHIPMENT

INSPECTION

STORAGE

FIGURE 13–15. Logic flow for production of molding VZ-3.

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developed when tours are scheduled during the production or testing phase of a program. Figure 13–16 shows the customer not only where the testing will take place, but what tests will be conducted.

Block diagrams, schematics, pictorials, and logic flows all fulfill a necessary need for describing the wide variety of activities within a company. The figures and charts are more than descriptive techniques. They can also provide management with the necessary tools for decision-making.

13.4 LOGIC DIAGRAMS/NETWORKS

Probably the most difficult figure to construct is the logic diagram. Logic diagrams are developed to illustrate the inductive and deductive reasoning necessary to achieve some objective within a given time frame. The major difficulty in developing logic diagrams is the inability to answer such key questions as: What happens if something goes wrong? Can I quantify any part of the diagram’s major elements?

Logic diagrams are constructed similarly to bar charts on the supposition that nothing will go wrong and are usually accompanied by detailed questions, possibly in a checklist

Logic Diagrams/Networks 673

1 STRAND TEST MATRIX

ACTIVITY

50 STRANDS

QA TESTS

BRICK SAMPLES

DRUM SAMPLES

HUMIDITY SAMPLES

TEST CONDITIONS

10 20 30

100 80 70

2000 1000 500

NO. OF SAMPLES PRESSURE, PSI TEMP, 8K

LAB 6 TEST STRANDS

LAB 7 INGREDIENT

TESTING

LAB 6 PRESS PIECES

LAB 13 TEST SAMPLES

LAB 11 CUT SAMPLES

LAB 7 INGREDIENT

TESTING

FIGURE 13–16. Propellant samples testing matrix.

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format, that require answering. The following questions would be representative of those asked for an R&D project:

● What documentation is released to start the described activity and possibly the ele- ments within each activity?

● What information is required before this documentation can be released? (What prior activities must be completed, work designed, studies finalized, etc?)

● What are the completion, or success, criteria for the activity? ● What are the alternatives for each phase of the program if success is not achieved? ● What other activities are directly dependent on the result of this activity?

● What other activities or inputs are required to perform this activity? ● What are the key decision points, if any, during the activity? ● What documentation signifies completion of the activity (i.e., report, drawing,

etc.)? ● What management approval is required for final documentation?

These types of questions are applicable to many other forms of data presentation, not only logic diagrams.

13.5 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses:

● Time Management ● Communication Management ● Executing ● Controlling

Understanding the following principles is beneficial if the reader is using this text to study for the PMP® Certification Exam:

● How to identify the different ways that information can be displayed for reporting purposes

● Different types of graphical reporting techniques and their advantages and disadvantages

The following multiple-choice questions will be helpful in reviewing the principles of this chapter:

1. Which of the following is a valid way of obtaining proper project performance information? A. First-hand observations B. Oral and written reports

674 PROJECT GRAPHICS

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C. Review and technical interchange meetings D. All of the above

2. Proper graphical display of information can result in: A. Reducing paperwork costs B. Reducing reporting costs C. Reducing time for routine decisions D. All of the above

ANSWERS

1. D

2. D

PROBLEMS

13–1 For each type of schedule defined in this chapter answer the following questions:

a. Who prepares the schedule? b. Who updates the schedule? c. Who should present the data to the customers?

13–2 Should the customers have the right to dictate to the contractor how the schedule should be prepared and presented? What if this request contradicts company policies and procedures?

13–3 Should a different set of schedules and charts be maintained for out-of-house as well as in-house reporting? Should separate schedules be made for each level of management? Is there a more effective way to ease these types of problems?

Problems 675

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Pricing and Estimating

677

4th Edition) Study Guide, 11th Edition) Certification Exam

• Capital Industries • The Automobile Problem • Integration • Polyproducts Incorporated • Life-Cycle Costing Management • Small Project Cost • Multiple Choice Exam • Scope

Estimating at Percy Management Company • Cost Management

• Cory Electric • Camden Construction

Corporation • Payton Corporation • The Estimating Problem*

14.0 INTRODUCTION

With the complexities involved, it is not surprising that many business managers consider pricing an art. Having information on customer cost budgets and competitive pricing would certainly help.

PMBOK® Guide, 5th Edition 6.4.2.4 Bottom-Up Estimating

6.5.2 Activity Duration Estimating

* Case Study also appears at end of chapter.

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However, the reality is that whatever information is available to one bidder is generally available to the others.

A disciplined approach helps in developing all the input for a rational pricing recommendation. A side benefit of using a disciplined management process is that it leads to the documentation of the many factors and assumptions involved at a later time. These can be compared and analyzed, contributing to the learn- ing experiences that make up the managerial skills needed for effective business decisions.

Estimates are not blind luck. They are well-thought-out decisions based on either the best available information, some type of cost estimating relationship, or some type of cost model. Cost estimating rela- tionships (CERs) are generally the output of cost models. Typical CERs might be:

● Mathematical equations based on regression analysis ● Cost–quantity relationships such as learning curves ● Cost–cost relationships ● Cost–noncost relationships based on physical characteristics, technical parameters, or performance

characteristics

14.1 GLOBAL PRICING STRATEGIES

Specific pricing strategies must be developed for each individual situation. Frequently, however, one of two situations prevails when one is pursuing project acquisitions compet- itively. First, the new business opportunity may be a one-of-a-kind program with little or no follow-on potential, a situation classified as type I acquisition. Second, the new busi- ness opportunity may be an entry point to a larger follow-on or repeat business, or may represent a planned penetration into a new market. This acquisition is classified as type II.

Clearly, in each case, we have specific but different business objectives. The objective for type I acquisition is to win the program and execute it profitably and satisfactorily according to contractual agreements. The type II objective is often to win the program and perform well, thereby gaining a foothold in a new market segment or a new customer com- munity in place of making a profit. Accordingly, each acquisition type has its own, unique pricing strategy, as summarized in Table 14–1.

Comparing the two pricing strategies for the two global situations (as shown in Table 14–1) reveals a great deal of similarity for the first five points. The fundamental difference is that for a profitable new business acquisition the bid price is determined according to actual cost, whereas in a “must-win” situation the price is determined by the market forces. It should be emphasized that one of the most crucial inputs in the pricing decision is the cost estimate of the proposed baseline. The design of this baseline to the minimum requirements should be started early, in accordance with well-defined ground rules, cost models, and established cost targets. Too often the baseline design is performed in paral- lel with the proposal development. At the proposal stage it is too late to review and fine- tune the baseline for minimum cost. Also, such a late start does not allow much of an option for a final bid decision. Even if the price appears outside the competitive range, it makes little sense to terminate the proposal development. As all the resources have been sent anyway, one might just as well submit a bid in spite of the remote chance of winning.

Clearly, effective pricing begins a long time before proposal development. It starts with preliminary customer requirements, well-understood subtasks, and a top-down estimate

678 PRICING AND ESTIMATING

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with should-cost targets. This allows the functional organization to design a baseline to meet the customer requirements and cost targets, and gives management the time to review and redirect the design before the proposal is submitted. Furthermore, it gives management an early opportunity to assess the chances of winning during the acquisition cycle, at a point when additional resources can be allocated or the acquisition effort can be terminated before too many resources are committed to a hopeless effort.

The final pricing review session should be an integration and review of information already well known in its basic context. The process and management tools outlined here should help to provide the framework and discipline for deriving pricing decisions in an orderly and effective way.

14.2 TYPES OF ESTIMATES

Any company or corporation that wants to remain profitable must contin- uously improve its estimating and pricing methodologies. While it is true that some companies have been successful without good cost estimating and pricing, very few remain successful without them.

Types of Estimates 679

TABLE 14–1. TWO GLOBAL PRICING STRATEGIES

Type II Acquisition: Type I Acquisition: New Program with Potential for Large One-of-a-Kind Program with Little or No Follow-On Business or Representing a Follow-On Business Desired Penetration into New Markets

1. Develop cost model and estimating guidelines; 1. Design proposed project/program baseline design proposed project/program baseline for compliant with customer requirements, with minimum cost, to minimum customer requirements. innovative features but minimum risks.

2. Estimate cost realistically for minimum 2. Estimate cost realistically. requirements. 3. Scrub baseline. Squeeze out unnecessary costs.

3. Scrub the baseline. Squeeze out unnecessary 4. Determine realistic minimum cost. Obtain costs. commitment from performing organizations.

4. Determine realistic minimum cost. Obtain 5. Determine “should-cost” including risk commitment from performing organizations. adjustments.

5. Adjust cost estimate for risks. 6. Compare your final cost estimate to customer 6. Add desired margins. Determine the price. budget and the “most likely” winning price. 7. Compare price to customer budget and 7. Determine the gross profit margin necessary for

competitive cost information. your winning proposal. This margin could be 8. Bid only if price is within competitive range. negative!

8. Decide whether the gross margin is acceptable according to the must-win desire.

9. Depending on the strength of your desire to win, bid the “most likely” winning price or lower.

10. If the bid price is below cost, it is often necessary to provide a detailed explanation to the customer of where the additional funding is coming from. The source could be company profits or sharing of related activities. In any case, a clear resource picture should be given to the customer to ensure cost credibility.

PMBOK® Guide, 5th Edition 6.5.2 Activity Duration Estimating

7.2.2 Cost Estimating Tools and

Techniques

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Good estimating requires that information be collected prior to the initiation of the estimating process. Typical information includes:

● Recent experience in similar work ● Professional and reference material ● Market and industry surveys ● Knowledge of the operations and processes ● Estimating software and databases if available ● Interviews with subject matter experts

Projects can range from a feasibility study, through modification of existing facilities, to com- plete design, procurement, and construction of a large complex. Whatever the project may be, whether large or small, the estimate and type of information desired may differ radically.

The first type of estimate is an order-of-magnitude analysis, which is made without any detailed engineering data. The order-of-magnitude analysis may have an accuracy of 635 percent within the scope of the project. This type of estimate may use past experience (not necessarily similar), scale factors, parametric curves, or capacity estimates (i.e., $/# of product or $/kW electricity).

Order-of-magnitude estimates are top-down estimates usually applied to level 1 of the WBS, and in some industries, use of parametric estimates are included. A parametric esti- mate is based upon statistical data. For example, assume that you live in a Chicago suburb and wish to build the home of your dreams. You contact a construction contractor who informs you that the parametric or statistical cost for a home in this suburb is $120 per square foot. In Los Angeles, the cost may be $4150 per square foot.

Next, there is the approximate estimate (or top-down estimate), which is also made without detailed engineering data, and may be accurate to 615 percent. This type of esti- mate is prorated from previous projects that are similar in scope and capacity, and may be titled as estimating by analogy, parametric curves, rule of thumb, and indexed cost of sim- ilar activities adjusted for capacity and technology. In such a case, the estimator may say that this activity is 50 percent more difficult than a previous (i.e., reference) activity and requires 50 percent more time, man-hours, dollars, materials, and so on.

The definitive estimate, or grassroots buildup estimate, is prepared from well-defined engineering data including (as a minimum) vendor quotes, fairly complete plans, specifi- cations, unit prices, and estimate to complete. The definitive estimate, also referred to as detailed estimating, has an accuracy of 65 percent.

Another method for estimating is the use of learning curves. Learning curves are graphical representations of repetitive functions in which continuous operations will lead to a reduction in time, resources, and money. The theory behind learning curves is usually applied to manufacturing operations.

Each company may have a unique approach to estimating. However, for normal project management practices, Table 14–2 would suffice as a starting point.

Many companies try to standardize their estimating procedures by developing an esti- mating manual. The estimating manual is then used to price out the effort, perhaps as much as 90 percent. Estimating manuals usually give better estimates than industrial engineer- ing standards because they include groups of tasks and take into consideration such items as downtime, cleanup time, lunch, and breaks. Table 14–3 shows the table of contents for a construction estimating manual.

680 PRICING AND ESTIMATING

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Types of Estimates 681

TABLE 14–2. STANDARD PROJECT ESTIMATING

Estimating Method Generic Type WBS Relationship Accuracy Time to Prepare

Parametric ROM* Top down 225% to 175% Days Analogy Budget Top down 210% to 125% Weeks Engineering Definitive Bottom up 25% to 110% Months

(grass roots)

*ROM 5 Rough order of magnitude.

TABLE 14–3. ESTIMATING MANUAL TABLE OF CONTENTS

Introduction Purpose and types of estimates

Major Estimating Tools Cataloged equipment costs Automated investment data system Automated estimate system Computerized methods and procedures

Classes of Estimates Definitive estimate Capital cost estimate Appropriation estimate Feasibility estimate Order of magnitude Charts—estimate specifications quantity and pricing guidelines

Data Required Chart—comparing data required for preparation of classes of estimates

Presentation Specifications Estimate procedure—general Estimate procedure for definitive estimate Estimate procedure for capital cost estimate Estimate procedure for appropriation estimate Estimate procedure for feasibility estimate

TABLE 14–4. CLASSES OF ESTIMATES

Class Types Accuracy

I Definitive 65% II Capital cost 610–15% III Appropriation (with some capital cost) 615–20% IV Appropriation 620–25% V Feasibility 625–35% VI Order of magnitude . 635%

Estimating manuals, as the name implies, provide estimates. The question, of course, is “How good are the estimates?” Most estimating manuals provide accuracy limitations by defining the type of estimates (shown in Table 14–3). Using Table 14–3, we can create Tables 14–4, 14–5, and 14–6, which illustrate the use of the estimating manual.

Not all companies can use estimating manuals. Estimating manuals work best for repetitive tasks or similar tasks that can use a previous estimate adjusted by a degree-of- difficulty factor. Activities such as R&D do not lend themselves to the use of estimating manuals other than for benchmark, repetitive laboratory tests. Proposal managers must carefully consider whether the estimating manual is a viable approach. The literature

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abounds with examples of companies that have spent millions trying to develop estimat- ing manuals for situations that just do not lend themselves to the approach.

During competitive bidding, it is important that the type of estimate be consistent with the customer’s requirements. For in-house projects, the type of estimate can vary over the life cycle of a project:

● Conceptual stage: Venture guidance or feasibility studies for the evaluation of future work. This estimating is often based on minimum-scope information.

● Planning stage: Estimating for authorization of partial or full funds. These esti- mates are based on preliminary design and scope.

● Main stage: Estimating for detailed work. ● Termination stage: Reestimation for major scope changes or variances beyond the

authorization range.

14.3 PRICING PROCESS

This activity schedules the development of the work breakdown structure and provides management with two of the three operational tools necessary for the control of a system or project. The development of these two tools is normally the responsibility of the pro- gram office with input from the functional units.

The integration of the functional unit into the project environment or system occurs through the pricing-out of the work breakdown structure. The total program costs obtained by pricing out the activities over the scheduled period of performance provide management with the third tool necessary to successfully manage the project. During the

682 PRICING AND ESTIMATING

TABLE 14–5. CHECKLIST FOR WORK NORMALLY REQUIRED FOR THE VARIOUS CLASSES (I–VI) OF ESTIMATES

Item I II III IV V VI

1. Inquiry X X X X X X 2. Legibility X X X 3. Copies X X 4. Schedule X X X X 5. Vendor inquiries X X X 6. Subcontract packages X X 7. Listing X X X X X 8. Site visit X X X X 9. Estimate bulks X X X X X

10. Labor rates X X X X X 11. Equipment and subcontract selection X X X X X 12. Taxes, insurance, and royalties X X X X X 13. Home office costs X X X X X 14. Construction indirects X X X X X 15. Basis of estimate X X X X X X 16. Equipment list X 17. Summary sheet X X X X X 18. Management review X X X X X X 19. Final cost X X X X X X 20. Management approval X X X X X X 21. Computer estimate X X X X

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Pricing Process 683

TABLE 14–6. DATA REQUIRED FOR PREPARATION OF ESTIMATES

Classes of Estimates

I II III IV V VI

General Product X X X X X X Process description X X X X X X Capacity X X X X X X Location—general X X Location—specific X X X X Basic design criteria X X X X General design specifications X X X X

Process Process block flow diagram X Process flow diagram (with equipment size and material) X X Mechanical P&Is X X X Equipment list X X X X X Catalyst/chemical specifications X X X X X

Site Soil conditions X X X X Site clearance X X X Geological and meteorological data X X X Roads, paving, and landscaping X X X Property protection X X X Accessibility to site X X X Shipping and delivery conditions X X X Major cost is factored X X

Major Equipment Preliminary sizes and materials X X X Finalized sizes, materials, and appurtenances X X

Bulk Material Quantities Finalized design quantity take-off X Preliminary design quantity take-off X X X X

Engineering Plot plan and elevations X X X X Routing diagrams X X X Piping line index X X Electrical single line X X X X Fire protection X X X Sewer systems X X X Pro-services—detailed estimate X X Pro-services—ratioed estimate X X X Catalyst/chemicals quantities X X X X X

Construction Labor wage, F/B, travel rates X X X X X Labor productivity and area practices X X Detailed construction execution plan X X Field indirects—detailed estimate X X Field indirects—ratioed estimate X X X

Schedule Overall timing of execution X X Detailed schedule of execution X X X Estimating preparation schedule X X X

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pricing activities, the functional units have the option of consulting program management about possible changes in the activity schedules and work breakdown structure.

The work breakdown structure and activity schedules are priced out through the lowest pricing units of the company. It is the responsibility of these pricing units, whether they be sec- tions, departments, or divisions, to provide accurate and meaningful cost data (based on his- torical standards, if possible). All information is priced out at the lowest level of performance required, which, from the assumption of Chapter 11, will be the task level. Costing informa- tion is rolled up to the project level and then one step further to the total program level.

Under ideal conditions, the work required (i.e., man-hours) to complete a given task can be based on historical standards. Unfortunately, for many industries, projects and pro- grams are so diversified that realistic comparison between previous activities may not be possible. The costing information obtained from each pricing unit, whether or not it is based on historical standards, should be regarded only as an estimate. How can a company predict the salary structure three years from now? What will be the cost of raw materials two years from now? Will the business base (and therefore overhead rates) change over the duration of the program? The final response to these questions shows that costing data are explicitly related to an environment that cannot be predicted with any high degree of cer- tainty. The systems approach to management, however, provides for a more rapid response to the environment than less structured approaches permit.

Once the cost data are assembled, they must be analyzed for their potential impact on the company resources of people, money, equipment, and facilities. It is only through a total program cost analysis that resource allocations can be analyzed. The resource allocation analysis is performed at all levels of management, ranging from the section supervisor to the vice president and general manager. For most programs, the chief executive must approve final cost data and the allocation of resources.

Proper analysis of the total program costs can provide management (both program and corporate) with a strategic planning model for integration of the current program with other programs in order to obtain a total corporate strategy. Meaningful planning and pric- ing models include analyses for monthly manloading schedules per department, monthly costs per department, monthly and yearly total program costs, monthly material expendi- tures, and total program cash-flow and man-hour requirements per month.

Previously we identified several of the problems that occur at the nodes where the hor- izontal hierarchy of program management interfaces with the vertical hierarchy of func- tional management. The pricing-out of the work breakdown structure provides the basis for effective and open communication between functional and program management where both parties have one common goal. This is shown in Figure 14–1. After the pricing effort is completed, and the program is initiated, the work breakdown structure still forms the basis of a communications tool by documenting the performance agreed on in the pricing effort, as well as establishing the criteria against which performance costs will be measured.

14.4 ORGANIZATIONAL INPUT REQUIREMENTS

Once the work breakdown structure and activity schedules are established, the program manager calls a meeting for all organizations that will submit pricing information. It is

684 PRICING AND ESTIMATING

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imperative that all pricing or labor-costing representatives be present for the first meeting. During this “kickoff” meeting, the work breakdown structure is described in depth so that each pricing unit manager will know exactly what his responsibilities are during the program. The kickoff meeting also resolves the struggle for power among functional managers whose responsibilities may be similar. An example of this would be quality control activities. During the research and development phase of a program, research personnel may be permitted to perform their own quality control efforts, whereas during production activities the quality control department or division would have overall responsibility. Unfortunately, one meeting is not always sufficient to clarify all problems. Follow-up or status meetings are held, normally with only those parties concerned with the problems that have arisen. Some companies prefer to have all members attend the status meetings so that all personnel will be familiar with the total effort and the associated problems. The advantage of not having all program-related personnel attend is that time is of the essence when pricing out activities. Many functional divisions carry this policy one step further by having a divisional represen- tative together with possibly key department managers or section supervisors as the only attendees at the kickoff meeting. The divisional representative then assumes all responsibility for assuring that all costing data are submitted on time. This arrangement may be beneficial in that the program office need contact only one individual in the division to learn of the activity status, but it may become a bottleneck if the representative fails to maintain proper communication between the functional units and the program office, or if the individual simply is unfamiliar with the pricing requirements of the work breakdown structure.

During proposal activities, time may be extremely important. There are many situa- tions in which a request for proposal (RFP) requires that all responders submit their bids by a specific date. Under a proposal environment, the activities of the program office, as

Organizational Input Requirements 685

PROGRAM MANAGEMENT

FUNCTIONAL HIERARCHY

WORK BREAKDOWN STRUCTURE

1. DEFINE PERFORMANCE REQUIREMENTS

2. CONTROL PERFORMANCE COSTS

HORIZONTAL HIERARCHY

FUNCTIONAL HIERARCHY

FIGURE 14–1. The vertical–horizontal interface.

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well as those of the functional units, are under a schedule set forth by the proposal man- ager. The proposal manager’s schedule has very little, if any, flexibility and is normally under tight time constraints so that the proposal may be typed, edited, and published prior to the date of submittal. In this case, the RFP will indirectly define how much time the pricing units have to identify and justify labor costs.

The justification of the labor costs may take longer than the original cost estimates, especially if historical standards are not available. Many proposals often require that com- prehensive labor justification be submitted. Other proposals, especially those that request an almost immediate response, may permit vendors to submit labor justification at a later date.

In the final analysis, it is the responsibility of the lowest pricing unit supervisors to maintain adequate standards, so that an almost immediate response can be given to a pric- ing request from a program office.

14.5 LABOR DISTRIBUTIONS

The functional units supply their input to the program office in the form of man-hours, as shown in Figure 14–2. The input may be accompanied by labor justification, if required. The man-hours are submitted for each task, assuming that the task is the lowest pricing element, and are time-phased per month. The man-hours per month per task are converted to dollars after multiplication by the appropriate labor rates. The labor rates are generally known with certainty over a twelve-month period, but from then on are only estimates. How can a company predict salary structures five years hence? If the company underes- timates the salary structure, increased costs and decreased profits will occur. If the salary structure is overestimated, the company may not be competitive; if the project is govern- ment funded, then the salary structure becomes an item under contract negotiations.

The development of the labor rates to be used in the projection is based on historical costs in business base hours and dollars for the most recent month or quarter. Average hourly rates are determined for each labor unit by direct effort within the operations at the department level. The rates are only averages, and include both the highest-paid employees and lowest-paid employees, together with the department manager and the clerical support.1

These base rates are then escalated as a percentage factor based on past experience, budget as approved by management, and the local outlook and similar industries. If the company has a predominant aerospace or defense industry business base, then these salaries are nego- tiated with local government agencies prior to submittal for proposals.

The labor hours submitted by the functional units are quite often overestimated for fear that management will “massage” and reduce the labor hours while attempting to main- tain the same scope of effort. Many times management is forced to reduce man-hours either because of insufficient funding or just to remain competitive in the environment.

686 PRICING AND ESTIMATING

1. Problems can occur if the salaries of the people assigned to the program exceed the department averages. Methods to alleviate this problem are discussed later. Also, in many companies department managers are included in the overhead rate structure, not in direct labor, and therefore their salaries are not included as part of the depart- ment average.

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The reduction of man-hours often causes heated discussions between the functional and program managers. Program managers tend to think in terms of the best interests of the program, whereas functional managers lean toward maintaining their present staff.

The most common solution to this conflict rests with the program manager. If the pro- gram manager selects members for the program team who are knowledgeable in man-hour standards for each of the departments, then an atmosphere of trust can develop between the program office and the functional department so that man-hours can be reduced in a manner that represents the best interests of the company. This is one of the reasons why program team members are often promoted from within the functional ranks.

The man-hours submitted by the functional units provide the basis for total program cost analysis and program cost control. To illustrate this process, consider Example 14–1 below.

Example 14–1. On May 15, Apex Manufacturing decided to enter into competitive bidding for the modification and updating of an assembly line program. A work break- down structure was developed as shown below:

PROGRAM (01-00-00): Assembly Line Modification PROJECT 1 (01-01-00): Initial Planning

Task 1 (01-01-01): Engineering Control Task 2 (01-01-02): Engineering Development

PROJECT 2 (01-02-00): Assembly Task 1 (01-02-01): Modification Task 2 (01-02-02): Testing

Labor Distributions 687

PROGRAM MANAGEMENT

WBS RELEASE

FUNCTIONAL MANAGEMENT

P R

IC IN

G IN

F O

R M

A T

IO N

: M

A N

-H O

U R

S /T

A S

K S

W O

R K

R E

L E

A S

E :

M A

N -H

O U

R S

/T A

S K

DEPARTMENTS

SECTIONS SECTIONS SECTIONS

FIGURE 14–2. Functional pricing flow.

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On June 1, each pricing unit was given the work breakdown structure together with

the schedule shown in Figure 14–3. According to the schedule developed by the proposal

manager for this project, all labor data must be submitted to the program office for review

no later than June 15. It should be noted here that, in many companies, labor hours are

submitted directly to the pricing department for submittal into the base case computer

run. In this case, the program office would “massage” the labor hours only after the base

case figures are available. This procedure assumes that sufficient time exists for analysis

and modification of the base case. If the program office has sufficient personnel capable

of critiquing the labor input prior to submittal to the base case, then valuable time can

be saved, especially if two or three days are required to obtain computer output for the

base case.

During proposal activities, the proposal manager, pricing manager, and program man-

ager must all work together, although the program manager has the final say. The primary

responsibility of the proposal manager is to integrate the proposal activities into the oper-

ational system so that the proposal will be submitted to the requestor on time. A typical

schedule developed by the proposal manager is shown in Figure 14–4. The schedule

includes all activities necessary to “get the proposal out of the house,” with the first major

step being the submittal of man-hours by the pricing organizations. Figure 14–4 also

indicates the tracking of proposal costs. The proposal activity schedule is usually accom-

panied by a time schedule with a detailed estimates checklist if the complexity of the pro-

posal warrants one. The checklist generally provides detailed explanations for the proposal

activity schedule.

After the planning and pricing charts are approved by program team members and

program managers, they are entered into an electronic data processing (EDP) system as

shown in Figure 14–5. The computer then prices the hours on the planning charts using

the applicable department rates for preparation of the direct budget time plan and esti-

mate-at-completion reports. The direct budget time plan reports, once established, remain

688 PRICING AND ESTIMATING

MONTHS AFTER GO-AHEAD

PROGRAM GO-AHEAD

INITIAL PLANNING

ENGINEERING CONTROL

ENGINEERING DEVELOPMENT

ASSEMBLY

MODIFICATION

TESTING

FINAL REPORT

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

FIGURE 14–3. Activity schedule for assembly line updating.

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the same for the life of the contract except for customer-directed or approved changes or

when contractor management determines that a reduction in budget is advisable.

However, if a budget is reduced by management, it cannot be increased without customer

approval.

The time plan is normally a monthly mechanical printout of all planned effort by work

package and organizational element over the life of the contract, and serves as the data

bank for preparing the status completion reports.

Initially, the estimate-at-completion report is identical to the budget report, but it

changes throughout the life of a program to reflect degradation or improvement in perfor-

mance or any other events that will change the program cost or schedule.

Labor Distributions 689

WEEKS AFTER PROPOSAL KICKOFF

PROPOSAL KICKOFF

ACTIVITY SCHEDULES AND WBS PREPARATION

DISTRIBUTION OF SCHEDULES AND WBS

COST DATA SUBMITTED FROM FUNCTIONAL UNITS

PROCUREMENT DATA SUBMITTED

TECHNICAL WRITE-UPS SUBMITTED

PROGRAM MANAGEMENT DRYRUN

MANAGEMENT COST REVIEW

TYPING AND EDITING

FINAL PROOFING AND REPRODUCTION

PROPOSAL SENT TO VENDOR

1 2 3 4 5 6 7 8 9 10 11 12

PROPOSED COSTS, IN

THOUSANDS

PROJECTED COSTS ACTUAL COSTS

FIGURE 14–4. Proposal activity schedule.

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14.6 OVERHEAD RATES

The ability to control program costs involves more than tracking labor dollars and labor hours; overhead dollars, one of the biggest headaches, must also be tracked. Although most programs have an assistant program

manager for cost whose responsibilities include monthly overhead rate analysis, the pro- gram manager can drastically increase the success of his program by insisting that each program team member understand overhead rates. For example, if overhead rates apply only to the first forty hours of work, then, depending on the overhead rate, program dol- lars can be saved by performing work on overtime where the increased salary is at a lower burden. This can be seen in Example 14–2 below.

Example 14–2. Assume that ApexManufacturing must write an interim report for task 1 of project 1 during regular shift or on overtime. The project will require 500 man-hours at $15.00 per hour. The overhead burden is 75 percent on regular shift but only 5 percent on overtime. Overtime, however, is paid at a rate of time and a half. Assuming that the report can be written on either time, which is cost-effective—regular time or overtime?

● On regular time the total cost is:

(500 hours) 3 ($15.00/hour) 3 (100% 1 75% burden) 5 $13,125.00

● On overtime, the total cost is:

(500 hours) 3 ($15.00/hour 3 1.5 overtime) 3 (100% 1 5% burden) 5 $11,812.50

Therefore, the company can save $1,312.50 by performing the work on overtime. Scheduling overtime can produce increased profits if the overtime overhead rate burden is

690 PRICING AND ESTIMATING

STATEMENT OF WORK

WORK BREAKDOWN STRUCTURE

SUBDIVIDED WORK DESCRIPTION

OR WORK PLANNING

AUTHORIZATION

MASTER PRODUCTION

SCHEDULE

DETAILED SCHEDULES

TOTAL PROGRAM SCHEDULE

MCCS PLANNING ACTIVITIES

COMPUTER MCCS BUDGET

DATA BANK: LABOR RATES

AND OVERHEAD STRUCTURE

ORGANIZATIONAL PLANNING: PROGRAM OFFICE OR

FUNCTIONAL UNITS

FIGURE 14–5. Labor planning flowchart.

PMBOK® Guide, 5th Edition 7.2.1 Cost Estimating Inputs

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much less than the regular time burden. This difference can be very large in manufactur- ing divisions, where overhead rates between 300 and 450 percent are common.

Regardless of whether one analyzes a project or a system, all costs must have associ- ated overhead rates. Unfortunately, many program managers and systems managers con- sider overhead rates as a magic number pulled out of the air. The preparation and assignment of overheads to each of the functional divisions is a science. Although the total dollar pool for overhead rates is relatively constant, management retains the option of deciding how to distribute the overhead among the functional divisions. A company that supports its R&D staff through competitive bidding projects may wish to keep the R&D overhead rate as low as possible. Care must be taken, however, that other divisions do not absorb additional costs so that the company no longer remains competitive on those man- ufactured products that may be its bread and butter.

The development of the overhead rates is a function of three separate elements: direct labor rates, direct business base projections, and projection of overhead expenses. Direct labor rates have already been discussed. The direct business base projection involves the determi- nation of the anticipated direct labor hours and dollars along with the necessary direct mate- rials and other direct costs required to perform and complete the program efforts included in the business base. Those items utilized in the business base projection include all contracted programs as well as the proposed or anticipated efforts. The foundation for determination of the business base required for each program can be one or more of the following:

● Actual costs to date and estimates to completion ● Proposal data ● Marketing intelligence ● Management goals ● Past performance and trends

The projection of the overhead expenses is made by an analysis of each of the elements that constitute the overhead expense. A partial listing of those items is shown in Table 14–7. Projection of expenses within the individual elements is then made based on one or more of the following:

● Historical direct/indirect labor ratios ● Regression and correlation analysis ● Manpower requirements and turnover rates ● Changes in public laws

● Anticipated changes in company benefits ● Fixed costs in relation to capital asset requirements ● Changes in business base ● Bid and proposal (B&P) tri-service agreements ● Internal research and development (IR&D) tri-service agreements

For many industries, such as aerospace and defense, the federal government funds a large percentage of the B&P and IR&D activities. This federal funding is a necessity since

Overhead Rates 691

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many companies could not otherwise be competitive within the industry. The federal gov- ernment employs this technique to stimulate research and competition. Therefore, B&P and IR&D are included in the above list.

The prime factor in the control of overhead costs is the annual budget. This budget, which is the result of goals and objectives established by the chief executive officer, is reviewed and approved at all levels of management. It is established at department level, and the department manager has direct responsibility for identifying and controlling costs against the approved plan.

The departmental budgets are summarized, in detail, for higher levels of management. This summarization permits management, at these higher organizational levels, to be aware of the authorized indirect budget in their area of responsibility.

Reports are published monthly indicating current month and year-to-date budget, actu- als, and variances. These reports are published for each level of management, and an analy- sis is made by the budget department through coordination and review with management. Each directorate’s total organization is then reviewed with the budget analyst who is assigned the overhead cost responsibility. A joint meeting is held with the directors and the vice president and general manager, at which time overhead performance is reviewed.

14.7 MATERIALS/SUPPORT COSTS

The salary structure, overhead structure, and labor hours fulfill three of four major pricing input requirements. The fourth major input is the cost for materials and support. Six subtopics are included under materials/sup-

port: materials, purchased parts, subcontracts, freight, travel, and other. Freight and travel can be handled in one of two ways, both normally dependent on the size of the program. For small-dollar-volume programs, estimates are made for travel and freight. For large- dollar-volume programs, travel is normally expressed as between 3 and 5 percent of the

692 PRICING AND ESTIMATING

TABLE 14–7. ELEMENTS OF OVERHEAD RATES

Building maintenance New business directors Building rent Office supplies Cafeteria Payroll taxes Clerical Personnel recruitment Clubs/associations Postage Consulting services Professional meetings Corporate auditing expenses Reproduction facilities Corporate salaries Retirement plans Depreciation of equipment Sick leave Executive salaries Supplies/hand tools Fringe benefits Supervision General ledger expenses Telephone/telegraph facilities Group insurance Transportation Holiday Utilities Moving/storage expenses Vacation

PMBOK® Guide, 5th Edition 7.2.1 Cost Estimating Inputs

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STATEMENT OF

WORK

WORK BREAKDOWN STRUCTURE

SUBDIVIDED WORK DESCRIPTION

OR WORK PLANNING

AUTHORIZATION

ENGINEERING DRAWINGS

BILL OF MATERIALS

MANUFACTURING PLANS

MASTER PRODUCTION

SCHEDULE

TOOLING REQUIREMENTS

DETAILED SCHEDULES

MCCS PLANNING ACTIVITIES

BUDGET

COMPUTER

FIGURE 14–6. Material planning flowchart.

693

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direct labor costs, and freight is likewise between 3 and 5 percent of all costs for material, purchased parts, and subcontracts. The category labeled “other support costs” may include such topics as computer hours or specialconsultants.

Determination of the material costs is very time-consuming, more so than cost deter- mination for labor hours. Material costs are submitted via a bill of materials that includes all vendors from whom purchases will be made, projected costs throughout the program, scrap factors, and shelf lifetime for those products that may be perishable.

Upon release of the work statement, work breakdown structure, and subdivided work description, the end-item bill of materials and manufacturing plans are prepared as shown in Figure 14–6. End-item materials are those items identified as an integral part of the pro- duction end-item. Support materials consist of those materials required by engineering and operations to support the manufacture of end-items, and are identified on the manufactur- ing plan.

A procurement plan/purchase requisition is prepared as soon as possible after contract negotiations (using a methodology as shown in Figure 14–7). This plan is used to monitor material acquisitions, forecast inventory levels, and identify material price variances.

Manufacturing plans prepared upon release of the subdivided work descriptions are used to prepare tool lists for manufacturing, quality assurance, and engineering. From these plans a special tooling breakdown is prepared by tool engineering, which defines those tools to be procured and the material requirements of tools to be fabricated in-house. These items are priced by cost element for input on the planning charts.

The materials/support costs are submitted by month for each month of the program. If long-lead funding of materials is anticipated, then they should be assigned to the first month of the program. In addition, an escalation factor for costs of materials/support items

694 PRICING AND ESTIMATING

PROGRAM MANAGEMENT

F E

E D

B A

C K

WBS RELEASE

MATERIAL CONTROL

PREPARE BILL OF MATERIALS

PROCUREMENT PROCUREMENT PROCUREMENT PROCUREMENT PROCUREMENT

VENDOR CONTACTS

BID REQUESTS

BID EVALUATION

VENDOR VISITS

VENDOR SELECTION

M A T

E R

IA L

, C

O M

M IT

M E

N T

S E

S C

A L

A T

IO N

F A

C T

O R

, T E

R M

IN A T

IO N

L IA

B IL

IT Y

FUNCTIONAL MANAGEMENT

FIGURE 14–7. Procurement activity.

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must be applied to all materials/support costs. Some vendors may provide fixed prices over time periods in excess of a twelve-month period. As an example, vendor Z may quote a firm-fixed price of $130.50 per unit for 650 units to be delivered over the next eighteen months if the order is placed within sixty days. There are additional factors that influence the cost of materials.

14.8 PRICING OUT THE WORK

Using logical pricing techniques will help in obtaining detailed estimates. The following thirteen steps provide a logical sequence to help a company control its limited resources. These steps may vary from company to company.

Step 1: Provide a complete definition of the work requirements. Step 2: Establish a logic network with checkpoints. Step 3: Develop the work breakdown structure. Step 4: Price out the work breakdown structure. Step 5: Review WBS costs with each functional manager. Step 6: Decide on the basic course of action. Step 7: Establish reasonable costs for each WBS element. Step 8: Review the base case costs with upper-level management. Step 9: Negotiate with functional managers for qualified personnel. Step 10: Develop the linear responsibility chart. Step 11: Develop the final detailed and PERT/CPM schedules. Step 12: Establish pricing cost summary reports. Step 13: Document the result in a program plan.

Although the pricing of a project is an iterative process, the project manager must still develop cost summary reports at each iteration point so that key project decisions can be made during the planning. Detailed pricing summaries are needed at least twice: in prepa- ration for the pricing review meeting with management and at pricing termination. At all other times it is possible that “simple cosmetic surgery” can be performed on previous cost summaries, such as perturbations in escalation factors and procurement cost of raw mate- rials. The list below shows the typical pricing reports:

● A detailed cost breakdown for each WBS element. If the work is priced out at the task level, then there should be a cost summary sheet for each task, as well as rollup sheets for each project and the total program.

● A total program manpower curve for each department. These manpower curves show how each department has contracted with the project office to supply func- tional resources. If the departmental manpower curves contain several “peaks and valleys,” then the project manager may have to alter some of his schedules to obtain some degree of manpower smoothing. Functional managers always prefer manpower-smoothed resource allocations.

Pricing Out the Work 695

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● A monthly equivalent manpower cost summary. This table normally shows the fully burdened cost for the average departmental employee carried out over the entire period of project performance. If project costs have to be reduced, the project man- ager performs a parametric study between this table and the manpower curve tables.

● A yearly cost distribution table. This table is broken down by WBS element and shows the yearly (or quarterly) costs that will be required. This table, in essence, is a project cash-flow summary per activity.

● A functional cost and hour summary. This table provides top management with an overall description of how many hours and dollars will be spent by each major functional unit, such as a division. Top management would use this as part of the forward planning process to make sure that there are sufficient resources available for all projects. This also includes indirect hours and dollars.

● A monthly labor hour and dollar expenditure forecast. This table can be combined with the yearly cost distribution, except that it is broken down by month, not activity or department. In addition, this table normally includes manpower termi- nation liability information for premature cancellation of the project by outside customers.

● A raw material and expenditure forecast. This shows the cash flow for raw mate- rials based on vendor lead times, payment schedules, commitments, and termina- tion liability.

● Total program termination liability per month. This table shows the customer the monthly costs for the entire program. This is the customer’s cash flow, not the con- tractor’s. The difference is that each monthly cost contains the termination liability for man-hours and dollars, on labor and raw materials. This table is actually the monthly costs attributed to premature project termination.

These tables are used by project managers as the basis for project cost control and by upper-level executives for selecting, approving, and prioritizing projects.

14.9 SMOOTHING OUT DEPARTMENT MAN-HOURS

The dotted curve in Figure 14–8 indicates projected manpower requirements for a given department as a result of a typical program manloading schedule. Department managers, how- ever, attempt to smooth out the manpower curve as shown by the solid line in Figure 14–8. Smoothing out the manpower requirements benefits department managers by eliminating fractional man-hours per day. The program manager must understand that if departments are permitted to eliminate peaks, valleys, and small-step functions in manpower planning, small project and task man-hour (and cost) variances can occur, but should not, in general, affect the total program cost significantly.

Two important questions to ask are whether the department has sufficient personnel available to fulfill manpower requirements and what is the rate at which the functional departments can staff the program? For example, project engineering requires approxi- mately twenty-three people during January 2002. The functional manager, however, may

696 PRICING AND ESTIMATING

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have only fifteen people available for immediate reassignment, with the remainder to be either transferred from other programs or hired from outside the company. The same situ- ation occurs during activity termination. Will project engineering still require twenty-three people in August 2002, or can some of these people begin being phased to other programs, say, as early as June 2002? This question, specifically addressed to support and adminis- trative tasks/projects, must be answered prior to contract negotiations. Figure 14–9 indi- cates the types of problems that can occur. Curve A shows the manpower requirements for

Smoothing Out Department Man-Hours 697

REFERENCE MONTH

M A

N P

O W

E R

, IN

M A

N -M

O N

T H

DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN

FIGURE 14–8. Typical manpower loading.

DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN

M A

N P

O W

E R

, IN

M A

N -M

O N

T H

CURVE A CURVE C

CURVE B

REGION OF COST FORFEITURE DUE TO BRINGING PEOPLE ON BOARD SLOWLY

REFERENCE MONTH

CURVE A: TIME-SMOOTHED

CURVE B: MODIFIED TIME-SMOOTHED

CURVE C: INCREASED MANPOWER LEVEL

FIGURE 14–9. Linearly increased manpower loading.

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a given department after time-smoothing. Curve B represents the modification to the time- phase curve to account for reasonable program manning and demanning rates. The differ- ence between these two curves (i.e., the shaded area) therefore reflects the amount of money the contractor may have to forfeit owing to manning and demanning activities. This problem can be partially overcome by increasing the manpower levels after time-smoothing (see curve C) such that the difference between curves B and C equals the amount of money that would be forfeited from curves A and B. Of course, program management would have to be able to justify this increase in average manpower requirements, especially if the adjustments are made in a period of higher salaries and overhead rates.

14.10 THE PRICING REVIEW PROCEDURE

The ability to project, analyze, and control problem costs requires coordination of pricing information and cooperation between the functional units and upper-level management. A typical company policy for cost analysis and review is shown in Figure 14–10. Corporate management may be required to initiate or authorize activities, if corporate/company resources are or may be strained by the program, if capital expenditures are required for new facilities or equipment, or simply if corporate approval is required for all projects in excess of a certain dollar amount.

Upper-level management, upon approval by the chief executive officer of the com- pany, approves and authorizes the initiation of the project or program. The actual perfor- mance activities, however, do not begin until the director of program management selects a program manager and authorizes either the bid and proposal budget (if the program is competitive) or project planning funds.

The newly appointed program manager then selects this program’s team. Team mem- bers, who are also members of the program office, may come from other programs, in which case the program manager may have to negotiate with other program managers and upper- level management to obtain these individuals. The members of the program office are nor- mally support-type individuals. In order to obtain team members representing the functional departments, the program manager must negotiate directly with the functional managers. Functional team members may not be selected or assigned to the program until the actual work is contracted for. Many proposals, however, require that all functional team members be identified, in which case selection must be made during the proposal stage of a program.

The first responsibility of the program office (not necessarily including functional team members) is the development of the activity schedules and the work breakdown structure. The program office then provides work authorization for the functional units to price out the activities. The functional units then submit the labor hours, material costs, and justification, if required, to the pricing team member. The pricing team member is nor- mally attached to the program office until the final costs are established, and becomes part of the negotiating team if the project is competitive.

Once the base case is formulated, the pricing team member, together with the other program office team members, performs perturbation analyses. These analyses are designed as systems approaches to problem-solving where alternatives are developed in order to respond to management’s questions during the final review.

698 PRICING AND ESTIMATING

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The base case, with the perturbation analysis costs, is then reviewed with upper-level management in order to formulate a company position for the program and to take a hard look at the allocation of resources required for the program. The company position may be to cut costs, authorize work, or submit a bid. Corporate approval may be required if the company’s chief executive officer has a ceiling on the amount he can authorize.

If labor costs must be cut, the program manager must negotiate with the functional managers as to the size and method for the cost reductions. Otherwise, this step would sim- ply entail authorization for the functional managers to begin the activities.

Figure 14–10 represents the system approach to determining total program costs. This procedure normally creates a synergistic environment, provides open channels of

The Pricing Review Procedure 699

FUNCTIONAL MANAGERS

PROGRAM TEAM

COMPANY DIRECTORS

CORPORATE MANAGEMENT

COMPANY CHIEF EXECUTIVE OFFICER

DIRECTOR OF PROGRAM MANAGEMENT

OTHER DIRECTORS

PROGRAM MANAGER

OTHER MEMBERS PRICING TEAM MEMBERS

ENGINEERING OPERATIONS FINANCE PROCUREMENT PERSONNEL

INITIAL APPROVAL

COMPANY UPPER LEVEL MANAGEMENT

EXECUTIVE APPROVAL

PM SELECTION AND FUNDING AUTHORIZATION 10

REVIEW WITH UPPER LEVEL MANAGEMENT 11 COMPANY POSITION

TEAM SELECTION

7 8 9 BASE CASE

REVIEW

PERTURBATION ANALYSIS

PERTURBATION REVIEW

WORK AUTHORIZATION, WBS, PERT/

GANTT CHARTS

6 LABOR HOUR/MATERIAL COSTS

AUTHORIZE COSTS OR REVIEW

COST REDUCTIONS

FIGURE 14–10. The pricing review procedure.

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communication between all levels of management, and ensures agreement among all indi- viduals as to program costs.

14.11 SYSTEMS PRICING

The systems approach to pricing out the activity schedules and the work breakdown struc- ture provide a means for obtaining unity within the company. The flow of information read- ily admits the participation of all members of the organization in the program, even if on a

700 PRICING AND ESTIMATING

ENVIRONMENT

LEGAL SOCIAL

ECONOMIC

POLITICAL TECHNOLOGICAL

UPPER LEVEL MANAGEMENT

COMPANY RESOURCES

PERFORMANCE/TECHNOLOGY

T IM

C O

S T

SELECTED PROGRAMS

STREAM OF POSSIBLE PROGRAMS

STRATEGIC PLANNING MODEL OUTPUT

P R

O G

R A

M M

A N

L O

A D

IN G

S C

H E

D U

L E

Y E

A R

LY C

O S

T D

IS T

R IB

U T

IO N

F U

N C

T IO

N A

L C

O S

T S

U M

M A

R IE

F U

N C

T IO

N A

L H

O U

R S

U M

M A

R IE

OPERATIONAL MANAGEMENT

FIGURE 14–11. System approach to resource control.

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part-time basis. Functional managers obtain a better understanding of how their labor fits into the total program and how their activities interface with those of other departments. For the first time, functional managers can accurately foresee how their activity can lead to corpo- rate profits.

The project pricing model (sometimes called a strategic project planning model) acts as a management information system, forming the basis for the systems approach to resource control, as shown in Figure 14–11. The summary sheets from the computer output of the strategic pricing model help management select programs that will best utilize resources. The strategic pricing model also provides management with an invaluable tool for performing perturbation analysis on the base case costs and an opportunity for design and evaluation of contingency plans, if necessary.

14.12 DEVELOPING THE SUPPORTING/BACKUP COSTS

Not all cost proposals require backup support, but for those that do, the backup support should be developed along with the pricing. The itemized prices should be compatible with the supporting data. Government pric-

ing requirements are a special case. Most supporting data come from external (subcontractor or outside vendor) quotes.

Internal data must be based on historical data, and these historical data must be updated continually as each new project is completed. The supporting data should be traceable by itemized charge numbers.

Customers may wish to audit the cost proposal. In this case, the starting point might be the supporting data. It is not uncommon on sole-source proposals to have the support- ing data audited before the final cost proposal is submitted to the customer.

Not all cost proposals require supporting data; the determining factor is usually the type of contract. On a fixed-price effort, the customer may not have the right to audit your books. However, for a cost-reimbursable package, your costs are an open book, and the customer usually compares your exact costs to those of the backup support.

Most companies usually have a choice of more than one estimate to be used for backup support. In deciding which estimate to use, consideration must be given to the pos- sibility of follow-on work:

● If your actual costs grossly exceed your backup support estimates, you may lose credibility for follow-on work.

● If your actual costs are less than the backup costs, you must use the new actual costs on follow-on efforts.

The moral here is that backup support costs provide future credibility. If you have well-documented, “livable” cost estimates, then you may wish to include them in the cost proposal even if they are not required.

Since both direct and indirect costs may be negotiated separately as part of a contract, supporting data, such as those in Tables 14–8 through 14–11 and Figure 14–12, may be nec- essary to justify any costs that may differ from company (or customer-approved) standards.

Developing the Supporting/Backup Costs 701

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TABLE 14–8. OPERATIONS SKILLS MATRIX

Administrative management a a a a a a Control and communications b b b b b b b b b b b b Environmental impact

assessment c c c c c c Facilities management d d d d Financial management e e e e e e e Human resources mangement f f f Industrial engineering g g g Intelligence and security h h h Inventory control i i i i Logistics j j j j OSHA k k k Project management l l l l l Quality control m m m m m m R&D n n n n n Wage and salary administration o o o o o o o

A b

le ,

B ak

er ,

C oo

k ,

D .

D ir

k ,

L .

E as

le y,

P .

F ra

n k

li n

, W .

G re

en ,

C .

H en

ry ,

L .

Im h

of f,

R .

Ju le

s, C

K le

in , W

L ed

ge r,

D .

M ay

er ,

Q .

N ew

to n

, A .

O li

ve r,

G .

P ra

tt ,

L .

Functional Areas of Expertise

Technical Staff

702

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Developing the Supporting/Backup Costs 703

TABLE 14–9. CONTRACTOR’S MANPOWER AVAILABILITY

Number of Personnel

Total Current Staff Available for This Anticipated Project and Other Growth by New Work 1/02 1/02

Permanent Agency Permanent 1 Permanent 1 Employees Personnel Agency Agency

Process engineers 93 — 70 4 Project managers/engineers 79 — 51 4 Cost estimating 42 — 21 2 Cost control 73 — 20 2 Scheduling/scheduling control 14 — 8 1 Procurement/purchasing 42 — 20 1 Inspection 40 — 20 2 Expediting 33 — 18 1 Home office construction

management 9 — 6 0 Piping 90 13 67 6 Electrical 31 — 14 2 Instrumentation 19 — 3 1 Vessels/exchangers 24 — 19 1 Civil/structural 30 — 23 2 Other 13 — 8 0

TABLE 14–10. STAFF TURNOVER DATA

For Twelve-Month Period 1/1/01 to 1/1/02

Number Terminated Number Hired

Process engineers 5 2 Project managers/engineers 1 1 Cost estimating 1 2 Cost control 12 16 Scheduling/scheduling control 2 5 Procurement/purchasing 13 7 Inspection 18 6 Expediting 4 5 Home office construction management 0 0 Design and drafting—total 37 29 Engineering specialists—total 26 45

Total 119 118

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704 PRICING AND ESTIMATING

TABLE 14–11. STAFF EXPERIENCE PROFILE

Number of Years’ Employment with Contractor

0–1 1–2 2–3 3–5 5 or more

Process engineers 2 4 15 11 18 Project managers/engineers 1 2 5 11 8 Cost estimating 0 4 1 5 7 Cost control 5 9 4 7 12 Scheduling and scheduling control 2 2 1 3 6 Procurement/purchasing 4 12 13 2 8 Inspection 1 2 6 14 8 Expediting 6 9 4 2 3 Piping 9 6 46 31 22 Electrical 17 6 18 12 17 Instrumentation 8 8 12 13 12 Mechanical 2 5 13 27 19 Civil/structural 4 8 19 23 16 Environmental control 0 1 1 3 7 Engineering specialists 3 3 3 16 21

Total 64 81 161 180 184

1000

900

800

700

600

500

400

300

200

100

SEPT

N U

M B

E R

O F

P E

O P

L E

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

2000 2001 2002

WORK COMMITTED BUT NOT RELEASED

AVAILABLE FOR OTHER WORK

BACKLOG OF WORK

COMMITTED AND RELEASED

PROPOSAL SUBMITTAL

E N

G IN

E E

R IN

9 5 %

C O

M P

L E

T E

CURRENT STAFF

TOTAL REIMBURSABLE

MANPOWER ANTICIPA

TED GRO WTH

NOTE TYPICAL TO ALL CURVES: CURVES BASED UPON 151 HOURS PER MAN PER MONTH WHICH TAKES INTO ACCOUNT NONPRODUCTIVE AND NONAVAILABLE TIME

FIGURE 14–12. Total reimbursable manpower.

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14.13 THE LOW-BIDDER DILEMMA

There is little argument about the importance of the price tag to the pro- posal. The question is, what price will win the job? The decision process that leads to the final price of your proposal is highly complex with many

uncertainties. Yet proposal managers, driven by the desire to win the job, may think that a very low-priced proposal will help. But winning is only the beginning. Companies have short- and long-range objectives on profit, market penetration, new product development, and so on. These objectives may be incompatible with or irrelevant to a low-price strategy. For example:

● A suspiciously low price, particularly on cost-plus type proposals, might be per- ceived by the customer as unrealistic, thus affecting the bidder’s cost credibility or even the technical ability to perform.

● The bid price may be unnecessarily low, relative to the competition and customer budget, thus eroding profits.

● The price may be irrelevant to the bid objective, such as entering a new market. Therefore, the contractor has to sell the proposal in a credible way, e.g., using cost sharing.

● Low pricing without market information is meaningless. The price level is always relative to (1) the competitive prices, (2) the customer budget, and (3) the bidder’s cost estimate.

● The bid proposal and its price may cover only part of the total program. The abil- ity to win phase II or follow-on business depends on phase I performance and phase II price.

● The financial objectives of the customer may be more complex than just finding the lowest bidder. They may include cost objectives for total system life-cycle cost (LCC), for design to unit production cost (DTUPC), or for specific logistic support items. Presenting sound approaches for attaining these system cost–performance parameters and targets may be just as important as, if not more important than, a low bid for the system’s development.

Further, it is refreshing to note that in spite of customer pressures toward low cost and fixed price, the lowest bidder is certainly not an automatic winner. Both commercial and gov- ernmental customers are increasingly concerned about cost realism and the ability to perform under contract. A compliant, sound, technical and management proposal, based on past expe- rience with realistic, well-documented cost figures, is often chosen over the lowest bidder, who may project a risky image regarding technical performance, cost, or schedule.

14.14 SPECIAL PROBLEMS

There are always special problems that, if overlooked, can have a severe impact on the pricing effort. As an example, pricing must include an understanding of cost control— specifically, how costs are billed back to the project. There are three possible situations:

● Work is priced out at the department average, and all work performed is charged to the project at the department average salary, regardless of who accomplished

Special Problems 705

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the work. This technique is obviously the easiest, but encourages project managers to fight for the highest salary resources, since only average wages are billed to the project.

● Work is priced out at the department average, but all work performed is billed back to the project at the actual salary of those employees who perform the work. This method can create a severe headache for the project manager if he tries to use

only the best employees on his project. If these employees are earning substan-

tially more money than the department average, then a cost overrun will occur

unless the employees can perform the work in less time. Some companies are

forced to use this method by government agencies and have estimating problems

when the project that has to be priced out is of a short duration where only the

higher-salaried employees can be used. In such a situation it is common to

“inflate” the direct labor hours to compensate for the added costs.

● The work is priced out at the actual salary of those employees who will perform the work, and the cost is billed back the same way. This method is the ideal situa- tion as long as the people can be identified during the pricing effort.

Some companies use a combination of all three methods. In this case, the project office is

priced out using the third method (because these people are identified early), whereas the

functional employees are priced out using the first or second method.

14.15 ESTIMATING PITFALLS

Several pitfalls can impede the pricing function. Probably the most seri-

ous pitfall, and the one that is usually beyond the control of the project

manager, is the “buy-in” decision, which is based on the assumption that

there will be “bail-out” changes or follow-on contracts later. These changes and/or con-

tracts may be for spare parts, maintenance, maintenance manuals, equipment surveillance,

optional equipment, optional services, and scrap factors. Other types of estimating pitfalls

include:

● Misinterpretation of the statement of work

● Omissions or improperly defined scope

● Poorly defined or overly optimistic schedule

● Inaccurate work breakdown structure

● Applying improper skill levels to tasks

● Failure to account for risks

● Failure to understand or account for cost escalation and inflation

● Failure to use the correct estimating technique

● Failure to use forward pricing rates for overhead, general and administrative, and

indirect costs

706 PRICING AND ESTIMATING

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Unfortunately, many of these pitfalls do not become evident until detected by the cost

control system, well into the project.

14.16 ESTIMATING HIGH-RISK PROJECTS

Whether a project is high-risk or low-risk depends on the validity of the

historical estimate. Construction companies have well-defined historical

standards, which lowers their risk, whereas many R&D and MIS projects

are high risk. Typical accuracies for each level of the WBS are shown in

Table 14–12.

A common technique used to estimate high-risk projects is the “rolling wave” or

“moving window” approach. This is shown in Figure 14–13 for a high-risk R&D project.

The project lasts for twelve months. The R&D effort to be accomplished for the first six

months is well defined and can be estimated to level 5 of the WBS. However, the effort for

the latter six months is based on the results of the first six months and can be estimated at

level 2 only, thus incurring a high risk. Now consider part B of Figure 14–13, which shows

a six-month moving window. At the end of the first month, in order to maintain a

six-month moving window (at level 5 of the WBS), the estimate for month seven must be

improved from a level-2 to a level-5 estimate. Likewise, in parts C and D of Figure 14–13,

we see the effects of completing the second and third months.

There are two key points to be considered in utilizing this technique. First, the length

of the moving window can vary from project to project, and usually increases in length as

you approach downstream life-cycle phases. Second, this technique works best when

upper-level management understands how the technique works. All too often senior man-

agement hears only one budget and schedule number during project approval and might

not realize that at least half of the project might be time/cost accurate to only 50–60 per-

cent. Simply stated, when using this technique, the word “rough” is not synonymous with

the word “detailed.”

Methodologies can be developed for assessing risk. Figures 14–14, 14–15, and Table

14–13 show such methodologies.

Estimating High-Risk Projects 707

TABLE 14–12. LOW- VERSUS HIGH-RISK ACCURACIES

WBS Accuracy

Low-Risk High-Risk Level Description Projects Projects

1 Program ±35 ±75–100 2 Project 20 50–60 3 Task 10 20–30 4 Subtask 5 10–15 5 Work package 2 5–10

PMBOK® Guide, 5th Edition 6.2.2.2 Rolling Wave Planning

Chapter 11 Risk Management

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14.17 PROJECT RISKS

Project plans are “living documents” and are therefore subject to change. Changes are needed in order to prevent or rectify unfortunate situations. These unfortunate situations can be called project risks.

Risk refers to those dangerous activities or factors that, if they occur, will increase the probability that the project’s goals of time, cost, and performance will not be met. Many risks can be anticipated and controlled. Furthermore, risk management must be an integral part of project management throughout the entire life cycle of the project.

Some common risks include:

● Poorly defined requirements ● Lack of qualified resources ● Lack of management support ● Poor estimating ● Inexperienced project manager

Risk identification is an art. It requires the project manager to probe, penetrate, and analyze all data. Tools that can be used by the project manager include:

● Decision support systems ● Expected value measures ● Trend analysis/projections ● Independent reviews and audits

708 PRICING AND ESTIMATING

WBS LEVEL 2WBS LEVEL 5

(A)

(B)

(C)

(D)

MONTHS AFTER GO-AHEAD

1 2 3 4 5 6 7 8 9 10 11 12

FIGURE 14–13. The moving window/rolling wave concept.

PMBOK® Guide, 5th Edition 11.2 Risk Identification

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Project Risks 709

INTERDEPENDENCY OF RISKS PROBABILITY

SERIOUSNESS (QUANTIFIED)

WILL HAPPEN HIGH

MEDIUM LOW

REMOTE

CATASTROPHE HIGH

MEDIUM LOW

IMPACT ON

COST AND SCHEDULE

RISKS

IDENTIFIED QUANTIFIED PROBABILITY INTERDEPENDENCY

GET ADVICE FROM PEOPLE WHO

HAVE BEEN THROUGH IT

AVOIDABLE? ELIMINATE YES

YES

PROBABILITY AND/OR SERIOUSNESS

REDUCIBLE?

MAKE ADJUSTMENTS

SERIOUSNESS LOW?

NO ACTION

TRANSFERABLE BY INSURANCE OR AGREEMENT WITH

CLIENT?

MAKE APPROPRIATE

ARRANGEMENTS

CONTROLLABLE? DEVELOP PLANS TO

MINIMIZE COST AND CONTROL

WHAT IS/ARE THE RESIDUAL

RISK (S)?

FUNDS RISK CONTINGENCIES

FIGURE 14–14. Decision elements for risk contingencies.

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Managing project risks is not as difficult as it may seem. There are six steps in the risk management process:

● Identification of the risk ● Quantifying the risk ● Prioritizing the risk ● Developing a strategy for managing the risk

710 PRICING AND ESTIMATING

BASE COST (PRODUCTION BUDGET)

MOST PROBABLE COST FOR ANTICIPATED SCOPE OF WORK (BASED ON ESTIMATES WITH A 50/50% CHANCE OF OVERRUN OR UNDERRUN)

UNCERTAINTIES

BARE COST (CONTROL BUDGETS)

NORMAL CONTINGENCIES RISK CONTINGENCIES

INCLUDING: DUE TO INADEQUACIES IN: DUE TO MAJOR UNKNOWNS:

DEVELOPMENT ALLOWANCE TO COVER MINOR CHANGES AFTER PLACING PURCHASE ORDERS CONSTRUCTION SPARE PARTS FOR BULK MATERIAL TO COVER • NORMAL LOSS • NORMAL DAMAGE • UNAVOIDABLE SCRAP • UNUSABLE SCRAP • CORRECTION OF ERRORS

DESIGN/EXECUTION BASIS SOFT (WEAK) SPOTS IN DESIGN/EXECUTION BASIS

ESTIMATING METHODS/DATA

EXCLUDING SCOPE CHANGES AND EXTRAORDINARY RANDOM EVENTS

MAINLY BASED ON PAST HISTORY. THE PROVISION OF MONEY IS LIKELY TO BE REQUIRED

NOT TO BE INCLUDED IN THE INDIVIDUAL COST ITEMS

POSSIBLE CIRCUMSTANCES • DESCALATION • POORER THAN MOST PROBABLE LABOR PRODUCTIVITY • POORER THAN AVERAGE WEATHER

• LIABILITY AS PER (DRAFT) AGREEMENT

• FIXED-PRICE ARRANGEMENT ETC.

• CHANGE OF SELECTED VENDOR, ETC.

TO COVER ABNORMAL AND POTENTIALLY LARGE CHANGES

SPECIFIED ON (COMBINED) RISK MEMOS

RISK ANALYSIS

NORMAL CONTINGENCIES RISK CONTINGENCY

CHANGE NOTIFICATION

FIGURE 14–15. Elements of base cost and risk contingencies.

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TABLE 14–13. STANDARD FORM FOR PROJECT RISK ANALYSIS AND RISK CONTINGENCIES

Proposal/Order No. PROJECT RISK ANALYSIS & RISK CONTINGENCY

Div./Dept. Issue

RISK CONTINGENCY = 2 EXPECTED VALUES REF: PROCEDURE 0110E Date No.

Transfer to Maximum Possible

Description of Risk Risk Outcome RISK of Maximum

Item Value Possible Change of Item Value

in % Amount Amount Expected ValueS

e q u e n c e

R is

k : Y

e s/

N o

P ro

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it y

In te

rd e p e n d e n cy

o f

R is

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S e ri

o u sn

e ss

C a t.

/H ig

h /M

e d ./

L o w

M a k e

A d ju

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In su

ra n c e

A g re

e m

e n t

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a c to

r o r

V e n d o r

E x c lu

si o n

fr o m

S c o p e

In c lu

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in E

st im

a te

D ev

e lo

p m

e n t

A ll

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a n c e

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ru c ti

o n

S p a re

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C o n tr

o l

A c c e p t

a s

R e si

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R is

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711

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● Project sponsor/executive review ● Taking action

Figures 14–14 and 14–15 and Table 14–13 identify the process of risk evaluation on capital projects. In all three exhibits, it is easily seen that the attempt is to quantify the risks, possibly by developing a contingency fund.

14.18 THE DISASTER OF APPLYING THE 10 PERCENT SOLUTION TO PROJECT ESTIMATES

Economic crunches can and do create chaos in all organizations. For the project manager, the worst situation is when senior management arbitrarily employs “the 10 percent solution,” which is a budgetary reduction of 10 percent for each and every project, especially those that have already begun. The 10 percent solution is used to “create” funds for additional activities for which budgets are nonexistent. The 10 percent solution very rarely succeeds. For the most part, the result is simply havoc, resulting in schedule slippages, a degradation of quality and performance, and eventual budgetary increases rather than the expected decreases.

Most projects are initiated through an executive committee, governing committee, or screening committee. The two main functions of these committees are to select the projects to be undertaken and to prioritize the efforts. Budgetary considerations may also be included, as they pertain to project selection. The real budgets, however, are established from the middle-management levels and sent upstairs for approvals.

Although the role of executive committee is often ill-defined with regard to budget- ing, the real problem is that the committee does not realize the impact of adopting the 10 percent solution. If the project budget is an honest one, then a reduction in budget must be accompanied by a trade-off in either time or performance. It is often said that 90 percent of the budget generates the first 10 percent of the desired service or quality levels, and that the remaining 10 percent of the budget will produce the remaining 90 percent of the target requirements. If this is true, then a 10 percent reduction in budget must be accom- panied by a loss of performance much greater than the target reduction in cost.

It is true that some projects have “padded” estimates, and the budgetary reduction will force out the padding. Most project managers, however, provide realistic estimates and schedules with marginal padding. Likewise, a trade-off between time and cost is unlikely to help, since increasing the duration of the project will increase the cost.

Everyone knows that reducing cost quite often results in a reduction of quality. Conversely, if the schedule is inflexible, then the only possi-

ble trade-offs available to the project manager may be cost versus quality. If the estimated budget for a project is too high, then executives often are willing to sacrifice some degree of quality to keep the budget in line. The problem, of course, is to decide how much qual- ity degradation is acceptable.

712 PRICING AND ESTIMATING

Cost versus Quality

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All too often, executives believe that cost and quality are linearly related: if the bud- get is cut by 10 percent, then we will have an accompanying degradation of quality by 10 percent. Nothing could be further from the truth. In the table below we can see the rela- tionship between cost, quality, and time.

The Disaster of Applying the 10 Percent Solution to Project Estimates 713

Project Costs

Tangible Quality

85–90% 10–15%

10% 90%

Time

The first 85–90 percent of the budget (i.e., direct labor budget) is needed to generate the first 10 percent of the quality. The last 10–15 percent of the budget often produces the remaining 90 percent of the quality. One does not need an advanced degree in mathematics to realize that a 10 percent cost reduction could easily be accompanied by a 50 percent quality reduction, depending, of course, where the 10 percent was cut.

The following scenario shows the chain of events as they might occur in a typical organization:

● At the beginning of the fiscal year, the executive committee selects those projects to be undertaken, such that all available resources are consumed.

● Shortly into the fiscal year, the executive committee authorizes additional projects that must be undertaken. These projects are added to the queue.

● The executive committee recognizes that the resources available are insufficient to service the queue. Since budgets are tight, hiring additional staff is ruled out. (Even if staff could be hired, the project deadline would be at hand before the new employ- ees were properly trained and up to speed.)

● The executive committee refuses to cancel any of the projects and takes the “easy” way out by adopting the 10 percent solution on each and every project. Furthermore, the executive committee asserts that original performance must be adhered to at all costs.

● Morale in the project and functional areas, which may have taken months to build, is now destroyed overnight. Functional employees lose faith in the ability of the executive committees to operate properly and make sound decisions. Employees seek transfers to other organizations.

● Functional priorities are changed on a daily basis, and resources are continuously shuffled in and out of projects, with very little regard for the schedule.

● As each project begins to suffer, project managers begin to hoard resources, refus- ing to surrender the people to other projects, even if the work is completed.

● As quality and performance begin to deteriorate, managers at all levels begin writ- ing “protection” memos.

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● Schedule and quality slippages become so great that several projects are extended into the next fiscal year, thus reducing the number of new projects that can be undertaken.

The 10 percent solution simply does not work. However, there are two viable alterna- tives. The first is to use the 10 percent solution, but only on selected projects and after an “impact study” has been conducted, so that the executive committee understands the impact on the time, cost, and performance constraints. The second choice, which is by far the bet- ter one, is for the executive committee to cancel or descope selected projects. Since it is impossible to reduce budget without reducing scope, canceling a project or simply delaying it until the next fiscal year is a viable choice. After all, why should all projects have to suffer?

Terminating one or two projects within the queue allows existing resources to be used more effectively, more productively, and with higher organizational morale. However, it does require strong leadership at the executive committee level for the participants to ter- minate a project rather than to “pass the buck” to the bottom of the organization with the 10 percent solution. Executive committees often function best if the committee is responsible for project selection, prioritization, and tracking, with the middle managers responsible for budgeting.

14.19 LIFE-CYCLE COSTING (LCC)

For years, many R&D organizations have operated in a vacuum where tech- nical decisions made during R&D were based entirely on the R&D portion of the plan, with little regard for what happens after production begins.

Today, industrial firms are adopting the life-cycle costing approach that has been developed and used by military organizations. Simply stated, LCC requires that decisions made during the R&D process be evaluated against the total life-cycle cost of the system. As an example, the R&D group has two possible design configurations for a new product. Both design configurations will require the same budget for R&D and the same costs for manufac- turing. However, the maintenance and support costs may be substantially greater for one of the products. If these downstream costs are not considered in the R&D phase, large unantici- pated expenses may result at a point where no alternatives exist.

Life-cycle costs are the total cost to the organization for the ownership and acquisi- tion of the product over its full life. This includes the cost of R&D, production, operation, support, and, where applicable, disposal. A typical breakdown description might include:

● R&D costs: The cost of feasibility studies; cost-benefit analyses; system analyses; detail design and development; fabrication, assembly, and test of engineering models; initial product evaluation; and associated documentation.

● Production cost: The cost of fabrication, assembly, and testing of production models; operation and maintenance of the production capability; and associated internal logistic support requirements, including test and support equipment devel- opment, spare/repair parts provisioning, technical data development, training, and entry of items into inventory.

714 PRICING AND ESTIMATING

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● Construction cost: The cost of new manufacturing facilities or upgrading existing structures to accommodate production and operation of support requirements.

● Operation and maintenance cost: The cost of sustaining operational personnel and maintenance support; spare/repair parts and related inventories; test and support equipment maintenance; transportation and handling; facilities, modifications, and technical data changes; and so on.

● Product retirement and phaseout cost (also called disposal cost): The cost of phas- ing the product out of inventory due to obsolescence or wearout, and subsequent equipment item recycling and reclamation as appropriate.

Life-cycle cost analysis is the systematic analytical process of evaluating various alternative courses of action early on in a project, with the objective of choosing the best way to employ scarce resources. Life-cycle cost is employed in the evaluation of alterna- tive design configurations, alternative manufacturing methods, alternative support schemes, and so on. This process includes:

● Defining the problem (what information is needed) ● Defining the requirements of the cost model being used ● Collecting historical data–cost relationships ● Developing estimate and test results

Successful application of LCC will:

● Provide downstream resource impact visibility ● Provide life-cycle cost management ● Influence R&D decision-making ● Support downstream strategic budgeting

There are also several limitations to life-cycle cost analyses. They include:

● The assumption that the product, as known, has a finite life-cycle ● A high cost to perform, which may not be appropriate for low-cost/low-volume

production ● A high sensitivity to changing requirements

Life-cycle costing requires that early estimates be made. The estimating method selected is based on the problem context (i.e., decisions to be made, required accuracy, complexity of the product, and the development status of the product) and the operational considerations (i.e., market introduction date, time available for analysis, and available resources).

The estimating methods available can be classified as follows:

● Informal estimating methods ● Judgment based on experience ● Analogy

Life-Cycle Costing (LCC) 715

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● SWAG method ● ROM method ● Rule-of-thumb method

● Formal estimating methods ● Detailed (from industrial engineering standards) ● Parametric

Table 14–14 shows the advantages/disadvantages of each method.

716 PRICING AND ESTIMATING

TABLE 14–14. ESTIMATING METHODS

Estimating Technique Application Advantages Disadvantages

Engineering estimates Reprocurement • Most detailed technique • Requires detailed program (empirical) Production • Best inherent accuracy and product definition

Development • Provides best estimating • Time-consuming and may base for future program be expensive change estimates • Subject to engineering

bias

• May overlook system integration costs

Parametric estimates Production • Application is simple • Requires parametric cost and scaling Development and low cost relationships to be (statistical) • Statistical database can established

provide expected values • Limited frequently to and prediction intervals specific subsystems or

• Can be used for functional hardware of equipment or systems systems prior to detail design or • Depends on quantity and program planning quality of the data

• Limited by data and number of independent variables

Equipment/subsystem Reprocurement • Relatively simple • Requires analogous analogy estimates Production • Low cost product and program data (comparative) Development • Emphasizes incremental • Limited to stable

Program planning program and product technology changes • Narrow range of electronic

• Good accuracy for applications similar systems • May be limited to systems

and equipment built by the same firm

Expert opinion All program phases • Available when there are • Subject to bias insufficient data, • Increased product or parametric cost program complexity can relationships, or degrade estimates program/product • Estimate substantiation is definition not quantifiable

PMBOK® Guide, 5th Edition 7.2.2 Cost Estimating Tools and

Techniques

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Figure 14–16 shows the various life-cycle phases for Department of Defense projects. At the end of the demonstration and validation phase (which is the completion of R&D) 85 percent of the decisions affecting the total life-cycle cost will have been made, and the cost reduction opportunity is limited to a maximum of 22 percent (excluding the effects of learning curve experiences). Figure 14–17 shows that, at the end of the R&D phase,

Life-Cycle Costing (LCC) 717

TRADE-OFF STUDIES,

RECOMMENDATIONS, AND ACCEPTANCE BY,

THE PMO

P E

R C

E N

DECISIONS AFFECTING LIFE-CYCLE COSTS WILL HAVE BEEN MADE

COST REDUCTION OPPORTUNITY

100

85 95

22 15

CONCEPTUAL DEFINITION

FULL-SCALE DEVELOPMENT

PRODUCTION–OPERATIONSDEMONSTRATION AND VALIDATION

FIGURE 14–16. Department of Defense life-cycle phases.

C U

M U

L A T

IV E

P E

R C

E N

T O

F L

C C

C O

M M

IT T

E D 100%

75%

50%

25%

70%

85%

95% PRODUCT PROVIDE OPERATIONS AND PRODUCT SUPPORT PLANS

PROVIDE DETAIL DESIGNS PROVIDE PRELIMINARY DESIGNS

DEVELOP PROTOTYPE PLANS

PROVIDE SYSTEM AND PRODUCTION FEASIBILITY

IDENTIFY AND FREEZE SUBSYSTEM CONFIGURATIONS

DEVELOP SYSTEM ALTERNATIVES

DEFINE FIXED AND TRADABLE ALTERNATIVES

DESCRIBE OPERATIONAL SCENARIO

CONCEPT

FORMULATION

CONCEPT

VALIDATION DEVELOPMENT PRODUCTION OPERATIONS

FIGURE 14–17. Actions affecting life-cycle cost (LCC).

PMBOK® Guide, 5th Edition Chapter 2 Project Life Cycle and

Organization

2.4 Characteristics of Project

Phases

7.2.1 Cost Estimating Inputs

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95 percent of the cumulative life-cycle cost is committed by the government. Figure 14–18 shows that, for every $12 that DoD puts into R&D, $28 are needed downstream for pro- duction and $60 for operation and support.

Life-cycle cost analysis is an integral part of strategic planning since today’s decision will affect tomorrow’s actions. Yet there are common errors made during life-cycle cost analyses:

● Loss or omission of data ● Lack of systematic structure ● Misinterpretation of data ● Wrong or misused techniques ● A concentration on insignificant facts ● Failure to assess uncertainty ● Failure to check work ● Estimating the wrong items

718 PRICING AND ESTIMATING

(A)(A)

(B)(B)

LCC

LIFE-CYCLE COST

SYSTEM ACQUISITION

OPERATION AND SUPPORT

PRODUCTION

SYSTEM RESEARCH AND DEVELOPMENT

YEARS

MILESTONES

12%

28%

60%

7% R&D

27% PROD 66% O&S

FIGURE 14–18. (A) Typical DoD system acquisition LCC profile; (B) typical communication sys- tem acquisition LCC profile.

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14.20 LOGISTICS SUPPORT

There is a class of projects called “material” projects where the deliverable may require maintenance, service, and support after development. This support will continue through- out the life cycle of the deliverable. Providing service to these deliverables is referred to as logistics support.

In the previous section we showed that approximately 85 percent of the deliverable’s life-cycle cost has been committed by the end of the design phase (see Figures 14–16 and 14–17). We also showed that the majority of the total life-cycle cost of a system is in operation and support, and could account for well above 60 percent of the total cost. Clearly, the decisions with the greatest chance of affecting life-cycle cost and identifying cost savings are those influencing the design of the deliverable. Simply stated, proper plan- ning and design can save a company hundreds of millions of dollars once the deliverable is put into use.

The two key parameters used to evaluate the performance of material systems are sup- portability and readiness. Supportability is the ability to maintain or acquire the necessary human and nonhuman resources to support the system. Readiness is a measure of how good we are at keeping the system performing as planned and how quickly we can make repairs during a shutdown. Clearly, proper planning during the design stage of a project can reduce supportability requirements, increase operational readiness, and minimize or lower logistics support costs.

The ten elements of logistics support include:

● Maintenance planning: The process conducted to evolve and establish maintenance concepts and requirements for the lifetime of a materiel system.

● Manpower and personnel: The identification and acquisition of personnel with the skills and grades required to operate and support a material system over its life- time.

● Supply support: All management actions, procedures, and techniques used to determine requirements to acquire, catalog, receive, store, transfer, issue, and dispose of secondary items. This includes provisioning for initial support as well as replenishment supply support.

● Support equipment: All equipment (mobile or fixed) required to support the oper- ation and maintenance of a materiel system. This includes associated multiuse end-items; ground-handling and maintenance equipment; tools, metrology, and calibration equipment; and test and automatic test equipment. It includes the acquisition of logistics support for the support and test equipment itself.

● Technical data: Recorded information regardless of form or character (such as manuals and drawings) of a scientific or technical nature. Computer programs and related software are not technical data; documentation of computer programs and related software are. Also other information related to contract administration.

● Training and training support: The processes, procedures, techniques, training devices, and equipment used to train personnel to operate and support a materiel system. This includes individual and crew training; new equipment training; initial, formal, and on-the-job training; and logistic support planning for training equipment and training device acquisitions and installations.

Logistics Support 719

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● Computer resource support: The facilities, hardware, software, documentation, manpower, and personnel needed to operate and support embedded computer systems.

● Facilities: The permanent or semipermanent real property assets required to sup- port the materiel system. Facilities management includes conducting studies to define types of facilities or facility improvement, locations, space needs, environ- ment requirements, and equipment.

● Packaging, handling, storage, and transportation: The resources, processes, pro- cedures, design considerations, and methods to ensure that all system, equipment, and support items are preserved, packaged, handled, and transported properly. This includes environmental considerations and equipment preservation require- ments for short- and long-term storage and transportability.

● Design interface: The relationship of logistics-related design parameters to readi- ness and support resource requirements. These logistics-related design parameters are expressed in operational terms rather than as inherent values and specifically relate to system readiness objectives and support costs of the material system.

14.21 ECONOMIC PROJECT SELECTION CRITERIA: CAPITAL BUDGETING

Project managers are often called upon to be active participants during the benefit-to-cost analysis of project selection. It is highly unlikely that com- panies will approve a project where the costs exceed the benefits. Benefits

can be measured in either financial or nonfinancial terms. The process of identifying the financial benefits is called capital budgeting, which

may be defined as the decision-making process by which organizations evaluate projects that include the purchase of major fixed assets such as buildings, machinery, and equip- ment. Sophisticated capital budgeting techniques take into consideration depreciation schedules, tax information, and cash flow. Since only the principles of capital budgeting will be discussed in this text, we will restrict ourselves to the following topics:

● Payback Period ● Discounted Cash Flow (DCF) ● Net Present Value (NPV) ● Internal Rate of Return (IRR)

14.22 PAYBACK PERIOD

The payback period is the exact length of time needed for a firm to recover its initial investment as calculated from cash inflows. Payback period is the least precise of all capital budgeting methods because the calculations are in

dollars and not adjusted for the time value of money. Table 14–15 shows the cash flow stream for Project A.

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From Table 14–15, Project A will last for exactly five years with the cash inflows shown. The payback period will be exactly four years. If the cash inflow in Year 4 were $6,000 instead of $5,000, then the payback period would be three years and 10 months.

The problem with the payback method is that $5,000 received in Year 4 is not worth $5,000 today. This unsophisticated approach mandates that the payback method be used as a supplemental tool to accompany other methods.

14.23 THE TIME VALUE OF MONEY

Everyone knows that a dollar today is worth more than a dollar a year from now. The reason for this is because of the time value of money. To illustrate the time value of money, let us look at the following equation:

FV 5 PV(1 1 k)n

where FV 5 Future value of an investment PV 5 Present value

k 5 Investment interest rate (or cost of capital) n 5 Number of years

Using this formula, we can see that an investment of $1,000 today (i.e., PV) invested at 10% (i.e., k) for one year (i.e., n) will give us a future value of $1,100. If the investment is for two years, then the future value would be worth $1,210.

Now, let us look at the formula from a different perspective. If an investment yields $1,000 a year from now, then how much is it worth today if the cost of money is 10%? To solve the problem, we must discount future values to the present for comparison purposes. This is referred to as “discounted cash flows.”

The previous equation can be written as:

PV 5 } (1

k)n }

Using the data given:

PV 5 } (1

1,0

1)1 } 5 $909

The Time Value of Money 721

TABLE 14–15. CAPITAL EXPENDITURE DATA FOR PROJECT A

Initial Investment Expected Cash Inflows

Year 1 Year 2 Year 3 Year 4 Year 5 $10,000 $1,000 $2,000 $2,000 $5,000 $2,000

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Therefore, $1,000 a year from now is worth only $909 today. If the interest rate, k, is known to be 10%, then you should not invest more than $909 to get the $1,000 return a year from now. However, if you could purchase this investment for $875, your interest rate would be more than 10%.

Discounting cash flows to the present for comparison purposes is a viable way to assess the value of an investment. As an example, you have a choice between two investments. Investment A will generate $100,000 two years from now and investment B will generate $110,000 three years from now. If the cost of capital is 15%, which investment is better?

Using the formula for discounted cash flow, we find that:

PVA 5 $75,614 PVB 5 $72,327

This implies that a return of $100,000 in two years is worth more to the firm than a $110,000 return three years from now.

14.24 NET PRESENT VALUE (NPV)

The net present value (NPV) method is a sophisticated capital budgeting technique that equates the discounted cash flows against the initial invest- ment. Mathematically,

NPV 5 ^ n

t51 3}(1

Vt k)t

}4 2 II where FV is the future value of the cash inflows, II represents the initial investment, and k is the discount rate equal to the firm’s cost of capital.

Table 14–16 calculates the NPV for the data provided previously in Table 14–15 using a discount rate of 10%.

722 PRICING AND ESTIMATING

TABLE 14–16. NPV CALCULATION FOR PROJECT A

Cash Year Inflows Present Value

1 $1,000 $ 909 2 2,000 1,653 3 2,000 1,503 4 5,000 3,415 5 2,000 1,242

Present value of cash inflows $ 8,722

Less investment 10,000

Net Present Value ,1,278.

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This indicates that the cash inflows discounted to the present will not recover the initial investment. This, in fact, is a bad investment to consider. Previously, we stated that the cash flow stream yielded a payback period of four years. However, using discounted cash flow, the actual payback is greater than five years, assuming that there will be cash inflow in years 6 and 7.

If in Table 14–16 the initial investment was $5,000, then the net present value would be $3,722. The decision-making criteria using NPV are as follows:

● If the NPV is greater than or equal to zero dollars, accept the project. ● If the NPV is less than zero dollars, reject the project.

A positive value of NPV indicates that the firm will earn a return equal to or greater than its cost of capital.

14.25 INTERNAL RATE OF RETURN (IRR)

The internal rate of return (IRR) is perhaps the most sophisticated capital budgeting technique and also more difficult to calculate than NPV. The internal rate of return is the discount rate where the present value of the

cash inflows exactly equals the initial investment. In other words, IRR is the discount rate when NPV 5 0. Mathematically

^ n

t51 3}(1 1

IR t

R)t }4 2 II 5 0

The solution to problems involving IRR is basically a trial-and-error solution. Table 14–17 shows that with the cash inflows provided, and with a $5,000 initial investment, an IRR of 10% yielded a value of $3,722 for NPV. Therefore, as a second guess, we should try a value greater than 10% for IRR to generate a zero value for NPV. Table 14–17 shows the final calculation.

The table implies that the cash inflows are equivalent to a 31% return on investment. Therefore, if the cost of capital were 10%, this would be an excellent investment. Also, this project is “probably” superior to other projects with a lower value for IRR.

Internal Rate of Return (IRR) 723

TABLE 14–17. IRR CALCULATION FOR PROJECT A CASH INFLOWS

IRR NPV

10% $3,722 20% 1,593 25% 807 30% 152 31% 34 32% ,78.

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14.26 COMPARING IRR, NPV, AND PAYBACK

For most projects, both IRR and NPV will generate the same accept- reject decision. However, there are differences that can exist in the under- lying assumptions that can cause the projects to be ranked differently. The

major problem is the differences in the magnitude and timing of the cash inflows. NPV assumes that the cash inflows are reinvested at the cost of capital, whereas IRR assumes reinvestment at the project’s IRR. NPV tends to be a more conservative approach.

The timing of the cash flows is also important. Early year cash inflows tend to be at a lower cost of capital and are more predictable than later year cash inflows. Because of the downstream uncertainty, companies prefer larger cash inflows in the early years rather than the later years.

Magnitude and timing are extremely important in the selection of capital projects. Consider Table 14–18.

If the company has sufficient funds for one and only one project, the natural assump- tion would be to select Project D with a 35% IRR. Unfortunately, companies shy away from long-term payback periods because of the relative uncertainties of the cash inflows after Year 1. One chemical/plastics manufacturer will not consider any capital projects unless the payback period is less than one year and has an IRR in excess of 50%!

14.27 RISK ANALYSIS

Suppose you have a choice between two projects, both of which require the same initial investment, have identical net present values, and require the same yearly cash inflows to break even. If the cash inflow of the first investment has a probability of occurrence of 95% and that of the second investment is 70%, then risk analysis would indicate that the first

investment is better. Risk analysis refers to the chance that the selection of this project will prove to be

unacceptable. In capital budgeting, risk analysis is almost entirely based upon how well we can predict cash inflows since the initial investment is usually known with some degree of certainty. The inflows, of course, are based upon sales projections, taxes, cost of raw materials, labor rates, and general economic conditions.

Sensitivity analysis is a simple way of assessing risk. A common approach is to esti- mate NPV based upon an optimistic (best case) approach, most likely (expected) approach,

724 PRICING AND ESTIMATING

TABLE 14–18. CAPITAL PROJECTS

Payback Period Project IRR with DCF

A 10% 1 year B 15% 2 years C 25% 3 years D 35% 5 years

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Analysis and Modeling

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and pessimistic (worst case) approach. This can be illustrated using Table 14–19. Both Projects A and B require the same initial investment of $10,000, with a cost of capital of 10%, and with expected five-year annual cash inflows of $5,000/year. The range for Project A’s NPV is substantially less than that of Project B, thus implying that Project A is less risky. A risk lover might select Project B because of the potential reward of $27,908, whereas a risk avoider would select Project A, which offers perhaps no chance for loss.

14.28 CAPITAL RATIONING

Capital rationing is the process of selecting the best group of projects such

that the highest overall net present value will result without exceeding the

total budget available. An assumption with capital rationing is that the pro-

jects under consideration are mutually exclusive. There are two approaches

often considered for capital rationing. The internal rate of return approach plots the IRRs in descending order against the

cumulative dollar investment. The resulting figure is often called an investment opportu- nity schedule. As an example, suppose a company has $300,000 committed for projects and must select from the projects identified in Table 14–20. Furthermore, assume that the cost of capital is 10%.

Capital Rationing 725

TABLE 14–19. SENSITIVITY ANALYSIS

Project A Project B Initial Investment $10,000 $10,000

Annual Cash Inflows Optimistic $ 8,000 $10,000 Most likely 5,000 5,000 Pessimistic 3,000 1,000 Range $ 5,000 $ 9,000

Net Present Values Optimistic $20,326 $27,908 Most likely 8,954 8,954 Pessimistic 1,342 ,6,209. Range $18,984 $34,117

TABLE 14–20. PROJECTS UNDER CONSIDERATION

Discounted Cash Project Investment IRR Flows at 10%

A $ 50,000 20% $116,000 B 120,000 18% 183,000 C 110,000 16% 147,000 D 130,000 15% 171,000 E 90,000 12% 103,000 F 180,000 11% 206,000 G 80,000 8% 66,000

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Figure 14–19 shows the investment opportunity schedule. Project G should not be considered because the IRR is less than the firm’s cost of capital, but we should select Projects, A, B, and C, which will consume $280,000 out of a total budget of $300,000. This allows us to have the three largest IRRs.

The problem with the IRR approach is that it does not guarantee that the projects with the largest IRRs will maximize the total dollar returns. The reason is that not all of the funds have been consumed.

A better approach is the net present value method. In this method, the projects are again ranked according to their IRRs, but the combination of projects selected will be based upon the highest net present value. As an example, the selection of Projects A, B, and C from Table 14–20 requires an initial investment of $280,000 with resulting dis- counted cash flows of $446,000. The net present value of Projects A, B, and C is, there- fore, $166,000. This assumes that unused portions of the original budget of $300,000 do not gain or lose money. However, if we now select Projects A, B, and D, we will invest $300,000 with a net present value of $170,000 ($470,000 less $300,000). Selection of Projects A, B, and D will, therefore, maximize net present value.

14.29 PROJECT FINANCING2

Project financing involves the establishment of a legally independent project company, usually for large-scale investments (LSI) and long term where the providers of funds are repaid out of cash flow and earnings, and where the assets of the unit (and only the unit)

726 PRICING AND ESTIMATING

0 $1000

$200 $300 $400 $500 $600 $700 $800

10%

12%

14%

16%

18%

20%

IR R

$280K

COST OF CAPITAL

BUDGET CONSTRAINT

C D

E F

TOTAL INVESTMENT (IN THOUSANDS)

FIGURE 14–19. Investment Opportunity Schedule (IOS) for Table 14–20.

2. Project financing is a relatively new topic and is now being taught in graduate programs in business. At Harvard University, it is taught as a course entitled Large Scale Investment by Professor Benjamin C. Esty. Many excel- lent examples appear in Professor Esty’s text, Modern Project Finance (Hoboken, NJ: Wiley, 2004).

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are used as collateral for the loans. Debt repayment would come from the project company only rather than from any other entity. A risk with project financing is that the capital assets may have a limited life. The potential limited life constraint often makes it difficult to get lenders to agree to long-term financial arrangements.

Another critical issue with project financing especially for high-technology projects is that the projects are generally long term. It may be nearly eight to ten years before service will begin, and in terms of technology, eight years can be an eternity. Project financing is often considered a “bet on the future.” And if the project were to fail, the company could be worth nothing after liquidation.

There are several risks that must be considered to understand project financing. The risks commonly considered are

Financial Risks ● Use of project versus corporate financing ● Use of corporate bonds, stock, zero coupon bonds, and bank notes ● Use of secured versus unsecured debt ● The best sequence or timing for raising capital ● Bond rating changes ● Determination of the refinancing risk, if necessary

Development Risks ● Reality of the assumptions ● Reality of the technology ● Reality of development of the technology ● Risks of obsolescence

Political Risks ● Sovereignty risks ● Political instability ● Terrorism and war ● Labor availability ● Trade restrictions ● Macroeconomics such as inflation, currency conversion, and transferability of

funding and technology

Organizational Risks ● Members of the board of directors ● Incentives for the officers ● Incentives for the board members ● Bonuses as a percentage of base compensation ● Process for the resolution of disputes

Execution Risks ● Timing when execution will begin ● Life expectancy of execution ● Ability to service debt during execution

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14.30 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses:

● Integration Management ● Scope Management ● Time Management ● Cost Management ● Initiating ● Planning

Understanding the following principles is beneficial if the reader is using this text to study for the PMP® Certification Exam:

● What is meant by cost-estimating relationships (CER) ● Three basic types of estimates ● Relative accuracy of each type of estimate and the approximate time to prepare the

estimate ● Information that is needed to prepare the estimates (i.e., labor, material, overhead

rates, etc.) ● Importance of backup data for costs ● Estimating pitfalls ● Concept of rolling wave planning ● What is meant by life cycle costing ● Different ways of evaluating a project’s financial feasibility or benefits (i.e., ROI,

payback period, net present value, internal rate of return, depreciation, scoring models)

The following multiple-choice questions will be helpful in reviewing the principles of this chapter:

1. Which of the following is a valid way of evaluating the financial feasibility of a project? A. Return on investment B. Net present value C. Internal rate of return D. All of the above

2. The three common classification systems for estimates includes all of the following except: A. Parametric estimates B. Quick-and-dirty estimates C. Analogy estimates D. Engineering estimates

3. The most accurate estimates are: A. Parametric estimates B. Quick-and-dirty estimates

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C. Analogy estimates D. Engineering estimates

4. Which of the following is considered to be a bottom-up estimate rather than a top-down estimate? A. Parametric estimates B. Analogy estimates C. Engineering estimates D. None of the above

5. Which of the following would be considered as a cost-estimating relationship (CER)? A. Mathematical equations based upon regression analysis B. Learning curves C. Cost–cost or cost–quantity relationships D. All of the above

6. If a worker earns $30 per hour in salary but the project is charged $75 per hour for each hour the individual works, then the overhead rate is: A. 100% B. 150% C. 250% D. None of the above

7. Information supplied to a customer to support the financial data provided in a proposal is commonly called: A. Backup data B. Engineering support data C. Labor justification estimates D. Legal rights estimates

8. Estimating pitfalls can result from: A. Poorly defined statement of work B. Failure to account for risks in the estimates C. Using the wrong estimating techniques D. All of the above

9. The source of many estimating risks is: A. Poorly defined requirements B. An inexperienced project manager C. Lack of management support during estimating D. All of the above

10. A project where the scope evolves as the work takes place is called either progressive plan- ning or: A. Synchronous planning B. Continuous planning C. Rolling wave planning D. Continuous reestimation planning

11. The calculation of the total cost of a product, from R&D to operational support and disposal, is called: A. Birth-to-death costing B. Life-cycle costing C. Summary costing D. Depreciation costing

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ANSWERS

1. D

2. B

3. D

4. C

5. D

6. B

7. A

8. D

9. D

10. C

11. B

PROBLEMS

14–1 How does a project manager price out a job in which the specifications are not prepared until the job is half over?

14–2 Beta Corporation is in the process of completing a contract to produce 150 units for a given customer. The contract consisted of R&D, testing and qualification, and full production. The industrial engineering department had determined that the following number of hours were required to produce certain units:

Unit Hours Required Per Unit 1 100 2 90 4 80 8 70

16 65 32 60 64 55

128 50

a. Plot the data points on regular graph paper with the Y-axis as hours and the X-axis as number of units produced.

b. Plot the data points on log–log paper and determine the slope of the line. c. Compare parts a and b. What are your conclusions? d. How much time should it take to manufacture the 150th unit? e. How much time should it take to manufacture the 1,000th unit? Explain your answer.

Is it realistic? If not, why? f. As you are producing the 150th unit, you receive an immediate follow-on contract for

another 150 units. How many manufacturing hours should you estimate for the follow-on effort (using only the learning curves)?

g. Let’s assume that industrial engineering determines that the optimum number of hours (for 100 percent efficiency) of manufacturing is forty-five. At what efficiency factor are you now performing at the completion of unit number 150? After how many units in the follow-on contract will you reach the optimum level?

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Problems 731

h. At the end of the first follow-on contract, your team and personnel are still together and performing at a 100 percent efficiency position (of part g). You have been awarded a second follow-on contract, but the work will not begin until six months from now. Assuming that you can assemble the same team, how many man-hours/unit will you estimate for the next 150-unit follow-on?

i. Would your answer to part h change if you could not assemble the same team? Explain your answer quantitatively.

j. You are now on the contract negotiation team for the second follow-on contract of 150 units (which is not scheduled to start for six months). Based on the people available and the “loss of learning” between contracts, your industrial engineering department esti- mates that you will be performing at a 60 percent efficiency factor. The customer says that your efficiency factor should be at least 75 percent. If your company is burdened at $40/hour, how much money is involved between the 60 and 75 percent efficiency factors?

k. What considerations should be made in deciding where to compromise in the effi- ciency factor?

14–3 With reference to Figure 14–10, under what conditions could each of the following situ- ations occur:

a. Program manager and program office determine labor hours by pricing out the work breakdown structure without coordination with functional management.

b. Upper-level management determines the price of a bid without forming a program office or consulting functional management.

c. Perturbations on the base case are not performed. d. The chief executive officer selects the program manager without consulting his directors. e. Upper-level management does not wish to have a cost review meeting prior to sub-

mittal of a bid.

14–4 Can Figure 14–20 be used effectively to price out the cost of preparing reports?

LEGEND

Greater Than 10% over Target

Greater Than 10% under Target

Within 10% of Target

To ta

l P ro

je ct

C o st

f o r

R e p o rt

s (3

$ 10

0 0 )

110

100

0 0 20 40 60 80 100 120 140 160

Total Project Cost (3 $10,000)

FIGURE 14–20. Project documentation costs.

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732 PRICING AND ESTIMATING

14–5 Answer the following questions with reference to Figure 14–10.

a. The base case for a program is priced out at $22 million. The company’s chief exec- utive officer is required to obtain written permission from corporate to bid on pro- grams in excess of $20 million. During the price review meeting the chief executive states that the bid will be submitted at $19.5 million. Should you, as program man- ager, question this?

b. Would your answer to part a change if this program were a follow-on to an earlier program?

c. Proposals normally consist of management, technical, and cost volumes. Indicate in Figure 14–10 where these volumes can go to press, assuming each can be printed independently.

14–6 Under what kind of projects would each of the following parameters be selected:

a. Salary escalation factor of 0 percent. b. Material termination liability of 0 percent or 100 percent. c. Material commitments for twenty months of a twenty-four-month program. d. Demanning ratio of 0 percent or 100 percent of following months’ labor.

14–7 How can upper-level management use the functional cost and hour summary to deter- mine manpower planning for the entire company? How would you expect management to react if the functional cost and hour summary indicated a shortage or an abundance of trained personnel?

14–8 Which of the figures presented in this chapter should program management make avail- able to the functional managers? Explain your answer.

14–9 The Jennings Construction Company has decided to bid on the construction for each of the two phases of a large project. The bidding requirements are that the costs for each phase be submitted separately together with a transition cost for turning over the first phase of the program to a second contractor should Jennings not receive both awards or perform unsatisfactorily on the first phase. The evaluation for the award of the second phase will not be made until the first phase is near completion. How can the transition costs be identified in the strategic planning model?

14–10 Two contractors decide to enter into a joint venture on a project. What difficulties can occur if the contractors have decided on who does what work, but changes may take place if problems occur? What happens if one contractor has higher salary levels and overhead rates?

14–11 The Jones Manufacturing Company is competing for a production contract that requires that work begin in January 2003. The cost package for the proposal must be submitted by July 2002. The business base, and therefore the overhead rates, are uncertain because Jones has the possibility of winning another contract, to be announced in September 2002. How can the impact of the announcement be included in the proposal? How would you handle a situation where another contract may not be renewed after January 2003, i.e., assume that the announcement would not be made until March?

14–12 Many competitive programs contain two phases: research and development, and pro- duction. Production profits far exceed R&D profits. The company that wins the R&D contract normally becomes a favorite for the production contract, as well as for any follow-on work. How can the dollar figures attached to follow-on work influence the cost package that you submit for the R&D phase? Would your answer change if the man-hours submitted for the R&D phase become the basis for the production phase?

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Problems 733

14–13 During initial pricing activities, one of the functional managers discovers that the work breakdown structure requires costing data at a level that is not normally made, and will undoubtedly incur additional costs. How should you, as a program manager, respond to this situation? What are your alternatives?

14–14 Should the project manager give the final manpower loading curves to the functional managers? If so, at what point in time?

14–15 You have been asked to price out a project for an outside customer. The project will run for eight months. Direct labor is $100,000 for each month and the overhead rate is fixed at 100 percent per month. Termination liability on the direct labor and overhead rate is 80 percent of the following month’s expenses. Material expenses are as follows:

Material A: Cost is $100,000 payable 30 days net. Material is needed at the end of the fifth month. Lead time is four months with termination liability expenses as follows:

30 days: 25% 60 days: 75% 90 days: 100%

Material B: Cost is $200,000, payable on delivery. Material is needed at the end of the seventh month. Lead time is three months with termination liability as follows:

30 days: 50% 60 days: 100%

Complete the table below, neglecting profits.

Month

1 2 3 4 5 6 7 8

Direct labor

Overhead

Material

Monthly cash flow

Cumulative cash flow

Monthly termination liability: labor

Cumulative termination liability: labor

Monthly termination liability: material

Cumulative termination liability: material

Total project termination liability

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14–16 Should a project manager be appointed in the bidding stage of a project? If so, what authority should he have, and who is responsible for winning the contract?

14–17 Explain how useful each of the following can be during the estimating of project costs:

a. Contingency planning and estimating b. Using historical databases c. Usefulness of computer estimating d. Usefulness of performance factors to account for inefficiencies and uncertainties.

734 PRICING AND ESTIMATING

CASE STUDY

THE ESTIMATING PROBLEM1

Barbara just received the good news: She was assigned as the project manager for a project that her company won as part of competitive bidding. Whenever a request for proposal (RFP) comes into Barbara’s company, a committee composed mainly of senior managers reviews the RFP. If the decision is made to bid on the job, the RFP is turned over to the Proposal Department. Part of the Proposal Department is an estimating group that is responsible for estimating all work. If the estimating group has no previous history concerning some of the deliverables or work packages and is unsure about the time and cost for the work, the estimating team will then ask the functional managers for assistance with estimating.

Project managers like Barbara do not often participate in the bidding process. Usually, their first knowledge about the project comes after the contract is awarded to their company and they are assigned as the project manager. Some project managers are highly optimistic and trust the estimates that were submitted in the bid implicitly unless, of course, a significant span of time has elapsed between the date of submittal of the proposal and the final contract award date. Barbara, however, is somewhat pessimistic. She believes that accepting the estimates as they were submitted in the proposal is like playing Russian roulette. As such, Barbara prefers to review the estimates.

One of the most critical work packages in the project was estimated at twelve weeks using one grade 7 employee full time. Barbara had performed this task on previous projects and it required one person full time for fourteen weeks. Barbara asked the estimating group how they arrived at this estimate. The estimating group responded that they used the three-point estimate where the optimistic time was four weeks, the most likely time was thirteen weeks, and the pes- simistic time was sixteen weeks.

Barbara believed that the three-point estimate was way off of the mark. The only way that this work package could ever be completed in four weeks would be for a very small project nowhere near the complexity of Barbara’s project. Therefore, the estimating group was not con- sidering any complexity factors when using the three-point estimate. Had the estimating group used the triangular distribution where each of the three estimates had an equal likelihood of occurrence, the final estimate would have been thirteen weeks. This was closer to the fourteen weeks that Barbara thought the work package would take. While a difference of 1 week seems small, it could have a serious impact on Barbara’s project and incur penalties for late delivery.

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Barbara was now still confused and decided to talk to Peter, the employee that was assigned to do this task. Barbara had worked with Peter on previous projects. Peter was a grade 9 employee and considered to be an expert in this work package. As part of the discussions with Barbara, Peter made the following comments:

I have seen estimating data bases that include this type of work package and they all esti-

mate the work package at about 14 weeks. I do not understand why our estimating group

prefers to use the three point estimate.

“Does the typical data base account for project complexity when considering the esti- mates?” asked Barbara. Peter responded:

Some data bases have techniques for considering complexity, but mostly they just assume

an average complexity level. When complexity is important, as it is in our project, analogy

estimating would be better. Using analogy estimating and comparing the complexity of the

work package on this project to the similar works packages I have completed, I would say

that 16–17 weeks is closer to reality, and let’s hope I do not get removed from the project

to put out a fire somewhere else in the company. That would be terrible. It is impossible

for me to get it done in 12 weeks. And adding more people to this work package will not

shorten the schedule. It may even make it worse.

Barbara then asked Peter one more question:

Peter, you are a grade 9 and considered as the subject matter expert. If a grade 7 had been

assigned, as the estimating group had said, how long would it have taken the grade 7 to do

the job?

“Probably about 20 weeks or so,” responded Peter.

QUESTIONS

1. How many different estimating techniques were discussed in the case? 2. If each estimate is different, how does a project manager decide that one estimate is

better than another? 3. If you were the project manager, which estimate would you use?

Case Study 735

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Cost Control

737

4th Edition) Study Guide, 11th Edition) Certification Exam

• The Bathtub Period* • Using the 50/50 Rule • Cost Management • Trouble in Paradise* • Multiple Choice Exam • Scope Management

• Crossword Puzzle on Cost Management

15.0 INTRODUCTION

Cost control is equally important to all companies, regardless of size. Small companies generally have tighter monetary controls because the failure of even one project can put the company at risk, but they have less

sophisticated control techniques. Large companies may have the luxury to spread project losses over sev- eral projects, whereas the small company may have few projects.

*Case Study also appears at end of chapter.

PMBOK® Guide 5th Edition 7.4 Cost Control

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Many people have a poor understanding of cost control. Cost control is not only “monitoring” costs and recording data, but also analyzing the data in order to take corrective action before it is too late. Cost control should be performed by all personnel who incur costs, not merely the project office.

Cost control implies good cost management, which must include:

● Cost estimating ● Cost accounting ● Project cash flow ● Company cash flow ● Direct labor costing

● Overhead rate costing ● Other tactics, such as incentives, penalties, and profit-sharing

Cost control is actually a subsystem of the management cost and control system (MCCS) rather than a complete system per se. This is shown in Figure 15–1, where the MCCS is represented as a two-cycle process: a planning cycle and an operating cycle. The operating cycle is what is commonly referred to as the cost control system. Failure of a cost control system to accurately describe the true status of a project does not necessarily imply that the cost control system is at fault. Any cost control system is only as good as the original plan against which performance will be measured. Therefore, the designing of a planning system must take into account the cost control system. For this reason, it is common for the planning cycle to be referred to as planning and control, whereas the operating cycle is referred to as cost and control.

The planning and control system must help management project the status toward objective comple- tion. Its purpose is to establish policies, procedures, and techniques that can be used in the day-to-day man- agement and control of projects and programs. It must, therefore, provide information that:

● Gives a picture of true work progress ● Will relate cost and schedule performance ● Identifies potential problems with respect to their sources. ● Provides information to project managers with a practical level of summarization ● Demonstrates that the milestones are valid, timely, and auditable

The planning and control system, in addition to being a tool by which objectives can be defined (i.e., hierarchy of objectives and organization accountability), exists as a tool to develop planning, measure progress, and control change. As a tool for planning, the system must be able to:

● Plan and schedule work ● Identify those indicators that will be used for measurement

738 COST CONTROL

PLANNING

WORK AUTHORIZATION

AND RELEASE

COST DATA COLLATION

AND REPORTING

COST ACCOUNTING

CUSTOMER AND

MANAGEMENT REPORTING

PHASE I PHASE II PHASE III PHASE IV PHASE V

PLANNING CYCLE OPERATING CYCLE

FIGURE 15–1. Phases of a management cost and control system.

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● Establish direct labor budgets ● Establish overhead budgets ● Identify management reserve

The project budget that results from the planning cycle of the MCCS must be reasonable, attainable, and based on contractually negotiated costs and the statement of work. The basis for the budget is either historical cost, best estimates, or industrial engineering standards. The budget must identify planned man- power requirements, contract-allocated funds, and management reserve.

Establishing budgets requires that the planner fully understand the meaning of standards. There are two categories of standards. Performance results standards are quantitative measurements and include such items as quality of work, quantity of work, cost of work, and time-to-complete. Process standards are qual- itative, including personnel, functional, and physical factors relationships. Standards are advantageous in that they provide a means for unity, a basis for effective control, and an incentive for others. The disad- vantage of standards is that performance is often frozen, and employees are quite often unable to adjust to the differences.

As a tool for measuring progress and controlling change, the systems must be able to:

● Measure resources consumed ● Measure status and accomplishments ● Compare measurements to projections and standards ● Provide the basis for diagnosis and replanning

In using the MCCS, the following guidelines usually apply:

● The level of detail is specified by the project manager with approval by top management. ● Centralized authority and control over each project are the responsibility of the project manage-

ment division. ● For large projects, the project manager may be supported by a project team for utilization of the

MCCS.

Almost all project planning and control systems have identifiable design requirements. These include:

● A common framework from which to integrate time, cost, and technical performance ● Ability to track progress of significant parameters ● Quick response ● Capability for end-value prediction ● Accurate and appropriate data for decision-making by each level of management ● Full exception reporting with problem analysis capability ● Immediate quantitative evaluation of alternative solutions

MCCS planning activities include:

● Contract receipt (if applicable) ● Work authorization for project planning

Introduction 739

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● Work breakdown structure ● Subdivided work description ● Schedules ● Planning charts ● Budgets

MCCS planning charts are worksheets used to create the budget. These charts include planned labor in hours and material dollars.

MCCS planning is accomplished in one of these ways:

● One level below the lowest level of the WBS ● At the lowest management level ● By cost element or cost account

Even with a fully developed planning and control system, there are numerous benefits and costs. The appropriate system must consider a cost-benefit analysis, and include such items as:

● Project benefits ● Planning and control techniques facilitate:

—Derivation of output specifications ( project objectives) —Delineation of required activities (work) —Coordination and communication between organizational units —Determination of type, amount, and timing of necessary resources —Recognition of high-risk elements and assessment of uncertainties —Suggestions of alternative courses of action —Realization of effect of resource level changes on schedule and output performance —Measurement and reporting of genuine progress —Identification of potential problems —Basis for problem-solving, decision-making, and corrective action —Assurance of coupling between planning and control

● Project cost ● Planning and control techniques require:

—New forms (new systems) of information from additional sources and incremental process- ing (managerial time, computer expense, etc.)

—Additional personnel or smaller span of control to free managerial time for planning and con- trol tasks (increased overhead)

—Training in use of techniques (time and materials)

A well-disciplined MCCS will produce the following results:

● Policies and procedures that will minimize the ability to distort reporting ● Strong management emphasis on meeting commitments ● Weekly team meetings with a formalized agenda, action items, and minutes ● Top-management periodic review of the technical and financial status ● Simplified internal audit for checking compliance with procedures

740 COST CONTROL

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For MCCS to be effective, both the scheduling and budgeting systems must be disciplined and formal

in order to prevent inadvertent or arbitrary budget or schedule changes. This does not mean that the base- line budget and schedule, once established, is static or inflexible. Rather, it means that changes must be

controlled and result only from deliberate management actions.

Disciplined use of MCCS is designed to put pressure on the project manager to perform exceptionally

good project planning so that changes will be minimized. As an example, government subcontractors

may not:

● Make retroactive changes to budgets or costs for work that has been completed

● Rebudget work-in-progress activities

● Transfer work or budget independently of each other

● Reopen closed work packages

In some industries, the MCCS must be used on all contracts of $2 million or more, including firm-

fixed-price efforts. The fundamental test of whether to use the MCCS is to determine whether the contracts

have established end-item deliverables, either hardware or computer software, that must be accomplished

through measurable efforts.

Two programs are used by the government and industry in conjunction with the MCCS as an attempt

to improve effectiveness in cost control. The zero-base budgeting program provides better estimating tech-

niques for the verification portion of control. The design-to-cost program assists the decision-making part

of the control process by identifying a decision-making framework from which replanning can take place.

15.1 UNDERSTANDING CONTROL

Effective management of a program during the operating cycle requires

that a well-organized cost and control system be designed, developed, and

implemented so that immediate feedback can be obtained, whereby the

up-to-date usage or resources can be compared to target objectives estab-

lished during the planning cycle. The requirements for an effective control system (for

both cost and schedule/performance) should include1:

● Thorough planning of the work to be performed to complete the project

● Good estimating of time, labor, and costs

● Clear communication of the scope of required tasks

● A disciplined budget and authorization of expenditures

● Timely accounting of physical progress and cost expenditures

● Periodic reestimation of time and cost to complete remaining work

● Frequent, periodic comparison of actual progress and expenditures to schedules

and budgets, both at the time of comparison and at project completion

Understanding Control 741

1. Russell D. Archibald, Managing High-Technology Programs and Projects (New York: John Wiley & Sons, 1976), p. 191.

PMBOK® Guide, 5th Edition 3.6 Monitoring and Control

Process Group

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Management must compare the time, cost, and performance of the program to the budgeted time, cost, and performance, not independently but in an integrated manner. Being within one’s budget at the proper time serves no useful purpose if performance is only 75 percent. Likewise, having a production line turn out exactly 200 items, as planned, loses its significance if a 50 percent cost overrun is incurred. All three resource parameters (time, cost, and performance) must be analyzed as a group, or else we might “win the bat- tle but lose the war.” The use of the expression “management cost and control system” is vague in that the implication is that only costs are controlled. This is not true—an effec- tive control system monitors schedule and performance as well as costs by setting budgets, measuring expenditures against budgets and identifying variances, assuring that the expen- ditures are proper, and taking corrective action when required.

Previously we defined the work breakdown structure as the element that acts as the source from which all costs and controls must emanate. The WBS is the total project bro- ken down into successively lower levels until the desired control levels are established. The work breakdown structure therefore serves as the tool from which performance can be sub- divided into objectives and subobjectives. As work progresses, the WBS provides the framework on which costs, time, and schedule/performance can be compared against the budget for each level of the WBS.

The first purpose of control therefore becomes a verification process accomplished by the comparison of actual performance to date with the predetermined plans and standards set forth in the planning phase. The comparison serves to verify that:

● The objectives have been successfully translated into performance standards. ● The performance standards are, in fact, a reliable representation of program activ-

ities and events. ● Meaningful budgets have been established such that actual versus planned com-

parisons can be made.

In other words, the comparison verifies that the correct standards were selected, and that they are properly used.

742 COST CONTROL

POSSIBLE COST REDUCTIONS

PROJECT COSTS

COST OF CHANGE

PROJECT LIFE-CYCLE PHASES

FIGURE 15–2. Cost reduction analysis.

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The second purpose of control is decision-making. Three useful reports are required by management in order to make effective and timely decisions:

● The project plan, schedule, and budget prepared during the planning phase ● A detailed comparison between resources expended to date and those predeter-

mined. This includes an estimate of the work remaining and the impact on activ- ity completion.

● A projection of resources to be expended through program completion

These reports, supplied to the managers and the doers, provide three useful results:

● Feedback to management, the planners, and the doers ● Identification of any major deviations from the current program plan, schedule, or

budget ● The opportunity to initiate contingency planning early enough that cost, per-

formance, and time requirements can undergo corrected action without loss of resources

These reports provide management with the opportunity to minimize downstream changes by making proper corrections here and now. As shown in Figures 15–2 and 15–3, cost reductions are more available in the early project phases, but are reduced as we go further into the project life-cycle phases. Figure 15–3 identifies the people that most likely have the greatest influence on possibly initiating changes to a project. Downstream the cost of changes could easily exceed the original cost of the project. This is an example of the “iceberg” syndrome, where problems become evident too late in the project to be solved easily, resulting in a very high cost to correct them.

Understanding Control 743

IMPACT ON

COST

CUSTOMER, OWNER

PROJECT MANAGER

PROJECT TEAM, CONTRACTORS

USERS

PROJECT LIFE-CYCLE PHASES

INITIATION PLANNING EXECUTION CLOSURE

FIGURE 15–3. People with the ability to influence cost.

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15.2 THE OPERATING CYCLE

The management cost and control system (MCCS) takes on paramount importance during the operating cycle of the project. The operating cycle is composed of four phases:

● Work authorization and release (phase II) ● Cost data collection and reporting (phase III) ● Cost analysis (phase IV) ● Reporting: customer and management (phase V)

These four phases, when combined with the planning cycle (phase I), constitute a closed system network that forms the basis for the management cost and control system.

Phase II is considered as work release. After planning is completed and a contract is received, work is authorized via a work description document. The work description, or project work authorization form, is a contract that contains the narrative description, orga- nization, and time frame for each WBS level. This multipurpose form is used to release the contract, authorize planning, record detail description of the work outlined in the work breakdown structure, and release work to the functional departments.

Contract services may require a work description form to release the contract. The contractual work description form sets forth general contractual requirements and autho- rizes program management to proceed.

Program management may then issue a subdivided work description form to the func- tional units so that work can begin. The subdivided work description may also be issued through the combined efforts of the project team, and may be revised or amended when either the scope or the time frame changes. The subdivided work description generally is not used for efforts longer than ninety days and must be “tracked” as if a project in itself. This subdivided work description form sets forth contractual requirements and planning guidelines for the applicable performing organizations. The subdivided work description package established during the proposal and updated after negotiations by the program team is incrementally released by program management to the work control centers in manufacturing, engineering, publications, and program management as the authority for release of work orders to the performing organizations. The subdivided work description specifies how contractual requirements are to be accomplished, the functional organiza- tions involved, and their specific responsibilities, and authorizes the expenditure of resources within a particular time frame.

The work control center assigns a work order number to the subdivided work description form, if no additional instructions are required, and releases the document to the performing organizations. If additional instructions are required, the work control center can prepare a more detailed work-release document (shop traveler, tool order, work order release), assign the applicable work order number, and release it to the performing organization.

A work order number is required for all in-house direct and indirect charging. The work order number also serves as a cross-reference number for automatic assignment of the indentured work breakdown structure number to labor and material data records in the computer.

744 COST CONTROL

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Small companies can avoid this additional paperwork cost by going directly from an awarded contract to a single work order, which may be the only work order needed for the entire contract.

15.3 COST ACCOUNT CODES

Since project managers control resources through the line managers rather than directly, project managers end up controlling direct labor costs by opening and closing work orders. Work orders define the charge numbers

for each cost account. By definition, a cost account is an identified level at a natural inter- section point of the work breakdown structure and the organizational breakdown structure (OBS) at which functional responsibility for the work is assigned, and actual direct labor, material, and other direct costs are compared with actual work performed for management control purposes.

Cost accounts are the focal point of the MCCS and may comprise several work pack- ages, as shown in Figure 15–4. Work packages are detailed short-span job or material items identified for the accomplishment of required work. To illustrate this, consider the cost account code breakdown shown in Figure 15–5 and the work authorization form shown in Figure 15–6. The work authorization form specifically identifies the cost centers that are “open” for this charge number, the man-hours available for each cost center, and the oper- ational time period for the charge number. Because the exact dates of operation are com- pletely defined, the charge number can be assigned perhaps as much as a year in advance of the work-begin date. This can be shown pictorially, as in Figure 15–7.

If the man-hours are assigned to Cost Center 2400, then any 24xx cost center can use this charge number. If the work authorization form specifies Cost Center 2610, then any 261x cost center can use the charge number. However, if Cost Center 2623 is specified, then no lower cost accounts exist, and this is the only cost center that can use this work order charge number. In other words, if a charge number is opened up at the department level, then the department manager has the right to subdivide the assigned man-hours among the various sections and subsections. Company policy usually identifies the per- missible cost center levels that can be assigned in the work authorization form. These permissible levels are related to the work breakdown structure level. For example, Cost Center 5000 (i.e., divisional) can be assigned at the project level of the work breakdown structure, but only department, sectional, or subsectional cost accounts can be assigned at the task level of the work breakdown structure.

If a cost center needs additional time or additional man-hours, then a cost account change notice form must be initiated, usually by the requesting cost center, and approved by the project office. Figure 15–8 shows a typical cost account change notice form.

Large companies have computerized cost control and reporting systems. Small com- panies have manual or partially computerized systems. The major difficulty in using the cost account code breakdown and the work authorization form (Figures 15–5 and 15–6) is related to whether the employees fill out time cards, and frequency with which the time

Cost Account Codes 745

PMBOK® Guide, 5th Edition 7.3.2.1 Cost Aggregation

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HARDWARE

PROGRAM

TRAINING

ENGINEERING SUBSYSTEM

MANUFACTURING SUBSYSTEM

COMPONENT TESTING

MODULE A

MODULE C

MODULE D

ELECTRICAL DESIGN

MECHANICAL DESIGN

VERIFICATION VALIDATION

COST ACCOUNT

WORK PACKAGES

LEVEL 2

LEVEL 1

LEVEL 3

LEVEL 4

FUNCTIONAL ORGANIZATION

E N

G IN

E E

R IN

D E

S IG

C O

M P

A N

M F

G T

E S

MODULE B

COST ACCOUNT

FIGURE 15–4. The cost account intersection.

746

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Cost Account Codes 747

DIVISION

SECTION

DEPARTMENT

SUBSECTION

ENGINEERING DIVISION

PROJECT ENGINEERING

STRUCTURAL ENGINEERING

DESIGN ENGINEERING

PIPING ENGINEERING

PLASTICS ENGINEERING

METALS ENGINEERING

MECHANICAL ENGINEERING

COMPUTER GRAPHICS

2000

2400 2600 2800

2610 2620

2621 2623

2630

FIGURE 15–5. Cost account code breakdown.

TEST MATERIAL VB-2 IN ACCORDANCE WITH THE PROGRAM PLAN AND MIL STANDARD G1483-52. THIS TASK INCLUDES A WRITTEN REPORT.

2400 150 1 AUG 01 15 SEPT 01

PROJECT OFFICE AUTHORIZATION SIGNATURE

DESCRIPTION COST

CENTERS HOURS WORK

BEGINS WORK ENDS

2610 160 2621 140 2623 46 5000* 600

*NOTE: SOME COMPANIES DO NOT PERMIT DIVISION COST CENTERS TO CHARGE AT LEVEL 3 OF THE WBS

WBS NO: 31-03-02

DATE OF ORIGINAL RELEASE:

DATE OF REVISION:

REVISION NUMBER:

WORK ORDER NO: D1385

3 FEB 01

: 18 MAR 01

: C

WORK AUTHORIZATION FORM

FIGURE 15–6. Work authorization form.

PMBOK® Guide, 5th Edition 7.3.2.1 Cost Aggregation

PMBOK® Guide, 5th Edition 4.4 Monitor and Control

Project Work

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cards are filled out. Project-driven organizations fill out time cards at least once a week, and the cards are inputted to a computerized system. Non–project-driven organizations fill out time cards on a monthly basis, with computerization depending on the size of the company.

Cost data collection and reporting constitute the second phase of the operating cycle of the MCCS. Actual cost (ACWP) and the budgeted cost for work performed (BCWP) for each contract or in-house project are accumulated in detailed cost accounts by cost center and cost element, and reported in accordance with the flow charts shown in Figure 15–9. These detailed elements, for both actual costs incurred and the budgeted cost for work per- formed, are usually printed out monthly for all levels of the work breakdown structure. In addition, weekly supplemental direct labor reports can be printed showing the actual labor charge incurred, and can be compared to the predicted efforts.

Most weekly labor reports provide current month subtotals and previous month totals. Although these also appear on the detailed monthly report, they are included in the weekly report for a quick-and-dirty comparison. Year-to-date totals are usually not on the weekly report unless the users request them for an immediate comparison to the estimate at completion (EAC) and the work order release.

Weekly labor output is a vital tool for members of the program office in that these reports can indicate trends in cost and performance in sufficient time for contingency plans to be established and implemented. If these reports are not available, then cost and labor overruns would not be apparent until the following month when the detailed monthly labor, cost, and materials output was obtained.

748 COST CONTROL

WORK PACKAGE

WP# ORG#

DESCRIPTION OF TASK

SCHED: START STOP

BUDGET:

WBS ELEMENT

WORK PKGS M

ORG

FIGURE 15–7. Planning and budgeting describe, plan, and schedule the work.

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Work order releases are used to authorize certain cost centers to begin charging their time to a specific cost reporting element. Work orders specify hours, not dollars. The hours indicate the “targets” that the program office would like to have the department shoot for. If the program office wished to be more specific and “compel” the departments to live within these hours, then the budgeted cost for work scheduled (BCWS) should be changed to reflect the reduced hours.

Four categories of cost data are normally accumulated:

● Labor ● Material ● Other direct charges ● Overhead

Cost Account Codes 749

CACN No.

DESCRIPTION OF CHANGE:

REASON FOR CHANGE:

BUDGET SOURCE:

INITIATED BY: APPROVALS:

DateRevision to Cost Account No.

Requested Budget Authorized Budget

Labor Hours

Material $

Indirect $

Period of Performance:

From

Funded Contract Change Management Reserve Undistributed Budget Other

Program Mgr. Prog. Control

FIGURE 15–8. Cost account change notice (CACN).

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Project managers can maintain reasonable control over labor, material, and other direct charges. Overhead costs, on the other hand, are calculated yearly or monthly and applied retroactively to all applicable programs. Management reserves are often used to counterbal- ance the effects of adverse changes in overhead rates.

15.4 BUDGETS

The project budget, which is the final result of the planning cycle of the MCCS, must be

reasonable, attainable, and based on contractually negotiated costs and the statement of

work. The basis for the budget is either historical cost, best estimates, or industrial engi-

neering standards. The budget must identify planned manpower requirements, contract

allocated funds, and management reserve.

All budgets must be traceable through the budget “log,” which includes:

● Distributed budget

● Management reserve

● Undistributed budget

● Contract changes

The distributed or normal performance budget is the time-phased budget that is

released through cost accounts and work packages. Management reserve is generally the

750 COST CONTROL

ACTUALS

ACWP

BCWP

BCWS

COMPUTER

MONTHLY TOTAL PROGRAM EFFORT

WEEKLY LABOR REPORTS

MCCS COMPARISON REPORTS TO ALL

MANAGEMENT

VARIANCE REPORTS

LABOR

INVENTORY ACCOUNTS

FIGURE 15–9. Cost data collection and reporting flowchart.

PMBOK® Guide, 5th Edition 7.4 Cost Control

10.2.2.4 Information Management

Systems

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dollar amount established for categories of unforeseen problems and contingencies result-

ing in special out-of-scope work to the performers. Sometimes, people interpret the man-

agement reserve as their own little kitty of funds for a special purpose. Below are several

interpretations on how the control of the management reserve should be used.

1. The management reserve is actually excess profits and should not be used at all. It

should be booked as additional profits as soon as possible. (Accounting)

2. The management reserve should be spent on any activities that add features or

additional functionality to the product. Our customers will like that. It will also

build up good customer relations for future work. (Marketing)

3. The management reserve should be used for those activities that add value to our

company, especially our image in the community. (Senior management)

4. The management reserve should be use as part of risk management in developing

mitigation strategies for risks that occur during the execution of the project. Scope

changes not originally agreed to should be billed separately to the customer.

(Project manager)

5. The management reserve should be used for the additional hours necessary to show

that our technical community can exceed specifications rather than merely meeting

them. This is our strength. The management reserve should also be used as “seed

money” for exploring ideas discovered while working on this project. (Engineering

and R&D)

Some people confuse the management reserve with the definition of a “reserve” or “con-

tingency” fund. In the author's opinion, the management reserve is controlled by the project

manager of the performing organization and used for escalations in salaries, raw material

prices, and overhead rates. The management reserve may also be used for unforeseen

problems that may occur. The management reserve should not be used to cover up bad plan-

ning estimates or budget overruns.

Also, the management reserve should not be used for scope changes. Scope changes

should be paid for out of the customer’s reserve or contingency fund. In other words, the

management reserve generally applies to the performing organization, whereas the con-

tingency reserve is controlled by the customer for the scope changes that may be requested

by the performing organization. There is an exception. If the performing organization is

requesting a small scope change, the cost of convening the change control board, paying

airfares, meals, and lodgings may be prohibited. In this case, the management reserve may

be used and considered as a goodwill activity for the performing organization.

The management reserve should be established based upon the project’s risks. Some

project may require no management reserve at all, whereas others may necessitate a

reserve of 15 percent.

There is always the question of who should get to keep any unused management

reserve at the end of the project. If the project is under a firm-fixed price contract, then the

management reserve becomes extra profit for the performing organization. If the contract

is a cost reimbursable type, all or part of the unused management reserve may have to be

returned to the customer.

Budgets 751

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Although the management reserve may appear as a line item in the work breakdown

structure, it is neither part of the distributed budget nor part of the cost baseline. Budgets

are established on the assumption that they will be spent, whereas management reserve is

money that you try not to spend. It would be inappropriate to consider the management

reserve as an undistributed budget.

In addition to the “normal” performance budget and the management reserve budget,

there are two other budgets:

● Undistributed budget, which is that budget associated with contract changes where

time constraints prevent the necessary planning to incorporate the change into the

performance budget. (This effort may be time-constrained.)

● Unallocated budget, which represents a logical grouping of contract tasks that

have not yet been identified and/or authorized.

15.5 THE EARNED VALUE MEASUREMENT SYSTEM (EVMS)

In the early years of project management, it became evident that project managers were

having difficulty determining project status. Some people believed that status could be

determined only by a mystical approach, as shown in Figure 15–10.

The critical question was whether project managers were managing costs or just mon-

itoring costs. The government wanted costs to be managed rather than just monitored,

accounted for, or reported. This need resulted in the creation of the EVMS.

The basis for the EVMS, which some consider to be a component of the MCCS,

is the determination of earned value. Earned value is a management technique that

relates resource planning to schedules and technical performance requirements.

Earned value management (EVM) is a systematic process that uses earned value as the

primary tool for integrating cost, schedule, technical performance management, and

risk management.

Without using the EVMS, determining status can be difficult. Consider the following:

● The project ● A total budget of $1.2 million ● A 12-month effort ● Produce 10 deliverables

● Reported status ● Time elapsed: 6 months ● Money spent to date: $700,000 ● Deliverables produced: 4 complete, 2 partial

What is the real status of the project? How far along is the project: 40, 50, 60 percent, etc.? Another problem was how to accurately relate cost to performance. If you spent 20 percent of the budget, does that imply that you are 20 percent complete? If you are 30 per- cent complete, then have you spent 30 percent of the budget?

752 COST CONTROL

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The Earned Value Measurement System (EVMS) 753

The EVMS provides the following benefits:

● Accurate display of project status ● Early and accurate identification of trends ● Early and accurate identification of problems ● Basis for course corrections

The EVMS can answer the following questions:

● What is the true status of the project? ● What are the problems? ● What can be done to fix the problems? ● What is the impact of each problem? ● What are the present and future risks?

The EVMS emphasizes prevention over cures by identifying and resolving problems early. The EVMS is an early warning system allowing for early identification of trends and variances from the plan. The EVMS provides an early warning system, thus allowing the project manager sufficient time to make course corrections in small increments. It is usu- ally easier to correct small variances as opposed to large variances. Therefore, the EVMS should be used continuously throughout the project in order to detect the variances while they are small and possibly easy to correct. Large variances are more difficult to correct and run the risk that the cost to correct the large variance may displease management to the point where the project may be canceled.

FIGURE 15–10. Determining the status.

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754 COST CONTROL

15.6 VARIANCE AND EARNED VALUE

A variance is defined as any schedule, technical performance, or cost deviation from a specific plan. Variances must be tracked and reported. They should be mitigated through corrective actions and not eliminated through a baseline change unless there is a good reason. Variances are used by all levels of management to verify the budgeting system and the scheduling system. The budgeting and scheduling system variance must be com- pared because:

● The cost variance compares deviations only from the budget and does not provide a measure of comparison between work scheduled and work accomplished.

● The scheduling variance provides a comparison between planned and actual per- formance but does not include costs.

There are two primary methods of measurement:

● Measurable efforts: Discrete increments of work with a definable schedule for accomplishment, whose completion produces tangible results.

● Level of effort: Work that does not lend itself to subdivision into discrete scheduled increments of work, such as project support and project control.

Variances are used on both types of measurement. In order to calculate variances, we must define the three basic variances for budgeting

and actual costs for work scheduled and performed:

● Budgeted cost for work scheduled (BCWS) is the budgeted amount of cost for work scheduled to be accomplished plus the amount or level of effort or apportioned effort scheduled to be accomplished in a given time period.

● Budget cost for work performed (BCWP) is the budgeted amount

of cost for completed work, plus budgeted for level of effort or

apportioned effort activity completed within a given time period.

This is sometimes referred to as “earned value.”

● Actual cost for work performed (ACWP) is the amount reported as actually

expended in completing the work accomplished within a given time period.

PMBOK® Guide, 5th Edition 7.4.2 Cost Control Tools and

Techniques

7.4.2.4 Performance Reviews

Note: The Project Management Institute has changed the nomenclature in their new ver- sion of the PMBOK® Guide whereby BCWS is now PV, BCWP is now EV, and ACWP is now AC. However, the majority of heavy users of these acronyms, specifically govern- ment contractors, still use the old acronyms. Until the PMI acronyms are accepted across all industries, we will continue to focus on the most commonly used acronyms.

BCWS represents the time-phased budget plan against which performance is measured.

For the total contract, BCWS is normally the negotiated contract plus the estimated cost of

authorized but unpriced work (less any management reserve). It is time-phased by the

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Variance and Earned Value 755

assignment of budgets to scheduled increments of work. For any given time period, BCWS

is determined at the cost account level by totaling budgets for all work packages, plus the

budget for the portion of in-process work (open work packages), plus the budget for level

of effort and apportioned effort.

A contractor must utilize anticipated learning when developing the time-phased

BCWS. Any recognized method used to apply learning is usually acceptable as long as the

BCWS is established to represent as closely as possible the expected actual cost (ACWP)

that will be charged to the cost account/work package.

These costs can then be applied to any level of the work breakdown structure (i.e., pro-

gram, project, task, subtask, work package) for work that is completed, in-program, or

anticipated. Using these definitions, the following variance definitions are obtained:

● Cost variance (CV) calculation:

CV 5 BCWP 2 ACWP

A negative variance indicates a cost-overrun condition.

● Schedule variance (SV) calculation:

SV 5 BCWP 2 BCWS

A negative variance indicates a behind-schedule condition. In the analysis of both cost and schedule, costs are used as the lowest common denom-

inator. In other words, the schedule variance is given as a function of cost. To alleviate this problem, the variances are usually converted to percentages:

Cost variance % (CVP) 5 } BC

P }

Schedule variance % (SVP) 5 } BC

WS }

The schedule variance may be represented by hours, days, weeks, or even dollars. As an example, consider a project that is scheduled to spend $100K for each of the

first four weeks of the project. The actual expenditures at the end of week four are $325K. Therefore, BCWS 5 $400K and ACWP 5 $325K. From these two parameters alone, there are several possible explanations as to project status. However, if BCWP is now known, say $300K, then the project is behind schedule and overrunning costs.

It is important to understand the physical meaning of CV and SV. Consider the fol- lowing example:

● BCWS 5 $1000 ● BCWP 5 $800 ● ACWP 5 $700

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756 COST CONTROL

In this example, the units are dollars. The units could have just as easily been hours, days, or weeks. In this example, CV 5 $800 2 $700 5 1$100. Because CV is a positive value, it indicates that physical progress was accomplished at a lower cost than the forecasted cost. This is a favorable situation. Had CV been negative, it would have indicated that physical progress was accomplished at a greater cost than what was forecasted. If CV 5 0, then the physical accomplishment was as budgeted.

Although CV is measured in hours or dollars, it is actually a measurement of the effi- ciency with which physical progress was accomplished compared with the plan. To correct a negative cost variance, emphasis should be placed upon the productivity rate (i.e., burn rate) at which work is being performed.

Returning to the above example, SV 5 $800 2 $1000 5 2$200. In this example, the schedule variance is a negative value, indicating that physical progress is being accom- plished at a slower rate than planned. This is an unfavorable condition. If the schedule vari- ance were positive, this would indicate physical progress being accomplished at a faster rate than planned. If SV 5 0, physical progress is being accomplished as planned.

The schedule variance, SV, measures the timeliness of the physical progress compared to the plan whereas the cost variance, CV, measures the efficiency. To correct a negative schedule variance, emphasis should be placed upon improving the speed by which work is being performed.

The cost variance relates to the real cost. However, the problem with SV is how it relates to the real schedule. The schedule variance is determined from cost account or work package financial numbers and does not necessarily relate to the real schedule. The sched- ule variance does not distinguish between critical path and non–critical path work pack- ages. The schedule variance by itself does not measure time. A negative schedule variance indicates a behind-schedule condition but does not mean that the critical path has slipped. On the contrary, the real schedule (i.e., precedence networks or the arrow diagramming networks) could indicate that the project will be ahead of schedule. A detailed analysis of the real schedule is still required irrespective of the value for the schedule variance.

Variances are almost always identified as critical items and are reported to all organi- zational levels. Critical variances are established for each level of the organization in accordance with management policies.

Not all companies have a uniform methodology for variance thresholds. Permitted variances may be dependent on such factors as:

● Life-cycle phase ● Length of life-cycle phase ● Length of project ● Type of estimate ● Accuracy of estimate

Variance controls may be different from program to program. Table 15–1 identifies sample variance criteria for program X.

For many programs and projects, variances are permitted to change over the duration of the program. For strict manufacturing programs (product management), variances may be fixed over the program time span using criteria as in Table 15–1. For programs that

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Variance and Earned Value 757

include research and development, larger deviations may be permitted during the earlier phases than during the later phases. Figure 15–11 shows time-phased cost variances for a program requiring research and development, qualification, and production phases. Since the risk should decrease as time goes on, the variance boundaries are reduced. Figure 15–12 shows that the variance envelope in such a case may be dependent on the type of estimate.

By using both cost and schedule variance, we can develop an integrated cost/schedule reporting system that provides the basis for variance analysis by measuring cost perfor- mance in relation to work accomplished. This system ensures that both cost budgeting and performance scheduling are constructed on the same database.

TABLE 15–1. VARIANCE CONTROL FOR PROGRAM X

Organizational Level Variance Thresholds*

Section Variances greater than $750 that exceed 25% of costs Section Variances greater than $2,500 that exceed 10% of costs Section Variances greater than $20,000

Department Variances greater than $2,000 that exceed 25% of costs Department Variances greater than $7,500 that exceed 10% of costs Department Variances greater than $40,000

Division Variances greater than $10,000 that exceed 10% of costs

*Thresholds are usually tighter within company reporting system than required external to government. Thresholds for external reporting are usually adjusted during various phases of program (% lower at end).

VARIANCE UPPER BOUNDARY

PROJECTED COST

ACTUAL COST VARIANCE

VARIANCE LOWER BOUNDARY

TIME

R&D DEVELOPMENTQUALIFICATION PHASE I PHASE II PHASE III

FIGURE 15–11. Project variance projection.

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758 COST CONTROL

LIFE-CYCLE PHASE ACCURACY MANPOWER REQUIRED

$ REQUIRED

TIME DURATION

TYPE OF ESTIMATE

PERMITTED VARIANCE

MAIN 16,000 HRS. 1,285,600 6 MOS HISTORY 65% 62%

FIGURE 15–12. Methodology to variance.

In addition to calculating the cost and schedule variances in terms of dollars or per- centages, we also want to know how efficiently the work has been accomplished. The formulas used to calculate the performance efficiency as a percentage of EV are:

Cost performance index (CPI) 5 } A

P }

Schedule performance index (SPI) 5 } B

S }

If CPI 5 1.0, we have perfect cost performance. If CPI , 1.0, physical progress is being accomplished at a greater cost than forecasted. This is unfavorable. If CPI . 1.0, physical progress is being accomplished at less than the forecasted cost, which is favor- able. Similar to CV, CPI measures the efficiency by which the physical progress was accomplished compared to the plan or baseline. For an unfavorable value of CPI, emphasis should be placed upon improving the productivity by which work was being performed.

If SPI 5 1.0, we have perfect schedule performance. If SPI , 1.0, physical progress was accomplished at a slower rate than what was planned. This is unfavorable. If SPI . 1.0, physical progress was accomplished at a faster rate than what was planned, which is favorable. For an unfavorable value of SPI, emphasis should be placed upon improving the timeliness of the physical progress.

SPI and CPI are expressed as ratios compared to the performance factor of 1.0 whereas CV and SV are expressed in hours or dollars. One historic reason for this is that SPI and CPI can be used to show performance for a specified time period or trends over a long time horizon without disclosing actual company sensitive numbers. This makes SPI and CPI valuable tools for customer status reporting without disclosing hard numbers.

The cost and schedule performance index is most often used for trend analysis as

shown in Figure 15–13. Companies use either three-month, four-month, or six-month moving averages to predict trends. Trend analysis provides an early warning system and allows managers to take corrective action. Unfortunately, its use may be restricted to long- term projects because of the time needed to correct the situation.

Figure 15–14 shows an integrated cost/schedule system. The figure identifies a per- formance slippage to date. This might not be a bad situation if the costs are proportionately underrun. However, from the upper portion of Figure 15–14, we find that costs are over- run (in comparison to budget costs), thus adding to the severity of the situation.

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JAN FEB MAR APR MAY JUN

1.0

CPI OR SPI

JAN FEB MAR APR MAY JUN

1.0

CPI OR SPI

TIME

FAVO RAB

LE T REN

UNFAVORABLE TREND

NEUTRAL CURVE

Variance and Earned Value 759

Also shown in Figure 15–14 is the management reserve. This is identified as the difference between the contracted cost for projected performance to date and the bud- geted cost. Management reserves are the contingency funds established by the program manager to counteract unavoidable delays that can affect the project’s critical path. Management reserves cover unforeseen events within a defined project scope, but are not used for unlikely major events or changes in scope. These changes are funded sep- arately, perhaps through management-established contingency funds. Actually, there is a difference between management reserves (which come from project budgets) and contingency funds (which come from external sources) although most people do not differentiate. It is a natural tendency for a functional manager (and some project man- agers) to substantially inflate estimates to protect the particular organization and pro- vide a certain amount of cushion. Furthermore, if the inflated budget is approved,

FIGURE 15–13. The performance index.

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760 COST CONTROL

TIME

MEASUREMENT TIME

MANAGEMENT RESERVE

CONTRACTED COSTS

ACTUALS

TARGET COST (BCWS)

COST OVERRUN TO DATE (AGAINST THE BUDGET)

SCHEDULED PERFORMANCESCHEDULE

SLIPPAGE-TO-DATE ACTUAL PERFORMANCE

FIGURE 15–14. Integrated cost /schedule system.

2. C. N. Parkinson, Parkinson’s Law (Boston: Houghton Mifflin, 1957).

managers will undoubtedly use all of the allocated funds, including reserves. According to Parkinson2:

● The work at hand expands to fill the time available. ● Expenditures rise to meet budget.

Managers must identify all such reserves for contingency plans, in time, cost, and perfor- mance (i.e., PERT slack time).

The line indicated as actual cost in Figure 15–14 shows a cost overrun compared to the budget. However, costs are still within the contractual requirement if we consider the man- agement reserve. Therefore, things may not be as bad as they seem.

Government subcontractors are required to have a government-approved cost/sched- ule control system. The information requirements that must be demonstrated by such a system include:

● Budgeted cost for work scheduled (BCWS) ● Budgeted cost for work performed (BCWP) ● Actual cost for work performed (ACWP) ● Estimated cost at completion

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Variance and Earned Value 761

● Budgeted cost at completion ● Cost and schedule variances/explanations ● Traceability

The last two items imply that standardized policies and procedures should exist for report- ing and controlling variances.

When permitted variances are exceeded, cost account variance analysis reports, as shown in Figure 15–15, are required. Required signatures may include:

● The functional employees responsible for the work ● The functional managers responsible for the work ● The cost accountant and/or the assistant project manager for cost control ● The project manager, work breakdown structure element manager, or someone

with signature authority from the project office

For variance analysis, the goal of the cost account manager (whether project officer or functional employee) is to take action that will correct the problem within the original bud- get or justify a new estimate.

COST ACCOUNT NO/CAM

WBS/DESCRIPTION

COST PERF. DATA

REPORTING LEVEL

AS OF

VARIANCE AT COMPLETION

MONTH TO DATE ($)

PROBLEM CAUSE AND IMPACT

CORRECTIVE ACTION (INCLUDE EXPECTED RECOVERY DATE)

COST ACCOUNT MANAGER

CONTRACT TO DATE ($K)

BCWS BCWP ACWP SCH COST BUDGET EAC VAR.

DATE COST CENTER MGR.

DATE WBS ELEMENT MANAGER

DATE DATE

FIGURE 15–15. Cost account variance analysis report.

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762 COST CONTROL

Five questions must be addressed during variance analysis:

● What is the problem causing the variance? ● What is the impact on time, cost, and performance? ● What is the impact on other efforts, if any? ● What corrective action is planned or under way? ● What are the expected results of the corrective action?

One of the key parameters used in variance analysis is the “earned value” concept, which is the same as BCWP. Earned value is a forecasting variable used to predict whether the project will finish over or under the budget. As an example, on June 1, the budget showed that 800 hours should have been expended for a given task. However, only 600 hours appeared on the labor report. Therefore, the performance is (800/600) 3 100, or 133 percent, and the task is underrunning in performance. If the actual hours were 1,000, the performance would be 80 percent, and an overrun would be occurring.

The major difficulty encountered in the determination of BCWP is the evaluation of in-process work (work packages that have been started but have not been completed at the time of cutoff for the report). The use of short-span work packages or establishment of discrete value milestones within work packages will significantly reduce the work-in- process evaluation problem, and procedures used will vary depending on work package length. For example, some contractors prefer to take no BCWP credit for a short-term work package until it is completed, while others take credit for 50 percent of the work package budget when it starts and the remaining 50 percent at completion. Some con- tractors use formulas that approximate the time-phasing of the effort, others use earned standards, while still others prefer to make physical assessments of the work completed to determine the applicable budget earned. For longer work packages, many contractors use discrete milestones with preestablished budget or progress values to measure work performed.

The difficulty in performing variance analysis is the calculation of BCWP because one must predict the percent complete. The simplest formula for calculating BCWP is:

BCWP 5 (% complete) 3 BAC

Most people calculate “percent complete” based upon task durations. However, a more accurate representation would be to calculate “percent work complete.” However, this requires a schedule that is resource loaded. To eliminate this problem, many companies use standard dollar expenditures for the project, regardless of percent complete. For example, we could say that 10 percent of the costs are to be “booked” for each 10 percent of the time interval. Another technique, and perhaps the most common, is the 50/50 rule:

Half of the budget for each element is recorded at the time that the work is scheduled to

begin, and the other half at the time that the work is scheduled to be completed. For a pro-

ject with a large number of elements, the amount of distortion from such a procedure is

minimal. (Figures 15–16 and 15–17 illustrate this technique.)

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Variance and Earned Value 763

One advantage of using the 50/50 rule is that it eliminates the necessity for the continu- ous determination of the percent complete. However, if percent complete can be determined, then percent complete can be plotted against time expended, as shown in Figure 15–18.

There are techniques available other than the 50/50 rule3:

● 0/100: Usually limited to work packages (activities) of small duration (i.e., less than one month). No value is earned until the activity is complete.

● Milestone: This is used for long work packages with associated interim mile- stones, or a functional group of activities with a milestone established at identified control points. Value is earned when the milestone is completed. In these cases, a budget is assigned to the milestone rather than the work packages.

● Percent complete: Usually invoked for long-duration work packages (i.e., three months or more) where milestones cannot be identified. The value earned would be the reported percent of the budget.

Budgeted cost for work

Analysis

Scheduled (BCWS) Performed (BCWP)

Budget – 6

Cost account budget – 100

Work packages

BCWS = 38 BCWP = 49 Schedule variance = +11

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

50-50 rule used for work-in-process

FIGURE 15–16. Analysis showing use of 50/50 rule.

3. These techniques, in addition to the 50/50 method for determining work in progress, are available in software packages.

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764 COST CONTROL

● Equivalent units: Used for multiple similar-unit work packages, where earnings are on completed units, rather than labor.

● Cost formula (80/20): A variation of percent complete for long-duration work packages.

● Level of effort: This method is based on the passage of time, often used for supervision and management work packages. The value earned is based on time expended over total scheduled time. It is measured in terms of resources consumed over a given period of time and does not result in a final product.

$100 K

$50 K

$140 K

$90 K

$80 K

$100 K

$75 K

100

200

300

400

500

600

700

C U

M U

L A

T IV

E C

O S

T (

IN T

H O

U S

A N

D S

) COST VARIANCE

SCHEDULE VARIANCE BCWS

ACWP

BCWP

SUBTASK 1

SUBTASK 2

SUBTASK 3

SUBTASK 4

SUBTASK 5

SUBTASK 6

SUBTASK 7

SUBTASK 8

TASK 3

00 1 2 3 4 5 6 7 8

MONTHS AFTER GO-AHEAD

MILESTONE

TARGET START

ACTUAL START

TARGET COMPLETE

ACTUAL COMPLETE

PV VALUE IN PERFORMANCE RECORD

FIGURE 15–17. Project Z, task 3 cost data (contractual).

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Variance and Earned Value 765

● Apportioned effort: A rarely used technique, for special related work packages. As an example, a production work package might have an apportioned inspection work package of 20 percent. There are only a few applications of this technique. Many people will try to use this for supervision, which is not a valid application. This technique is used for effort that is not readily divisible into short-span work packages but that is in proportion to some other measured effort.

Generally speaking, the concept of earned value may not be an effective control tool if used in the lower levels of the WBS. Task levels and above are normally worth the effort for the calculation of earned value. As an example, consider Figure 15–17, which shows the contractual cost data for task 3 of project Z, and Table 15–2, which shows the cost data status at the end of the fourth month. The following is a brief summary of the cost data for each subtask in task 3 at the end of the fourth month:

● Subtask 1: All contractual funds were budgeted. Cost/performance was on time as indicated by the milestone position. Subtask is complete.

● Subtask 2: All contractual funds were budgeted. A cost overrun of $5,000 was incurred, and milestone was completed later than expected. Subtask is completed.

● Subtask 3: Subtask is completed. Costs were underrun by $10,000, probably because of early start.

● Subtask 4: Work is behind schedule. Actually, work has not yet begun. ● Subtask 5: Work is completed on schedule, but with a $50,000 cost overrun. ● Subtask 6: Work has not yet started. Effort is behind schedule.

% O

F P

H Y

S IC

A L P

R O

G R

E S

PHASE-OUT

MAIN PHASE

BUILD-UP PHASE

FORMATION PHASE

COMPLETED MILESTONE

100

0 0 20 40 60 80 100

% OF TIME EXPENDED

FIGURE 15–18. Physical progress versus time expended.

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766 COST CONTROL

TABLE 15–3. THE PARAMETERS FOR VARIANCE ANALYSIS

Question Answer Acronym

How much work should be done? Budgeted cost of work scheduled BCWS How much work is done? Budgeted cost of work performed BCWP How much did the “is done” work cost? Actual cost of work performed (actuals) ACWP What was the total job supposed to cost? Budget at completion (total budget) BAC What do we now expect the total job Estimate at completion or latest revised EAC

to cost? estimate LRE

● Subtask 7: Work has begun and appears to be 25 percent complete. ● Subtask 8: Work has not yet started.

To complete our analysis of the status of a project, we must determine the budget at completion (BAC) and the estimate at completion (EAC). Table 15–3 shows the parame- ters for variance analysis.

● The budget at completion is the sum of all budgets (BCWS) allocated to the project. This is often synonymous with the project baseline. This is what the total effort should cost.

● The estimate at completion identifies either the dollars or hours that represent a

realistic appraisal of the work when performed. It is the sum of all direct and indi-

rect costs to date plus the estimate of all authorized work remaining (EAC 5 cumulative actuals 1 the estimate-to-complete).

Using the above definitions, we can calculate the variance at completion (VAC):

VAC 5 BAC 2 EAC

The estimate at completion (EAC) is the best estimate of the total cost at the completion

of the project. The EAC is a periodic evaluation of the project status, usually on a monthly

TABLE 15–2. PROJECT Z, TASK 3 COST DATA STATUS AT END OF FOURTH MONTH (COST IN THOUSANDS)

Subtasks Status BCWS BCWP ACWP

1 Completed 100 100 100 2 Completed 50 50 55 3 Completed 50 50 40 4 Not started 70 0 0 5 Completed 90 90 140 6 Not started 40 0 0 7 Started 50 50 25 8 Not started — — —

Total 450 340 360

Note: The data assume a 50/50 ratio for planned and earned values of budget.

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Variance and Earned Value 767

basis or until a significant change has been identified. It is usually the responsibility of the

performing organization to prepare the EAC.

The calculation of a new EAC and subsequent revision does not imply that corrective

action has been taken. Consider a three-month task that is 99 percent complete and was

budgeted to spend $400K (BCWS). The actual costs to date (ACWP) are $395K. Using

the 50/50 rule, BCWP is $200K. The estimated cost-to-complete (EAC) ratio is

$395K/$200K, which implies that we are heading for a 100 percent cost overrun.

Obviously, this is not the case.

Using the data in Table 15–4, we can calculate the estimate at completion (EAC) by

the expression

EAC 5 (ACWP/BCWP) 3 BAC 5 BAC/CPI 5 (360/340) 3 579,000 5 $613,059

where BAC is the value of BCWS at completion.

The discussion of what value to use for BAC is argumentative. In the above calculation,

we used burdened direct labor dollars. Some people prefer to use nonburdened labor with the

argument that the project manager controls only direct labor hours and dollars. Also, the cal-

culation for EAC did not include material costs or general and administrative costs.

The above calculation of EAC implies that we are overrunning labor costs by 6.38%

and that the final burdened labor cost will exceed the budgeted burdened labor cost by

$34,059. For a more precise calculation of EAC we would need to include material cost

(assumed at $70,000) and G&A. This would give us a final cost, excluding profit, of

$751,365, which is an overrun of $37,365. The resulting profit would be $86,000 less

$37,365, or $48,635. The final analysis is that work is being accomplished almost on

schedule except for subtask 4 and subtask 6, but costs are being overrun.

TABLE 15–4. PROJECT Z, TASK 3 COST SUMMARY FOR WORK COMPLETED OR IN PROGRESS (COST IN THOUSANDS)

Cumulative to Date Cost Schedule

Contractual BCWS BCWP ACWP Variance Variance

Direct labor hours 8650 6712 5061 4652 409 Direct labor dollars 241 187 141 150 (9) (46) Labor overhead (140%) 338 263 199 210 (11) (64)

Subtotal 579 450 340 360 (20) Material dollars 70 66 26 30 (4)

Subtotal 649 G&A (10%) 65

Subtotal 714 Fee (12%) 86

Total 800

Note: This table assumes a 50/50 ratio for planned and earned values of budget.

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768 COST CONTROL

The question that remains is, “Where is the cost overrun occurring?” To answer this

question, we must analyze the cost summary sheet for project Z, task 3. Table 15–4 repre-

sents a hypothetical case for the cost elements of project Z, task 3. From Table 15–4 we

see that negative (overrun) variances exist for labor dollars, overhead dollars, and material

costs. Because labor overhead is measured as a percentage of direct labor dollars, the prob-

lem appears to be in the direct labor dollars. From the contractual column in Table 15–4 the project was estimated at $27.86 per hour

direct labor ($241,000/8650 hours), but actuals to date are $150,000/4652 hours, or $32.24 per hour. Therefore, higher-salaried people than anticipated are being employed. This salary increase is partially offset by the fact that there exists a positive variance of 409 direct labor hours, indicating that these higher-salaried employees are performing at a more favorable position than expected on the learning curve. Since the milestones (from Figure 15–17) appear to be on target, work is progressing as planned, except for subtask 4.

The labor overhead rate has not changed. The contractual, BCWS, and BCWP over- head rates were estimated at 140 percent. The actuals, obtained from month-end reports, indicate that the true overhead rate is as predicted.

The following conclusions can be drawn:

● Work is being performed as planned (almost on schedule, although at a more favorable position on the learning curve), except for subtask 4, which is giving us a schedule delay.

● Direct labor costs are increasing through the use of higher-salaried employees. ● Overhead rates are as anticipated. ● Direct labor hours must be reduced even further to compensate for increased costs,

or profits will be drastically reduced.

This type of analysis could have been carried out to one more level by identifying exactly which departments were using the more expensive employees. This step should probably be completed anyway to see if lower-paid employees are available and can work at the required position on the learning curve. Had the labor costs been a result of increased labor hours, this step would have definitely been necessary to identify the reason for the overrun in-house. Perhaps poor estimating was the cause.

In Table 15–4, there also appears a positive variance in materials. This likewise should undergo further analysis. The cause may be the result of improperly identified hardware, material escalation costs increasing beyond what was planned, increased scrap factors, or a change in subcontractors.

It should be obvious from the above analysis that a detailed investigation into the cause of variances appears to be the best method for identifying causes. The concept of earned value, although a crude estimate, identifies trends concerning the status of specific WBS elements. Using this concept, the budgeted cost for work scheduled (BCWS) may be called planned earned value (PEV), and the budgeted cost for work performed (BCWP) may be referred to as actual earned value (AEV). Earned values are used to determine whether costs are being incurred faster or slower than planned. However, cost overruns do not necessarily mean that there will be an eventual overrun, because the work may be get- ting done faster than planned.

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Variance and Earned Value 769

There are several formulas that can be used to calculate EAC. Using the data shown below, we can illustrate how each of three different formulas can give a different result. Assume that your project consists of these three activities only.

Activity %Complete BCWS BCWP ACWP

A 100 1000 1000 1200

B 50 1000 500 700

C 0 1000 0 0

Formula I. EAC 5 } A

P } 3 BAC

5 } 1

0 } (3000) 5 $3800

Formula II. EAC 5 3 3 413 4 5 }

0 } (2000) 1 $1000 5 $3533

Formula III. EAC 5 [Actual to date] 1 3 4 5 1900 1 [500 1 1000] 5 $3400

≠ ≠ B C

Advantages and disadvantages exist for each formula. Formula I assumes that the burn rate (i.e., ACWP/BCWP) will be the same for the remainder of the project. This is the easi- est formula to use. The burn rate is updated each reporting period.

Formula II assumes that all work packages not yet opened will be completed at the planned cost. However, it is possible for planned cost to be revised based upon history from completed work packages.

Formula III assumes that all remaining work is independent of the burn rate incurred thus far. This may be unrealistic unless all remaining work can be reestimated if necessary.

Other techniques are available for determining final completion costs.4 The value of the technique selected is based upon the dollar value of the project, the risk, the quality of the cost accounting system, and the accuracy of the estimates. The estimating techniques here use only labor costs. Material costs can be added into each equation to obtain total cost.

All remaining work to be at planned cost including remaining work in progress

Actual (or revised) cost of work packages not yet begun

Work completed and in progress

ACWP } BCWP

4. W. Q. Fleming and J. M. Koppelman, “Forecasting the Final Cost and Schedule Results,” PM Network, January 1996, pp. 13–18.

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770 COST CONTROL

TABLE 15–5. VARIANCE ANALYSIS CASE STUDIES

Planned Earned Actuals Actual Earned Case Value (BCWS) (ACWP) Value (BCWP)

1 800 800 800 2 800 600 400 3 800 400 600 4 800 600 600 5 800 800 600 6 800 800 1,000 7 800 1,000 1,000 8 800 600 800 9 800 1,000 800

10 800 1,000 600 11 800 600 1,000 12 800 1,200 1,000 13 800 1,000 1,200

Thirteen cases for comparing planned versus actual performance are shown in Table 15–5. Each case is described below using the relationships:

● Cost variance 5 actual earned value 2 actuals ● Schedule/performance variances 5 actual earned value 2 planned earned value

Case 1: This is the ideal planning situation where everything goes according to schedule. Case 2: Costs are behind schedule, and the program appears to be underrunning. Work

is being accomplished at less than 100 percent, since actuals exceed AEV (or BCWP). This indicates that a cost overrun can be anticipated. This situation grows even worse when we see that we are also 50 percent behind schedule. This is one of the worst possible cases.

Case 3: In this case there is good news and bad news. The good news is that we are per- forming the work efficiently (efficiency exceeds 100 percent). The bad news is that we are behind schedule.

Case 4: The work is not being accomplished according to schedule (i.e., is behind sched- ule), but the costs are being maintained for what has been accomplished.

Case 5: The costs are on target with the schedule, but the work is 25 percent behind schedule because the work is being performed at 75 percent efficiency.

Case 6: Because we are operating at 125 percent efficiency, work is ahead of schedule by 25 percent but within scheduled costs. We are performing at a more favorable position on the learning curve.

Case 7: We are operating at 100 percent efficiency and work is being accomplished ahead of schedule. Costs are being maintained according to budget.

Case 8: Work is being accomplished properly, and costs are being underrun. Case 9: Work is being accomplished properly, but costs are being overrun. Case 10: Costs are being overrun while underaccomplishing the plan. Work is being

accomplished inefficiently. This situation is very bad.

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Variance and Earned Value 771

Case 11: Performance is ahead of schedule, and the costs are lower than planned. This sit- uation results in a big Christmas bonus.

Case 12: Work is being done efficiently, and a possible cost overrun can occur. However, performance is ahead of schedule. The overall result may be either an overrun in cost or an underrun in schedule.

Case 13: Although costs are greater than those budgeted, performance is ahead of schedule, and work is being accomplished very efficiently. This is also a good situation.

In each of these cases, the concept of earned value was used to predict trends in cost and variance analysis. This method has its pros and cons.

Each of the critical variances (or earned values) identified usually requires a formal analysis to determine the cause of the variance, the corrective action to be taken, and the effect on the estimate to completion. These analyses are performed by the organization that was assigned the budget (BCWS) at the level of accumulation directed by program management.

Each critical variance identified on the organizational MCCS reports may require the completion of MCCS variance analysis procedures by the supervisor of the cost center involved. Analyzing both the work

breakdown and organizational structure, the supervisor systematically concentrates his efforts on cost and schedule problems appearing within his organization.

Analysis begins at the lowest organizational level by the supervisor involved. Critical variances are noted at the cost account on the MCCS report. If a schedule variance is involved and the subtask consists of a number of work packages, the supervisor may refer to a separate report that breaks down each cost account into the various work packages that are ahead or behind schedule. The supervisor can then analyze the variance on the basis of the work package involved and determine with the aid of supporting organizations the cause of the variance, the corrective action that can be taken, or the possible effect on asso- ciated or future planned effort.

Cost variances involving labor are analyzed by the supervisor on the basis of the per- formance of his organization in accomplishing the work assigned, within the budgeted man-hours and planned labor rate. The cause of any variance to this performance is deter- mined, and corrective action is then implemented.

Cost variances on nonlabor efforts are analyzed by the supervisor with the aid of the program team member and other supporting organizations.

All material variance analyses are normally initiated by cost accounting as a service to the using organization. These variance analyses are completed, including cause and corrective action, to the extent that can be explained by cost accounting. They are then sent to the using organization, which reviews the analyses and completes those resulting from schedule performance or usage. If a variance is recognized as a change in the material acquisition price, this information is supplied by cost accounting to the respon- sible organization and a change to the estimate-to-complete is initiated by the using organization.

Organization-Level Analysis

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772 COST CONTROL

The supervisor should forward copies of each completed MCCS variance analysis/EAC change form to his higher-level manager and the program team member.

The program team member may receive a team critical variance report

that lists variances in his organization at the lowest level of the work

breakdown structure at the division cost center level by cost element. Upon request of the

program manager, analyses of variances contributing to the variances on the team critical

variance report are summarized by the responsible program team member and reviewed

with the program manager.

The preparation of status reports, whether they be for internal management or for the

customer, should, at a minimum, answer two fundamental questions:

● Where are we today (with respect to time and cost)?

● Where will we end up (with respect to time and cost)?

The information necessary to answer these questions can be obtained from the following

formulas:

● Where are we today?

● Cost variances (in dollars/hours and percent complete)

● Schedule variances (in dollars/hours and percent complete)

● Percent complete

● Percent money spent

● Where will we end up?

● Estimate at completion (EAC)

● The remaining critical path

● SPI (trend analysis)

● CPI (trend analysis)

Since SPI and CPI are used for trend analyses, we can use CPI and SPI to forecast the

expected final cost and the expected end date of the project. We can express the cost at

completion, EAC, as:

EAC 5 } B

I }

The time at completion uses SPI for the forecast and can be expressed as:

New project length 5

Care must be taken with the use of SPI to calculate the new project length because a favorable vale for SPI (i.e., .1.0) could be the result of work packages that are not on the critical path.

original project length }}}

SPI

Program Team Analysis

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The Cost Baseline 773

Once EAC and the new project length are calculated, we can calculate the variance at completion (VAC) and the estimated cost to complete (ETC) using the following two formulas:

VAC 5 BAC 2 EAC and ETC 5 EAC 2 ACWP

Percent complete and percent money spent can be obtained from the following formulas:

Percent complete 5 } B

P }

Percent money spent 5 } A

P }

where BAC is the budget at completion. The program manager uses this information to review the program status with upper-

level management. This review is normally on a monthly basis on large projects. In addi- tion, the results of these analyses are used to explain variances in the contractually required reports to the customer.

After the analyses of the variances have been made, reports must be developed for both the customer and in-house (upper-level) management. Customer reporting procedures and specifications can be more detailed than in-house reporting and are often governed by the contract. Contractual requirements specify the reports required, the frequency of sub- mission and distribution, and the customer regulation that specifies the preparation instruc- tions for the report.

The types of reports required by the customer and management depend on the size of the program and the magnitude of the variance. Most reports contain the tracking of the vital technical parameters. These might include:

● The major milestones necessary for project success ● Comparison to specifications ● Types or conditions of testing ● Correlation of technical performance to the activity network and the work break-

down structure

One final note about reports: To save time and money, reports might be only one or two pages or fill-in-the-blank forms.

15.7 THE COST BASELINE

Once the project is initiated, the project team establishes the cost or finan- cial base-line against which status will be reported and variances will be measured. Figure 15–19 represents a cost baseline. Each block represents

PMBOK® Guide, 5th Edition 7.3.3 Cost Baseline

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774 COST CONTROL

a cost account or work package element. The summation of all of the cost accounts or work packages would then equal the time-phased budget. Each work package would then be described through the work authorization form for that work package.

The cost baseline in Figure 15–19 is just part of the cost breakdown. An illustration of a cost breakdown appears in Figure 15–20.

There are certain distinguishing features of Figure 15–20:

● The time-phased budget, which is the released budget, is the summation of all BCWS elements.

BAC

$ $ $ $ $ $ $ $

$ $ $ $ $ $

$ $ $ $

$ $ $

SUM OF ALL BCWS

C U

M U

L A

T IV

E C

O S

T , $

PROJECT COMPLETION

TIME

FIGURE 15–19. The cost baseline.

C U

M U

L A

T IV

E C

O S

T , $

TIME

COST ACCOUNTS

$ $ $ $ $ $ $ $

$ $ $ $ $ $

$ $ $ $

UNDISTRIBUTED BUDGET

MANAGEMENT RESERVE

PROFIT

CONTRACT COST

CONTRACT PRICE

TIME PHASED BUDGET

COST BASELINE

FIGURE 15–20. WBS level 1 cost breakdown.

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● The cost baseline is the summation of the time-phased budget (i.e., the distributed budget) and the undistributed budget. This will equal the released, planned budget at completion (BAC).

● The contractual cost to complete the project is the summation of the cost baseline and the management reserve, assuming that a management reserve exists.

● The contract price is the contract cost plus the profit, if any.

15.8 JUSTIFYING THE COSTS

Project pricing is often based upon best guesses rather than concrete estimates. This is par- ticularly true for companies that survive on competitive bidding and where the preparation cost of a bid may vary between $50,000 and $500,000. If the probability of winning a bid is low, then the company may spend the minimum amount of time and cost during bid preparation.

Table 15–6 shows a typical project pricing summary. In Table 15–6, each functional area or division can have its own overhead rate. In this

summary, the overhead rate for engineering is 110 percent, whereas the manufacturing overhead rate is 200 percent. If this company is a subsidiary of a larger company, then a corporate general and administrative (G&A) cost may be included. If the project is for an external customer, then a profit margin will be included.

Once the project pricing summary is completed, the costs must be justified before some executive committee. This is shown in Figure 15–21.

Every company has its own evaluation criteria cost summary approval process. Typical elements that must be justified or supported by hard data include:

● Labor Rates: For estimating purposes, department averages or skill set weighted averages can be used. This is sometimes called the blended rate. The best-case

Justifying the Costs 775

TABLE 15–6. TYPICAL PROJECT PRICING SUMMARY

Direct Labor Overhead

Department Hours Rate Dollars % Dollars Total

Engineering 1000 $42.00 42,000 110 46,200 $88,200 Manufacturing 500 $35.00 17,500 200 35,000 $52,500

Total Labor $140,700

Other: Subcontracts $10,000 Consultants $2,000 $12,000

Total labor and material $152,700 Corporate G&A: 10% $ 15,270

$167,970 Profit: 15% $ 25,196

$193,166

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776 COST CONTROL

FIGURE 15–21. Justifying the cost (and getting sign-off).

TABLE 15–7. FORWARD PRICING RATES: SALARY (Departmental Pay Structure)

Salary (per hour)

Pay Grade Title 2009 2010* 2011*

9 Engineering Consultant $53 $56 $60 8 Senior Engineer 48 50 53 7 Engineer 39 42 45 6 Junior Engineer 34 36 39 5 Apprentice Engineer 29 31 34

*Projected rates.

scenario would be estimating from the actual salary or skill set of the workers to be assigned. This may be impossible during competitive bidding because we do not know who will be available or who will be assigned assuming the contract is received. Also, if the project is a multiyear effort, we may need forward pricing rates, which are the predicted, full burdened salaries anticipated in the next few years. This is illustrated in Table 15–7.

● Overtime: If resources are scarce and the company has no intention of hiring additional resources, then some of the work must be accomplished on overtime. This could increase the cost of the project and an allowance must be made for pos- sible mistakes made during this period of excessive overtime.

● Scrap Factors: If the project includes procurement of raw materials, then some scrap factor allowance may be necessary. This calculation may be impacted by the skill set of the resources assigned and using the materials, previous experience using these materials, and experience on these types of projects.

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Justifying the Costs 777

● Risks: Risk analysis may be based upon the quality of the estimates and experi- ence of those who made the estimates. Other risks considered include the company’s ability to achieve the anticipated benefits or the designated profits and, if a disaster occurs, the company’s exposure and liability for lawsuits.

● Hidden Costs: These costs, some of which are illustrated in Figure 15–22, can erode all of the profitability expected on a project. Another potentially hidden cost is the yearly or monthly workload availability. A typical calculation appears in Table 15–8. If we use Table 15–8 and all of the workers are long-term employees, then there may be less than 1840 hours available per year because senior people may have earned more than three weeks of vacation per year.

Shipping/PostageCost of Capital

Travel Attending Meetings

FIGURE 15–22. Other often hidden costs.

TABLE 15–8. HOURS AVAILABLE FOR WORK

Hours available per year (52 3 40): 2080 hours Vacation (3 weeks): 2120 hours Sick leave (3 days): 224 hours Paid holidays (11 days): 288 hours Jury duty (1 day): 28 hours

1840 hours (1840 hours/year) 4 12 months 5 153 hours/month

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778 COST CONTROL

High ROM Estimate

Budgetary Estimate

Definitive Estimate

Low

Soft Data

Hard Data

Feasibility Study

Cost-Benefit Analysis

Blueprints

Overrun

FIGURE 15–23. Range of overruns.

15.9 THE COST OVERRUN DILEMMA

The lifeblood of most organizations is a continuous stream of new products or services. Because of the word “new,” historical data may be at a minimum and cost overruns are expected. Figure 15–23 shows a typical range of overruns.

Rough order-of-magnitude (ROM) estimates are often made from “soft” data, which can result in a wide range of overruns, and are used in the initiation phase of a project. As we go from soft data to hard data and enter the planning phase of a project, the accuracy of the estimates improves and the range of the overruns narrows.

When overruns occur, the project manager looks for ways of reducing costs. The sim- plest way is to reduce scope. This begins with a search for items that are easy to cut. The items that are easiest to cut are those items that were poorly understood during the esti- mating process and were therefore underestimated. Typical items that are cut or reduced in magnitude include:

● Project management supervision ● Line management supervision ● Process controls ● Quality assurance ● Testing

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Recording Material Costs Using Earned Value Measurement 779

If the easy-to-cut items do not provide sufficient cost reductions, then a desperate search begins among the hard-to-cut items. Hard-to-cut items include:

● Direct labor hours ● Materials ● Equipment ● Facilities ● Others

If the cost reductions are unacceptable to management, then management must decide whether or not to pull the plug and cancel the project. Pulling the plug may seem like an easy decision, but it turns out to be one of the most difficult decisions for executives to make. Typical reasons for not pulling the plug include:

● Quantitative reasons ● High exit barriers ● Significant expenditures have been made and are unrecoverable ● Penalty clauses ● Breach-of-contract lawsuits ● Payments to terminated workers ● Low salvage value of goods and property ● High plant closing costs ● Moving people may end up violating seniority and labor agreements

● Qualitative reasons ● Viewing failure as a sign of weakness ● Viewing failure as damage to one’s career ● Viewing failure as damage to one’s reputation ● Viewing failure as a roadblock to promotion ● Fear of exposing one’s mistakes to others ● Viewing bad news as a personal failure ● Refusing to admit defeat or failure ● Seeing what one wants to see rather than seeing reality

15.10 RECORDING MATERIAL COSTS USING EARNED VALUE MEASUREMENT

Using “earned value” measurement, the actual cost for work performed represents those direct and indirect costs identified specifically for the project (contract) at hand. Both the recorded and reported costs must relate specifically to this effort. Recording direct labor costs usually presents no problem since labor costs are normally recorded as the labor is accomplished. Therefore, recorded and reported labor will be the same.

Material costs, on the other hand, may be recorded at various times. Material costs can be recorded as commitments, expenditures, accruals, and applied costs. All provide useful information and are important for control purposes.

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780 COST CONTROL

Because of the choices available for material cost analysis, material costs should be

reported separately from the standard labor hour/labor dollar earned value report. For example, cost variances associated with the procurement of material may be determined at

the time that the purchase orders are negotiated and placed with the vendors since this

information provides the earliest visibility of potential cost variance problems. Significant variances in the anticipated and actual costs of materials can have a serious effect on the

total contract cost and should be reflected promptly in the estimated cost at completion

(EAC) and explained in the narrative part of the project status report.

Separating labor from material costs is essential. Consider the following example:

Example 15–1. You are budgeted to spend $1,000,000 in burdened labor and $600,000 in material. At the end of the first month of your project, the following informa-

tion is made available to you:

Labor: ACWP 5 $90,000

BCWP 5 $100,000

BAC 5 $1,000,000

Material: ACWP 5 $450,000

BCWP 5 $400,000

BAC 5 $600,000

For simplicity’s sake, let us use the following formula for EAC:

EAC 5 (ACWP/BCWP) 3 BAC

Therefore,

EAC(labor) 5 $900,000

EAC(material) 5 $675,000

If we add together both EACs, the estimated cost at completion will be $1,575,000, which

is $25,000 below the planned budget. If the costs are combined before we calculate EAC, then

EAC 5 [($450,000 1 $90,000)/$500,000] 3 ($1,600,000) 5 $1,728,000

which is a $128,000 overrun. Therefore, it is usually best to separate material from labor in status reporting.

Another major problem is how to account for the costs of material placed on order, which does not reflect the cost of work completed and is not normally used in status

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Recording Material Costs Using Earned Value Measurement 781

reporting. For performance measurement purposes, it is desirable that material costs be recorded at the time that the materials are received, paid for, or used rather than as of the time that they are ordered. Therefore, the actual costs reported for materials should be derived in accordance with established procedures, and normally will be recorded for earned value measurement purposes at or after time of material receipt. In addition, costs should always be recorded on the same basis as budgets are prepared in order to make comparisons between budgeted and actual costs meaningful. For example, material should not be budgeted on the basis of when it is used and then have its costs collected/reported on the basis of when it is received. Consider the following situations:

Situation I: An equipment manufacturer receives a contract to build five machines for the same customer, but each machine is slightly different. The manufacturer pur- chases and receives five of the same electric motors, one for each machine. What is

the earliest time that the manufacturer should take credit for the electric motors?

a. When ordered

b. When received

c. When paid for

d. When withdrawn from inventory

e. When installed

Situation II: The same manufacturer has purchased large quantities of steel plate for the five machines as well as for machines for other customers. By ordering in large quan-

tities, the manufacturer received a substantial price break. What is the earliest time the

manufacturer should take credit for the steel plate?

a. When ordered

b. When received

c. When paid for

d. When withdrawn from inventory

e. When installed

Situation III: Assume that the manufacturer in Situation II purchases the steel plate for a single customer rather than for multiple customers. What is the earliest

time the manufacturer should take credit for the steel plate?

a. When ordered

b. When paid for

c. When received

d. When applied

In Situations I and III, the recommended answer is “when received.” In Situation II, any

answer can be argued, but the preferred answer is “when installed.”

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782 COST CONTROL

5. Adapted from Quentin W. Fleming, Cost/Schedule Control Systems Criteria (Chicago: Probus Publishers, 1992), pp. 144–145.

15.11 THE MATERIAL ACCOUNTING CRITERION5

At a minimum, the contractor’s material accounting system must provide for the following:

a. Accurate cost accumulation and assignment of costs to cost accounts in a manner consistent with budgets using recognized, acceptable costing techniques.

b. Determination of material price variances by comparing planned versus actual commitments.

c. Cost performance measurement at the point in time most suitable for the category of material involved, but no earlier than the time of actual receipt of material.

d. Determination of material cost variances attributable to the excess usage of material. e. Determination of unit or lot costs when applicable. f. Full accountability for all material purchased for the project, including residual

inventory.

In order to satisfy these six system requirements, the following accounting practices should be adhered to:

a. The material cost actuals (ACWP) must equate to its material plans (BCWS), and be carried down to the cost account level of the WBS.

b. The material price variances must be determinable by comparing planned commit- ments (estimated material value) to actual commitments (actual cost of the material).

c. Physical work progress or earned value (BCWP) must be determinable, but not before the materials have been received.

d. Usage cost variances (to be discussed in the next section) must be determinable from excess material usage.

e. Material unit costs and/or lot costs must be determinable, as applicable. f. There must be full accountability of all materials purchased, including any resid-

ual material inventory.

Although this task appears difficult on the surface, it is easy if the organization focuses on two areas:

1. The material plans (BCWS): These frequently start at the point at which engi- neering or manufacturing or others have provided a definition sufficient to initiate an order for the items, regardless of when such items are actually ordered or received.

2. The material actuals (ACWP): This is ordinarily the point at which the costs of the parts are recorded on the firm’s accounting books, that is, when the bill is paid.

Those firms that have a material commitment system in use as part of the material account- ing system are usually able to establish and update the costs for their purchased goods at

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Material Variances: Price and Usage 783

multiple points: as an estimated liability when engineering or manufacturing defines the requirements; still as an estimated liability when someone formally initiates the request; updated to an accrued liability when an order is placed by purchasing; later updated to an actual liability when parts are received and accepted; and updated a final time when the bill is paid and the costs are recorded on the accounting books.

15.12 MATERIAL VARIANCES: PRICE AND USAGE6

One of the requirements of a material accounting system is that it be able to determine just

why material budgets were exceeded; this is called variance analysis. When the actual mate-

rial costs exceed a material budget, there are normally two causes:

1. The articles purchased cost more than was planned, called a “price variance.”

2. More articles were consumed than were planned, called a “usage variance.”

Price variances (PV) occur when the budgeted price value (BCWS) of the material

was different than what was actually experienced (ACWP). This condition can arise for a

host of reasons: poor initial estimates, inflation, different materials used than were

planned, too little money available to budget, and so on.

The formula for price variance (PV) is:

PV 5 (Budgeted price 2 Actual price) 3 (Actual quantity)

Price variance is the difference between the budgeted cost for the bill of materials and

the price paid for the bill of materials.

By contrast, usage variances (UV) occur when a greater quantity of materials is con-

sumed than were planned. The formula for usage variance (UV) is:

UV 5 (Budgeted quantity 2 Actual quantity) 3 (Budgeted price)

Normally, usage variances are the resulting costs of materials used over and above the

quantity called for in the bill of materials.

Consider the following example: The project manager establishes a material budget of

100 units (which includes 10 units for scrap factor) at a price of $150 per unit. Therefore,

the material budget was set at $15,000. At the end of the short project, material actuals

(ACWP) came in at $15,950, which was $950 over budget. What happened?

6. Adapted from Quentin W. Fleming, Cost/Schedule Control Systems Criteria (Chicago: Probus Publishers, 1992), pp. 151–152.

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784 COST CONTROL

Applying the formulas defined previously,

Price variance (PV) 5 (BCWS price 2 ACWP price) 3 Actual quantity 5 ($150 per unit 2 $145 per unit) 3 110 units 5 $550 favorable

Usage variance (UV) 5 (BCWP qty 2 ACWP qty) 3 BCWS price 5 (100 units 2 110 units) 3 $150 per unit 5 $1,500 unfavorable

The analysis indicates that your purchase price was less than you anticipated, thus gener-

ating a cost savings. However, you used 10 units more than planned for, thus generating

an unfavorable usage variance. Further investigation indicated that your line manager had

increased the scrap factor from 10 to 20 units.

Good business practices indicate that such variance analyses take place to determine

why actual material costs exceed the budgeted material values.

15.13 SUMMARY VARIANCES

Summary variances can be calculated for both labor and material. Consider the informa- tion shown below:

Direct Material Direct Labor

Planned price/unit $ 30.00 $ 24.30 Actual units 17,853 9,000 Actual price/unit $ 31.07 $ 26.24 Actual cost $554,630 $236,200

We can now calculate the total price variance for direct material and the rate cost variance:

● Total price variance for direct material 5 Actual units 3 (BCWP 2 ACWP) 5 17,853 3 ($30.00 2 $31.07) 5 $19,102.71 (unfavorable)

● Labor rate cost variance 5 Budgeted rate 2 Actual rate 5 $24.30 2 $26.24 5 $1.94 (unfavorable)

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15.14 STATUS REPORTING

One of the best ways of reducing executive meddling on projects is to pro- vide executives with frequent, meaningful status reports. Figure 15–24 shows a relatively simple status report based upon data accumulation in

the form of Figures 15–25 and 15–26. These types of status reports should be short and concise, containing pertinent information only. Status can also be shown graphically as in Figure 15–27. The difference between Figure 15–27 and 15–17 is that at-completion esti- mates have been identified.

As the available project management software becomes more sophisticated, so does project reporting. There are four types of reports that are generally printed out from the earned value measurement system:

● Performance Reports: These reports indicate the physical progress to date, namely, BCWS, BCWP, and ACWP. The report might also include information on material procurement, delivery, and usage, but most companies have separate reports on materials.

● Status Reports: These reports identify where we are today and use the informa- tion from the performance reports to calculate SV and CV.

● Projection Reports: These reports calculate EAC, ETC, SPI, and CPI as well as any other forward-looking projections. These reports emphasize where we will end up.

● Exception Reports: These reports identify exceptions, problems, or situations that exceed the threshold limits on such items as variances, cash flow, resources assigned, and other such topics.

Reporting procedures for variance analysis should be as brief as possible. The reason for this is simple: the shorter and more concise the report, the faster that feedback can be generated and responses developed. Time is critical if rescheduling must be accomplished with limited resources. The two most common situations providing constraints on resource rescheduling are that:

● The end date is fixed ● The resources available are constant (or limited)

With a fixed end date, program rescheduling generally requires that additional resources be supplied. In the second situation, program slippage may be the only alterna- tive unless a constant stream of resources can be redistributed so as to shorten the length of the critical path.

Once the variance analysis is completed, both project and functional management must diagnose the problem and search for corrective actions. This includes:

● Finding the cure for the problem ● Developing a plan to recover the position

Status Reporting 785

PMBOK® Guide, 5th Edition 10.2.2.5 Performance Reporting

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1. VARIANCE ANALYSIS (cost in thousands)

Subtask Milestone

Status

Budgeted Cost Work Schedule

Budgeted Cost Work Performed

Actual Cost Schedule

Variance, %

Cost

1 Completed 100 100 100 0 0

Started7 002550 50 50

3 Completed 04050 50 20

Completed5 014090 90 255.5

2 Completed 50 50 055 210

Total 360340450 25.9224.4

4 Not started 70 0 0 2100

Not started6 040 0 2100 —

—

——Not started8 00 0

2. ESTIMATE AT COMPETION (EAC)

3. COST SUMMARY Costs are running approximately 5.9% over budget of higher-salaried labor.

The 24.4% behind-schedule condition is due to subtasks 4 and 6, which have not yet begun owing to lack of raw materials and the 50/50 method for booking costs. Overtime will get us back on schedule but at an additional cost of 2.5% of direct labor costs.

4. SCHEDULE SUMMARY

May need additional planning.

(b) Customer unhappy with test results, and wants additional work.

Cost overrun and behind schedule condition.

(a) Lack of raw materials.

Customer will provide us with revised statement of work on 6/15/10.

Overtime is scheduled. We will try to use lower-salaried people. Raw materials are expected to be on dock next week.

Corrective ActionPotential ImpactCurrent Problem

6. EVENT REPORT

8 10/1/1010/1/10 7 9/1/109/1/10 6 8/1/108/1/10 5 6/1/106/1/10 4 7/1/107/1/10 3 4/23/105/1/10 2 5/8/105/1/10 1 4/1/104/1/10

Actual Completion

Projected Completion

Scheduled CompletionMilestone/Subtask

5. MILESTONE REPORT

Overrun 5 613,059 2 579,000 5 $34,059 EAC 5 (360/340) 3 $579,000 5 $613,059

786 COST CONTROL

FIGURE 15–24. Blue Spider Project, monthly project report #4.

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Status Reporting 787

PROJECT OFFICE

EXECUTIVE MANAGEMENT

REPORTSEMPLOYEE TIME

CARDS COMPUTER

BUDGETS AND TARGET % COMPLETE

ACTUAL %

COMPLETE

TOTAL PROJECT DETAIL REPORTS

PROJECT SUMMARY REPORTS

FUNCTIONAL MANAGEMENT

FUNCTIONAL DETAIL/

SUMMARY REPORTS

EXCEPTIONS REPORTS

(IF NECESSARY)

FIGURE 15–26. Cost control and report flow.

WBS

O R

G A

N IZ

A T

IO N

SCHED VAR

BUDGET

COST VAR

EAC

FIGURE 15–25. Data accumulation.

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788 COST CONTROL

This by no means implies that all variances require corrective action. There are four

major responses to a variance report:

● Ignoring it

● Functional modification

● Replanning

● System redesign

Permissible variances exist for all levels of the organization. If the variance is within

these permitted deviations, then there will be no response, and the variance may be ignored.

In some situations where the variance is marginal (or even within limits), corrective action

PROJECTED SLIPPAGE

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,750

(000)

CONTRACT TARGET COST

REPORTING CUT-OFF DATE

PROJECTED OVERRUN

ESTIMATED COST AT COMPLETION

COST VARIANCE

SCHEDULE VARIANCE DOLLARS

BUDGETED COST FOR WORK PERFORMED (EV) (ACTUAL ACCOMPLISHMENT)

ACTUAL COSTS

BUDGETED COST FOR WORK

SCHEDULED (PV) (PLANNED

ACCOMPLISHMENT)

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

BUDGETED COST AT COMPLETION

2,500

FIGURE 15–27. Graphical status reporting.

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Status Reporting 789

may be required. This would normally occur at the functional level and might simply

involve using another test procedure or possibly considering some alternative not delineated

in the program plan.

If major variances occur, then either replanning or system redesign must take place.

The replanning process requires the redefining and reestablishing of project goals as work

progresses, but always within system specifications. This might include making trade-offs

in time, cost, and performance or defining new project activities and methods of pursuing

the project, such as new PERT networks. If resources are limited, then a proper redistri-

bution or reallocation must be made. If resources are not limited, the additional personnel,

financing, equipment, facilities, or information may be required.

If replanning cannot be accomplished without system redesign, then system specifica-

tions may have to be changed.7 This is the worst possible case because performance may be

sacrificed to satisfy the constraints of time and money.

Whenever companies operate on a matrix structure, information must be carefully pre-

pared and distributed to all key individuals in the organization. To avoid dual standards and

red tape, management must establish the decision-making policies associated with cost

and control systems. The following is a policy guide:

● Approving all estimates, and negotiating all estimates and the definition of work

requirements with the respective organizations.

● Approving the budget, and directing distribution and budgeting of available funds

to all organizational levels by program element.

● Defining the work required and the schedule.

● Authorizing work release. The manager may not, however, authorize work beyond

the scope of the contract.

● Approving the program bill-of-materials, detailed plans, and program schedules

for need and compliance with program requirements.

● Approving the procuring work statement, the schedules, the source selection, the

negotiated price, and the type of contract on major procurement.

● Monitoring the functional organization’s performance against released budgets,

schedules, and program requirements.

● When cost performance is unacceptable, taking appropriate action with the

affected organization to modify the work requirements or to stimulate corrective

action within the functional organization so as to reduce cost without changing the

contracted scope of work.

● Being responsible for all communications and policy matters on contracted pro-

grams so that no communicative directives shall be issued without the signature or

concurrence of the program manager.

7. Here we are discussing system specifications. Functional modification responses can also require specifica- tion changes, but not on the system level. Examples of functional modifications might be changes in tolerances for testing or for purchasing raw materials.

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TABLE 15–9. PROGRAM INTERRELATIONSHIPS

Program Manager Functional Manager Relationship

Makes or approves all decisions that affect the Assembles and furnishes the information Management controls, contract contractually committed target time, cost, and needed to assist the program manager in administration, budgeting, estimating, performance requirements or objectives of the making decisions. Submits to the and financial controls are a functional program. program manager all proposed changes specialty. The program manager

that affect program cost, schedule targets, utilizes the services of the specialist and technical requirements and objectives organizations. The specialists retain through the program team member. their own channels to the general

manager but must keep the program manager informed through the program team member.

Approves all engineering change control decisions Implements engineering change decisions that affect the contractually committed target approved by the program manager. time, cost, and performance requirements or Advises him of any resulting objectives of the program. programming impasses and negotiates

adjustments through the program team member.

Establishes program budgets in conjunction with In all matters pertaining to budget and the cognizant program team members; monitors cost control, the program manager and negotiates changes. utilizes the services of the program

team member representing the cognizant financial control organization.

Authorizes release of the budget and work Within the allocated budget, provides authorization for the performance of approved manpower skills, facilities, and other work, and negotiates any intradirectorate resources pertaining to his functional reallocation above section level with the affected specialty to the degree and level functional organizations through the program necessary to meet program schedule, cost, team members. and technical performance requirements

of the contract.

790

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791

Requests the assignment of program team Coordinates with the program manager in Program manager does not hire or fire members to the program, and approves the release the selection and assignment of a functional personnel. Program team of the team member from the program. program team member to the program or members should not be removed from

release of the program team member the program without the concurrence from the program. of the program manager.

Establishes report requirements and controls Works in concert with other functional Insofar as possible, program controls necessary for evaluation of all phases of program organizations to ensure that he and they must be satisfied from existing data performance consistent with effective policies and are proceeding satisfactorily in the and controls as defined by division procedures. completion of mutually interdependent policies and procedures.

program tasks and events.

Measures and evaluates performance of tasks Follows up all activities of his The program manager directs or against the established plan. Identifies current and organization to ensure satisfactory redirects activities of functional potential problems. Decides upon and authorizes performance to program requirements. organizations only through the corrective action. Detects actual or potential problems. cognizant program team member.

Takes timely corrective action in his Functional managers are responsible organization, and when such problems for the performance of their involve interface with other functional organizations. Functional managers do organizations, notifies them and not implement decisions involving coordinates the initiation of mutually increased total program costs, changes satisfactory remedial action. Keeps the in schedule, or changes in technical program manager advised (through the performance without prior approval of program team member) of conditions the program team members and the affecting the program, existing, or program manager. expected problems, problems solved, and corrective action required or performed.

Apprises the program team members and/or functional organizations of program changes affecting their function.

Assures the establishment, coordination, and This includes such programs as value execution of support programs to the extent engineering, data management, and required or permitted by the contract. configuration management.

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792 COST CONTROL

Describing the responsibilities of a manager is only a portion of the management pol-

icy. Because the program manager must cross over functional boundaries to accomplish all

of the above, it is also necessary to describe the responsibilities of the functional manager

and the relationship between the two. Table 15–9 is an example of this. Similar tables can

be developed for planning and scheduling, communications, customer relations, and con-

tract administration.

15.15 COST CONTROL PROBLEMS

No matter how good the cost and control system is, problems can occur. Common causes of cost problem include:

● Poor estimating techniques and/or standards, resulting in unrealistic budgets ● Out-of-sequence starting and completion of activities and events ● Inadequate work breakdown structure

● No management policy on reporting and control practices

● Poor work definition at the lower levels of the organization

● Management reducing budgets or bids to be competitive or to eliminate “fat”

● Inadequent formal planning that results in unnoticed, or often uncontrolled,

increases in scope of effort

● Poor comparison of actual and planned costs

● Comparison of actual and planned costs at the wrong level of management

● Unforeseen technical problems

● Schedule delays that require overtime or idle time costing

● Material escalation factors that are unrealistic

Cost overruns can occur in any phase of project development. The most common causes

for cost overruns are:

● Proposal phase

● Failure to understand customer requirements

● Unrealistic appraisal of in-house capabilities

● Underestimating time requirements

● Planning phase

● Omissions

● Inaccuracy of the work breakdown structure

● Misinterpretation of information

● Use of wrong estimating techniques

● Failure to identify and concentrate on major cost elements

● Failure to assess and provide for risks

● Negotiation phase

● Forcing a speedy compromise

PMBOK® Guide, 5th Edition 7.4 Cost Control

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Enterprise Resource Planning 793

● Procurement ceiling costs

● Negotiation team that must “win this one”

● Contractual phase

● Contractual discrepancies

● SOW different from RFP requirements

● Proposal team different from project team

● Design phase

● Accepting customer requests without management approval

● Problems in customer communications channels and data items

● Problems in design review meetings

● Production phase

● Excessive material costs

● Specifications that are not acceptable

● Manufacturing and engineering disagreement

15.16 PROJECT MANAGEMENT INFORMATION SYSTEMS

A project management information system (PMIS) contains all of the essential and sup- porting information for project approval, initiation, planning, scheduling, execution, mon- itoring and control, and closure. While an earned-value measurement system (EVMS) is a critical component of the PMIS, today’s PMIS contains significantly more metrics than just time and cost. The PMIS can provide significant benefits if designed properly, such as:

● Satisfying the information needs for the various stakeholders in a timely manner ● Providing the correct Information for informed decision-making ● Having the correct amount of information, rather than too much or too little ● Lowering the cost of collecting the right information ● Providing information on how the project interacts with various initiatives that are

part of the ongoing business ● Providing information on how one project interacts with other projects being sup-

ported by line managers ● Providing value to the company

A good PMIS can prevent projects from failing because of the derailment in project com- munications. PMIS also makes it easy for team members and functional managers to input the information necessary for effective status reporting.

15.17 ENTERPRISE RESOURCE PLANNING

For several decades, PMISs were seen as report generators providing information on time, cost, and what work was left to do on the project. Time and cost were the two primary met- rics that were tracked. Today, that has changed.

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Companies have come to the realization that everything they do in their company can be considered as a project. We are managing our business by projects. As such, decision- makers have a need for information on both business as well as project management processes, and the two are now related. Also, we are now looking at significantly more metrics than just time and cost.

Information is the key to effective decision-making. Companies have developed enter- prise resource planning (ERP) systems which are enterprise-wide information systems designed to coordinate all the resources, information, and tasks needed to complete vari- ous business and project processes. ERP supports supply chain management, finance and accounting, human resource management, and project management. PMIS is now part of ERP systems.

One of the most important reasons for integrating PMIS and ERP is capacity plan- ning. Functional managers must supply resources to both projects and ongoing busi- ness activities. ERP systems are invaluable in this regard. Capacity planning is an essential activity in the portfolio selection of projects. As an example, the ERP system states that a given functional department has fifteen employees available for work assignments and ten of these workers are committed to ongoing work. The ERP sys- tem then relays information to the PMIS stating that the remaining five employees are available for project work assignments. The information can also contain the pay grade of the available workers in case specific skill levels must be available for the selection of certain projects.

15.18 PROJECT METRICS

Metrics keep stakeholders informed as to the status of the project. Stakeholders must be confident that the correct metrics are being used and that the measurement portrays a clear and truthful representation of the status. At the beginning of a project, the project manager and the appropriate stakeholders must come to an agreement on which metrics to use and how measurements will be made. We are now using more metrics than just time and cost. This is partially due to the growth in PMIS and ERP technology as well as stake- holders now possessing a greater understanding about project management.

Today, part of the project manager’s new role is to understand what the critical met- rics are that need to be identified and managed for the project to be viewed as a success by all of the stakeholders. Project managers have come to the realization that defining pro- ject-specific metrics and key performance indicators are joint ventures between the project manager, client, and stakeholders. Getting stakeholders to agree on the metrics is difficult, but it must be done as early as possible in the project.

Unlike financial metrics, project-based metrics can change during each life-cycle phase as well as from project to project. Therefore, the establishment and measurement of metrics may be an expensive necessity to validate the critical success factors (CSFs) and maintain customer satisfaction. Many people believe that the future will be metric-driven project management.

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Project Metrics 795

Although most companies use some type of metrics for measurement, they seem to have a poor understanding of what constitutes a metric, at

least for use in project management. You cannot effectively manage a project without hav- ing metrics and accompanying measurement capable of providing you with complete or almost complete information. Therefore, the simplest definition of a metric is something that is measured. Consider the following:

● If it cannot be measured, then it cannot be managed. ● What gets measured gets done. ● You never really understand anything fully unless it can be measured.

Metrics can be measured and recorded as:

● Numbers ● Percentages ● Dollars ● Counts ● Ratings (good, bad, or neutral) ● Qualitatively versus quantitatively

If you cannot offer a stakeholder something that can be measured, then how can you promise that their expectations will be met? You cannot control what you cannot measure. Good metrics lead to proactive project management rather than reactive project manage- ment if the metrics are timely and informative.

For years, measurement itself was not well understood. We avoided metrics manage- ment because we did not understand it. But authors such as Douglas Hubbard have helped to resolve the problem8:

● Your problem is not as unique as you think. ● You have more data than you think. ● You need less data than you think. ● There is useful measurement that is much simpler than you think.

Over the years, numerous benefits have surfaced from the use of metrics management. Some benefits of using metrics are:

● Metrics tell us if we are hitting the targets/milestones, getting better, or getting worse. ● Metrics allow you to catch mistakes before they lead to other mistakes; early iden-

tification of issues. ● Good metrics lead to informed decision-making, whereas poor or inaccurate met-

rics lead to bad management decisions. ● Good metrics can assess performance accurately. ● Metrics allow for proactive management in a timely manner. ● Metrics improve future estimating.

8. D. W. Hubbard, How to Measure Anything; Finding the Value of Intangibles in Business (Wiley, Hoboken, NJ, 2007), p..31.

Understanding Metrics

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● Metrics improve performance for the future. ● Metrics make it easier to validate baselines and maintain the baselines with mini-

mal disruptions. ● Metrics can more accurately assess success and failure. ● Metrics can improve client satisfaction. ● Metrics are a means of assessing the project’s health. ● Metrics track the ability to meet the project’s critical success factors. ● Good metrics allow the definition of project success to be made in terms of factors

other than the traditional triple constraints.

While metrics are most frequently used to validate the health of a project, they can also be used to discover best practices in the processes. Capturing best practices and lessons learned are necessities for long-term continuous improvement. Without effective use of metrics, companies could spend years trying to achieve sustained improvements. In this regard, metrics are a necessity because:

● Project approvals are often based upon insufficient information and poor estimating. ● Project approvals are based upon unrealistic return on investment (ROI), net pre-

sent value (NPV), and payback period calculations. ● Project approvals are often based upon a best-case scenario. ● The true time and cost requirements may be either hidden or not fully understood

during the project approval process.

Metrics require:

● A need or purpose ● A target, baseline, or reference point ● A means of measurement ● A means of interpretation ● A reporting structure

Even with good metrics, metrics management can fail. The most common causes of failure are:

● Poor governance, especially by stakeholders ● Slow decision-making processes ● Overly optimistic project plans ● Trying to accomplish too much in too little time

● Poor project management practices and/or methodology ● Poor understanding of how the metrics will be used

Sometimes the failure of metrics management is due to poor stakeholder relations management. Typical issues that can lead to failure include the following:

● Failing to resolve disagreements among the stakeholders ● Failing to resolve mistrust among the stakeholders ● Failing to define CSFs

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● Failing to get an agreement on the definition of project success ● Failing to get an agreement on the metrics needed to support the CSFs and the def-

inition of success ● Failing to see if the CSFs are being met ● Failing to get an agreement on how to measure the metrics ● Failing to understand the metrics ● Failing to use the metrics correctly

During the past few years, one of the drivers for effective metrics man- agement has been the growth in complex projects. The larger and more complex the project is, the greater the difficulty in measuring and

determining success. Therefore, the larger and more complex the project is, the greater the need for metrics.

But determining the metrics requires answering certain critical questions:

● Collecting information and reporting

● Who will collect the information?

● When will the information be collected?

● When and how will the information be reported?

● Measurements

● What should be measured?

● When should it be measured?

● How should it be measured?

● Who will perform the measurement?

For many companies, answering these questions, especially on complex projects, was a challenge. As a result, metrics were often ignored because they were hard to define and collect.

Other reasons for the lack of support included:

● Metrics management was viewed as extra work and a waste of productive time. ● There was no guarantee that the correct metrics would be selected. ● If the wrong metrics are selected, then we are wasting time collecting the wrong

data. ● Metrics management is costly and the benefits do not justify the cost. ● Metrics are expensive and useless.

Metric management is often seen as an add-on to the existing work of the project team. But without these metrics, we often focus on reactive rather than proactive man- agement. The result is a focus on the completion of individual work packages rather than a focus on completion of the business solution for the client.

Everyone understands the value in using metrics. But there is still the inherent fear among team members that metrics will be seen as “Big Brother Is Watching You!” Employees will not support a metrics management effort that looks like a spying machine.

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Causes for Lack of Support for Metrics Management

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There are certain basic characteristics that a metric should possess. These include:

● Has a need or a purpose ● Provides useful information ● Focuses toward a target ● Can be measured with reasonable accuracy ● Reflects the true status of the project ● Supports proactive management ● Assists in assessing the likelihood of success or failure

● Accepted by the stakeholders as a tool for informed decision-making

Unlike business environments which are long term, project environments are much shorter and therefore more susceptible to changing metrics. In a project environment, metrics can change from project to project, during each life-cycle phase, and at any time because of:

● The way the company defines value internally ● The way the customer and the contractor jointly define success and value at pro-

ject initiation ● The way the customer and contractor come to an agreement at project initiation as

to what metrics should be used on a given project. ● New or updated versions of tracking software ● Improvements to the enterprise project management methodology and accompa-

nying project management information system ● Changes in the enterprise environmental factors ● Changes in the project’s business case assumptions

Metrics can be classified. As an example, below are seven types of metrics or metric indicators that could appear in a metrics library:

● Quantitative metrics (planning dollars or hours as a percentage of total labor) ● Practical metrics (improved efficiencies) ● Directional metrics (risk ratings getting better or worse) ● Actionable metrics (affect change as the number of unstaffed hours) ● Financial metrics (profit margins, ROI, etc.) ● Milestone metrics (number of work packages on time) ● End result or success metrics (customer satisfaction)

Finding a compromise on the correct number of metrics is not easy, but we must deter- mine how many metrics are needed for a particular project.

● With too many metrics:

● Metric management steals time from other work.

● We end up providing too much information to stakeholders such that they can-

not determine what information is critical.

● We end up providing information that has limited value.

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Characteristics of a Metric

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● With too few metrics:

● Not enough critical information is provided.

● Informed decision-making becomes difficult.

There are certain ground rules we can establish as part of the metric selection process:

● Make sure that the metrics are worth collecting ● Make sure that we use what we collect ● Make sure that the metrics are informative ● Train the team in the use and value of metrics

Selecting metrics is a lot easier when you have competent baselines from which to make measurements. It is very difficult or even impossible to use metrics management effectively when the baselines undergo continuous transformation. For work that has not been planned yet, benchmarks and standards can be used instead of baselines.

Metrics by themselves are just numbers or trends resulting from measurements. Metrics have no real value unless they can be properly interpreted by the stakeholders or subject matter experts and a corrective plan, if necessary, can be developed. It is important to know who will benefit from each metric. The level of importance can vary from stake- holder to stakeholder.

There are several questions that can be addressed during metric selection:

● How knowledgeable are the stakeholders in project management? ● How knowledgeable are the stakeholders in metrics management? ● Do we have the necessary organizational process assets for metric measurements? ● Will the baselines and standards undergo transformations during the project?

There are two additional factors that must be considered when selecting metrics. First, there is a cost involved in performing the measurements and, based upon the frequency of the measurements, the costs can be quite large. Second, we must recognize that metrics needed to be updated. Metrics are like best practices; they age and may no longer provide the value or information that was expected. There are several reasons therefore for peri- odically reviewing the metrics:

● Customers may desire real-time reporting rather than periodic reporting, thus mak- ing some metrics inappropriate.

● The cost and complexity of the measurement may make a metric inappropriate for use.

● The metric does not fit well with the organizational process assets available for an accurate measurement.

● Project funding limits may restrict the number of metrics that can be used.

In reviewing the metrics, there are three possible outcomes:

● Update the metric. ● Leave the metric as is but possibly put it on hold. ● Retire the metric from use.

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Finally, metrics should be determined after the project is selected and approval is obtained. Selecting a project based upon available or easy-to-use metrics often results in either the selection of the wrong project or metrics that provide useless data.

15.19 KEY PERFORMANCE INDICATORS

As stated in the previous section, part of the project manager’s role is to understand what the critical metrics are that need to be identified, measured, reported, and managed such that the project will be viewed as a success by all of the stakeholders, if possible. The term “metric” is generic whereas a “KPI” is specific. KPIs serve as early-warning signs that, if an unfavorable condition exists and is not addressed, the results could be poor. KPIs and metrics can be displayed in dashboards, scorecards, and reports.

Defining the correct metrics or KPIs are joint ventures between the project manager, client, and stakeholders and are necessities in order to get stakeholder agreement. One of the keys to a successful project is the effective and timely management of information. This includes the KPIs. KPIs give us information for making informed decisions by reduc- ing uncertainty.

Getting stakeholder agreement on the KPIs is difficult. If you provide the stakehold- ers with fifty metrics to select from, they will somehow justify the need for all fifty of them. If you show them 100 metrics, they will find a reason why all 100 should be reported. The hard part is to select from the metrics library those critical metrics which can function as KPIs.

For years, metrics and KPIs were used primarily as part of business intelligence tech- niques. When applied to projects, KPIs answer the question, “What is really important for different stakeholders to monitor on the project?” In business, once a KPI is established, it becomes difficult to change as enterprise environmental factors change for fear that his- torical comparison data will be lost. But benchmarking industry KPIs is still possible because the KPIs are long term. In project management, because of the uniqueness of pro- jects, benchmarking is more complex because of the relatively short life span of the KPIs.

Most often, the items that appear in the dashboards and reports are ele- ments that both customers and project managers track. These items are referred to as key performance indicators. According to Eckerson9:

A KPI is a metric measuring how well the organization or an individual performs an oper-

ational, tactical or strategic activity that is critical for the current and future success of the

organization.

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9. W. W. Eckerson, Performance Dashboards: Measuring, Monitoring and Managing Your Business (Wiley, Hoboken, NJ, 2006), p.294.

Need for KPIs

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Although Eckerson’s comment is more appropriate for business-oriented rather than project-oriented metrics, the application to a project environment still exists. KPIs are high-level snapshots of how a project is progressing toward predefined targets. Some peo- ple confuse a KPI with leading indicators. A leading indicator is actually a KPI that mea- sures how the work you are doing now will affect the future. KPIs can be treated as indicators but not necessarily leading indicators.

While some metrics may appear as leading indicators, care must be taken as to how they are interpreted. The misinterpretation of a metric or the mistaken belief that a metric is a leading indicator can lead to faulty conclusions.

KPIs are critical components of all earned-value measurement systems. Terms such as cost variance, schedule variance, schedule performance index, cost performance index, and time/cost at completion are actually KPIs if used correctly but not always referred to as such. The need for these KPIs is simple: What gets measured gets done! If the goal of a performance measurement system is to improve efficiency and effectiveness, then the KPI must reflect controllable factors. There is no point in measuring an activity if the users cannot change the outcome.

For more than four decades, the only KPIs we looked at were time and cost or deriv- atives of time and cost. Today, we realize that true project status cannot be measured from just time and cost alone. As such, the need for additional KPIs has grown. Typical KPIs that project managers may use include:

● Percent of work packages adhering to the schedule ● Percent of work packages adhering to the budget ● Number of assigned resources versus planned resources ● Percent of actual versus planned baselines completed to date ● Percent of actual versus planned best practices used ● Project complexity factor ● Time to achieve value ● Customer satisfaction ratings ● Number of critical assumptions made ● Percent of critical assumptions that have changed ● Number of cost revisions ● Number of schedule revisions ● Number of scope change review meetings ● Number of critical constraints ● Percent of work packages with a critical risk designation ● Net operating margins ● Grade levels of assigned resources versus planned resources

Project managers must explain to the stakeholders the differences between metrics and KPIs and why only the KPIs should be reported on dashboards. As an example, met- rics focus on the completion of work packages, achievement of milestones, and accom- plishment of performance objectives. KPIs focus on future outcomes and this is the information stakeholders need for decision-making. Neither metrics nor KPIs can truly predict that the project will be successful, but KPIs provide more accurate information on

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what might happen in the future if the existing trends continue. Both metrics and KPIs provide useful information, but neither can tell you what action to take or whether a dis- tressed project can be recovered.

Once the stakeholders understand the need for correct KPIs, other questions must be discussed, including:

● How many KPIs are needed? ● How often should they be measured? ● What should be measured? ● How complex will the KPI become?

● Who will be accountable for the KPI (i.e., the KPI owner)? ● Will the KPI serve as a benchmark?

We stated previously that what gets measured gets done, and it is through measure- ment that a true understanding of the information is obtained. If the goal of a metric mea- surement system is to improve efficiency and effectiveness, then the KPI must reflect controllable factors. There is no point in measuring an activity or a KPI if the users can- not change the outcome. Such KPIs would not be acceptable to stakeholders.

Although most companies use metrics and perform measurement, they seem to have a poor understanding of what constitutes a KPI for pro-

jects and how they should be used. Some general principles include:

● KPIs are agreed to beforehand and reflect the CSFs on the project. ● KPIs indicate how much progress has been made toward the achievement of the

project’s targets, goals, and objectives. ● KPIs are not performance targets. ● The ultimate purpose of a KPI is the measurement of items directly relevant to per-

formance and to provide information on controllable factors appropriate for deci- sion-making such that it will lead to positive outcomes.

● Good KPIs drive change but do not prescribe a course of action. They indicate how close you are to a target but do not tell you what must be done to correct devia- tions from the target.

● KPIs assist in the establishment of objectives to be targeted with the ultimate pur- pose of either adding value to the project or achieving the prescribed value.

Some people argue that the high-level purposes of a KPI are to encourage effective measurement. In this regard, the three high-level purposes are:

● Measurements that lead to motivation of the team ● Measurements that lead to compliance with use of organizational process assets

and alignment to business objectives ● Measurements that lead to performance improvements and the capturing of

lessons learned and best practices

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Using the KPIs

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Some companies post KPI information on bulletin boards, in the company cafeteria, on the walls of conference rooms or in company newsletters as a means of motivating the organization by showing progress toward that target. However, unfavorable KPIs can have an adverse effect on morale.

Some metrics, such as project profitability, can tell us if things look good or bad but do not necessarily provide meaningful information on

what we must do to improve performance. Therefore, a typical KPI must do more than just function as a metric. If we dissect the KPIs we will see the following:

● KEY 5 a major contributor to the success or failure of the project. A KPI met- ric is therefore only “key” when it can make or break the project.

● PERFORMANCE 5 a metric that can be measured, quantified, adjusted, and controlled. The metric must be controllable to improve performance.

● INDICATOR 5 reasonable representation of present and future performance.

A KPI is part of a measurable objective. Defining and selecting the KPIs are much easier if you define the CSFs first. KPIs should not be confused with CSFs. CSFs are things that must be in place to achieve an objective. A KPI is not a CSF but may provide a leading indication that the CSF can be met.

Selecting the right KPIs and the right number of KPIs will:

● Allow for better decision-making ● Improve performance on the project ● Help identify problem areas faster ● Improve customer–contractor–stakeholder relations

David Parmenter10 defines three categories of metrics:

● Results Indicators (RIs): what have we accomplished? ● Performance Indicators (PIs): what must we do to increase or meet performance? ● Key Performance Indicators (KPIs): what are the critical performance indicators

that can drastically increase performance or accomplishment of the objectives?

Most companies use an inappropriate mix of these three and label them as KPIs. Having too many KPIs can slow down projects due to excessive measurements and report- ing requirements. Too many can also blur one’s vision on actual performance. Too few can likewise cause delays because of the lack of critical information. Typically, we end up with too many rather than too few KPIs.

The number of KPIs can vary from project to project and may be impacted by the number of stakeholders. Some people select the number of KPIs based upon the Pareto principle, which states that 20 percent of the total indicators will impact 80 percent of the

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10. D., Key Performance Indicators (Wiley, Hoboken, NJ, 2007), p. 1.

Anatomy of a KPI

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project. David Parmenter states that the 10/80/10 rule is usually applied when selecting the number of KPIs11:

● RIs: 10 ● PIs: 80 ● KPIs: 10

Typically, between six and ten KPIs are standard. Factors influencing the number of KPIs include:

● The number of information systems that the project manager uses (i.e., one, two, or three)

● The number of stakeholders and their reporting requirements ● The ability to measure the information ● The organizational process assets available to collect the information ● The cost of measurement and collection ● Dashboard reporting limitations

The literature abounds with articles defining the characteristics of met- rics and KPIs. All too often, authors use the “SMART” rule as a means

of identifying the characteristics:

● S 5 Specific: clear and focused toward performance targets or a business purpose

● M 5 Measurable: can be expressed quantitatively ● A 5 Attainable: the targets are reasonable and achievable ● R 5 Realistic or relevant: the KPI is directly pertinent to the work done on the

project ● T 5 Time-Based: the KPI is measurable within a given time period

The SMART rule was originally developed for establishing meaningful objectives for projects and later adapted to the identification of metrics and KPIs. While the use of the SMART rule does have some merit, its applicability to KPIs is questionable.

The most important attribute of a KPI may be that it is actionable. If the trend of the metric is unfavorable, then the users should know what action is necessary to correct the unfavorable trend. The user must be able to control the outcome. This is a weakness when using the SMART rule to select KPIs.

Wayne Eckerson has developed a more sophisticated set of characteristics for KPIs. The list is more appropriate for business-oriented KPIs than project-oriented KPIs but can be adapted for project management usage. Table 15–10 shows Eckerson’s twelve characteristics.12

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11. See note 10, p. 9. 12. See note 9, p. 201.

KPI Characteristics

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Business or financial metrics are usually the results of many factors, and it therefore may be difficult to isolate what must be done to implement change. For project-oriented KPIs, the following six characteristics may very well be sufficient:

● Predictive: able to predict the future of this trend ● Measurable:can be expressed quantitatively ● Actionable: triggers changes that may be necessary for corrective action ● Relevant: the KPI is directly related to the success or failure of the project ● Automated: reporting minimizes the chance of human error ● Few in number: only what is necessary

Sometimes KPIs are categorized according to what they are intended to indicate, sim- ilar to the metrics categories discussed in the previous section:

● Quantitative KPIs: numerical values ● Practical KPIs: interfacing with company processes ● Directional KPIs: getting better or worse ● Actionable KPIs: effect change

● Financial KPIs: performance measurements

Another means of classification might be leading or lagging indicators or KPIs:

● Lagging KPIs measure past performance. ● Leading KPIs measure drivers for future performance.

Most dashboards have a compromise of both leading and lagging metrics.

Key Performance Indicators 805

TABLE 15–10. TWELVE CHARACTERISTICS OF EFFECTIVE KPIs

Aligned. KPIs are always aligned with corporate strategy and objectives. Owned. Every KPI is “owned” by an individual or group on the business side who is accountable for its outcome. Predictive. KPIs measure drivers of business value. Thus, they are “leading” indicators of performance desired by the organization. Actionable. KPIs are populated with timely, actionable data so users can intervene to improve performance before it is too late. Few in number. KPIs should focus users on a few high-value tasks, not scatter their attention and energy on too many things. Easy to understand. KPIs should be straightforward and easy to understand, not based on complex indexes that users do not know how to influence directly. Balanced and linked. KPIs should balance and reinforce each other, not undermine each other and suboptimize processes. Trigger changes. The act of measuring a KPI should trigger a chain reaction of positive changes in the organization, especially when it is monitored by the CEO. Standardized. KPIs are based on standard definitions, rules, and calculations so they can be integrated across dashboards through- out the organization. Context driven. KPIs put performance in context by applying targets and thresholds to performance so users can gauge their progress over time. Reinforced with incentives. Organizations can magnify the impact of KPIs by attaching compensation or incentives to them. However, they should do this cautiously, applying incentives only to well-understood and stable KPIs. Relevant. KPIs gradually lose their impact over time, so they must be periodically reviewed and refreshed.

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KPI Failures There are several reasons why the use of KPIs often fails on projects. Some of the rea-

sons are:

● People believe that the tracking of a KPI ends at the first line manager level. ● The actions needed to regulate unfavorable indications are beyond the control of

the employees doing the monitoring or tracking. ● The KPIs are not related to the actions or work of the employees doing the

monitoring. ● The rate of change of the KPIs is too slow, thus making them unsuitable for man-

aging the daily work of the employees.

● Actions needed to correct unfavorable KPIs take too long. ● Measurement of the KPIs does not provide enough meaning or data to make

them useful. ● The company identifies too many KPIs to the point where confusion reigns among

the people doing the measurements.

Years ago, the only metrics that some companies used were those identified as part of the earned-value measurement system. The metrics generally focused only on time and cost and neglected metrics related to business success as opposed to project success. As such, the measurement metrics were the same on each project and the same for each life- cycle phase. Today, metrics can change from phase to phase and from project to project. The hard part is obviously deciding upon which metrics to use. Care must be taken that whatever metrics are established does not end up comparing apples and oranges. Fortunately, there are several good books in the marketplace that can assist in identifying proper or meaningful metrics.13

15.20 VALUE-BASED METRICS

For years, customers and contractors have been working toward different definitions of project success. The project manager’s definition of success was profitability and tracked through financial metrics. The customer’s definition of success was usually the quality of the deliverables. Unfortunately, quality was measured at the closure of the project because it was difficult to track throughout the project. Yet quality was often considered the only measurement of success.

Today, clients and stakeholders appear to be more interested in the value they will receive at the end of the project. If you were to ask ten people, including project person- nel, the meaning of value, you would probably get ten different answers. Likewise, if you

806 COST CONTROL

13. Three books that provide examples of metric identification are P. F. Rad and G. Levin, Metrics for Project Management (Management Concepts, Vienna, VA, 2006); M. Schnapper and S. Rollins, Value-Based Metric for Improving Results (J. Ross Publishing, Ft. Lauderdale, FL, 2006); and D. W. Hubbard, How To Measure Anything (Wiley, Hoboken, NJ, 2007).

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were to ask which CSF has the greatest impact on value, you would get different answers. Each answer would be related to the individual’s work environment and industry. Today, companies seem to have more of an interest in value rather than quality. This does not mean that we are giving up on quality. Quality is part of value. Some people believe that value is simply quality divided by the cost of obtaining that quality. In other words, the less you pay for obtaining the customer’s desired level of quality, the greater the value to the customer.

The problem with this argument is that we assume that quality is the only attribute of value that is important to the client and therefore we need to determine better ways of mea- suring and predicting just quality. Unfortunately, there are other attributes of value and many of these other attributes are equally as difficult to measure and predict. Customers can have many attributes that they consider as value, but not all of the value attributes are equal in importance.

Unlike the use of quality as the solitary parameter, value allows a company to better measure the degree to which the project will satisfy its objectives. Quality can be regarded as an attribute of value along with other attributes. Today, everyone has quality and pro- duces quality in some form. This is necessary for survival. But what differentiates one company from another are the other attributes, components, or factors used to define value. Some of these attributes might include price, timing, image, reputation, customer service, and sustainability.

In today’s world, customers make decisions to hire a contractor based upon the value they expect to receive and the price they must pay to receive this value. Actually it is more of a “perceived” value that may be based upon trade-offs on the attributes of the client’s definition of value. The client may perceive the value of your project to be used internally in their company or pass it on to their customers through their customer value manage- ment program. If your organization does not or cannot offer recognized value to your clients and stakeholders, then you will not be able to extract value (i.e., loyalty) from them in return. Over time, they will defect to other contractors.

The importance of value is clear. According to a study by the American Productivity and Quality Center (APQC):

Although customer satisfaction is still measured and used in decision-making, the major-

ity of partner organizations [used in this study] have shifted their focus from customer sat-

isfaction to customer value.14

Project managers in the future must consider themselves as the creators of value. The definition of a project that I use in my courses is “a set of values scheduled for sustainable realization.” As a project manager, you must establish metrics so that the client and the stakeholders can track the value that you will be creating. Measuring and reporting cus- tomer value throughout the project is now a competitive necessity. If it is done correctly, it will build emotional bonds with your clients.

Value-Based Metrics 807

14. “Customer Value Measurement: Gaining Strategic Advantage,” The American Productivity and Quality Center (APQC), Portland, OR, 1999, p. 8.

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For years, the principles of value management have been applied to engineering and manufacturing activities, but only recently have the same principles been applied to pro- ject management. According to Venkataraman and Pinto15:

Value can be added to projects in several ways. These include providing greater levels of

client satisfaction, maintaining acceptable levels of satisfaction while lowering resource

expenditures, or some combination of the two. It is also possible to improve value by

simultaneously increasing satisfaction and resources, provided that satisfaction increases

more than the resources used to achieve it.

When managing projects for value, five fundamental concepts must be embraced:

Concept #1: Projects derive their value from the benefits the organization accrues by

achieving its stated goals

Concept #2: Project can be viewed as investments made by management

Concept #3: Project investors and sponsors tolerate risk

Concept #4: Project value is related to investment and risks

Concept #5: Value is a balance among the three key project elements: performance,

resource usage, and risk

Traditionally, business plans have identified the benefits and resulting value expected from the project. The business plans were usually prepared by a business analyst (BA), and all of this was done prior to the project manager being assigned and brought on board the project. Unfortunately, once the project kicked off, the metrics being monitored and reported generally focused on time and cost rather than the value that the customer was or would be receiving. Value-based metrics were not reported because we simply did not know how to perform the measurements.

Today, we can define a project as a collection of value scheduled for realization. The role of the BA and the PM are now coming together. As stated by Robert Wisocki16:

Meeting time and cost constraints has very little to do with project success. Project suc-

cess is measured in terms of business value expected compared to business value delivered.

Both the PM and the BA should be making every effort to maximize business value for the

time and cost invested. This puts the goals of the PM and the BA in alignment.

We can now define project success as the ability to achieve the desired value within the competing constraints imposed upon the project.

Today, with the growth of measurement management techniques, value-based metrics are a necessity for determining project success and are being considered as critical KPIs to be monitored and reported to the client. One contractor reports to their client on a monthly basis the amount of time left before the client will achieve the value that is expected, and the date may be beyond the end date of the project. However, many of the value-based met- rics are still considered as a measurement challenge, as shown in Table 15–11.

808 COST CONTROL

15. Adapted from R. R. Venkataraman and J. K. Pinto, Cost and Value Management in Projects (Wiley, Hoboken, NJ, 2008), pp.164–165. 16. R. K. Wysocki, The Business Analyst/Project Manager (Wiley, Hoboken, NJ, 2011), p. 2. The author pro- vided an excellent discussion of the relationship between the PM and the BA.

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Not all metrics are value-based metrics, and the metrics can change from project to project as well as in each life-cycle phase. Time and cost can be treated as value-based metrics if coming in under budget can increase profitability and coming in ahead of sched- ule allows us to enter the marketplace sooner to generate revenue.

Even with the best possible metrics, measuring value can be difficult. Some values are easy to measure while others are more difficult. The easy values to measure are often called soft or tangible values whereas the hard values are often considered as intangible values. Table 15–12 illustrates some of the easy and hard value metrics to measure. Table 15–13 shows some of the problems associated with measuring both hard and soft value metrics.

Value-Based Metrics 809

Table 15–11. Metric Measurement Complexity

Metric or KPI Measurement Complexity

Profitability Easy Customer satisfaction Hard Goodwill Hard Penetrate new markets Easy Develop new technology Medium Technology transfer Medium Reputation Hard Stabilize work force Easy Utilize unused capacity Easy

Table 15–12. Measuring Values

Easy (Soft/Tangible) Values Hard (Intangible) Values

ROI calculators Stockholder satisfaction Net present value Stakeholder satisfaction Internal rate of return Customer satisfaction Cash flow Employee retention Payback period Brand loyalty Profitability Time-to-market Market share Business relationships

Safety Reliability Reputation Goodwill Image

Table 15–13. Problems with Measuring Values

Easy (Soft/Tangible) Values Hard (Intangible) Values

Assumptions are often not disclosed and can affect decision-making Value is almost always based upon subjective-type attributes of the person doing the measurement

Measurement is very generic It is more of an art than a science Measurement never meaningfully captures the correct data Limited models are available to perform the measurement

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The intangible elements or metrics are now considered by some to be more important than the tangible elements. This appears to be happening on IT projects where executives are giving significantly more attention to intangible value metrics. The critical issue with intangible value metrics is not necessarily in the end result, but in the way that the intan- gibles were calculated.17 Tangible values are usually expressed quantitatively whereas intangible values are expressed through a qualitative assessment.

There are three schools of thought for value measurement:

● School 1: The only thing that is important is ROI. ● School 2: ROI can never be calculated effectively; only the intangibles are

important.

● School 3: If you cannot measure it, then it does not matter.

The three schools of thought appear to be an all-or-nothing approach where value is either 100 percent quantitative or 100 percent qualitative. The best approach is most likely a compromise between a quantitative and qualitative assessment of value.

The timing of value measurement is absolutely critical. During the life cycle of a pro- ject, it may be necessary to switch back and forth from qualitative to quantitative assess- ment and, as stated previously, the actual metrics or KPIs can change as well. Certain critical questions must be addressed:

● When or how far along the project life cycle can we establish concrete metrics, assuming it can be done at all?

● Can value be simply perceived and therefore no value metrics are required? ● Even if we have value metrics, are they concrete enough to reasonably predict

actual value? ● Will we be forced to use value-driven project management on all projects or are

there some projects where this approach is not necessary? ● Well-defined versus ill-defined ● Strategic versus tactical ● Internal versus external

● Can we develop a criterion for when to use value-driven project management, or should we use it on all projects but at a lower intensity level?

For some projects, assessing value at project closure may be difficult. We must estab- lish a time frame for how long we are willing to wait to measure the value or benefits from a project. This is particularly important if the actual value cannot be identified until some- time after the project has been completed. Therefore, it may not be possible to appraise the success of a project at closure if the true economic values cannot be realized until sometime in the future.

810 COST CONTROL

17. For additional information on the complexities of measuring intangibles, see J. J. Phillips, T. W. Bothell, and G. L. Snead, The Project Management Scorecard (Butterworth Heinemann, An Imprint of Elsevier, Oxford, UK, 2002), Chapter 10. The authors emphasize that the true impact on a business must be measured in business units.

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Some practitioners of value measurement question whether value measurement is better using boundary boxes instead of life-cycle phases. For value-driven projects, the potential problems with life-cycle phases include:

● Metrics can change between phases and even during a phase. ● Inability to account for changes in the enterprise environmental factors. ● Focus may be on the value at the end of the phase rather than the value at the end

of the project. ● Team members may get frustrated not being able to quantitatively calculate value.

Boundary boxes, as show in Figure 15–28, have some degree of similarity to statistic process control charts. We establish a performance target for the value metric. The goal is to stay between 6 10 percent of the optimal value. If we are greater than 10 percent above the optimal value, we are exceeding the expected value. If we are below 10 percent of the target value, performance is poor. If we are greater than 20 percent below the target value, urgent attention is needed.

Projects that focus heavily upon value-based metrics must undergo value health checks to confirm that the project will make a contribution of value to the company. Value metrics, such as KPIs, indicate the current value. What is also needed is an extrapolation of the present into the future. Using traditional project management combined with the traditional enterprise project management methodology we can calculate the time at com- pletion and the cost at completion. These are common terms that are part of earned-value measurement systems. But as stated previously, being on time and within budget is no guarantee that the perceived value will be there at project completion.

Therefore, instead of using an enterprise project management methodology which focuses on earned-value measurement, we may need to create a value management methodology (VMM) which stresses the value variables. With VMM, time to complete and cost to complete are still used, but we introduce a new term entitled value (or benefits) at completion. Determination of value at completion must be done periodically throughout

Value-Based Metrics 811

Risk of Project Failure

Unfavorable Expectation

Performance Target

Favorably Exceeding Target

Performance Characteristics

Superior

Normal

Caution

Urgent Attention

Target +10%

Target–10%

Target–20%

Figure 15–28. The boundary box

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the project. However, periodic reevaluation of benefits and value at completion may be dif- ficult because:

● There may be no reexamination process. ● Management is not committed and believes that the reexamination process is

unreal. ● Management is overoptimistic and complacent with existing performance. ● Management is blinded by unusually high profits on other projects (misinterpretation). ● Management believes that the past is an indication of the future.

An assessment of value at completion can tell us if value trade-offs are necessary. Reasons for value trade-offs include:

● Changes in the enterprise environmental factors ● Changes in the assumptions ● Better approaches have been found, possibly with less risk ● Availability of highly skilled labor ● A breakthrough in technology

As stated previously, most value trade-offs are accompanied by an elongation of the schedule. Two critical factors that must be considered before schedule elongation takes place are:

● Elongating a project for the desired or added value may incur risks. ● Elongating a project consumes resources which may have already been committed

to other projects in the portfolio.

Traditional tools and techniques may not work well on value-driven projects. The cre- ation of a VMM may be necessary to achieve the desired results. A VMM can include the features of EVMSs and enterprise project management systems (EPMs), but additional variables must be included for the capturing, measurement, and reporting of value.

15.21 DASHBOARDS AND SCORECARDS

In our attempt to go to paperless project management, emphasis is being given to visual displays such as dashboards and scorecards. Executives and customers desire a visual dis- play of the most critical project performance information in the least amount of space. Simple dashboard techniques, such as traffic light reporting, can convey critical perfor- mance information. As an example,

● Red traffic light: A problem exists which may affect time, cost, quality, or scope. Sponsorship involvement is necessary.

● Yellow or amber light: This is a caution. A potential problem may exist, perhaps

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in the future if not monitored. The sponsor is informed but no action by the spon- sor is necessary at this time.

● Green light: Work is progressing as planned. No involvement by the sponsor is necessary.

While a traffic light dashboard with just three colors is most common, some compa- nies use many more colors. The IT group of a retailer had an eight-color dashboard for IT projects. An amber color meant that the targeted end date had passed and the project was still not complete. A purple color meant that this work package was undergoing a scope change that could have an impact on the triple constraint.

Some people confuse dashboards with scorecards. There is a difference between dash- boards and scorecards. According to Eckerson18:

● Dashboards are visual display mechanisms used in an operationally oriented per- formance measurement system that measure performance against targets and thresholds using right-time data.

● Scorecards are visual displays used in a strategically oriented performance mea- surement system that chart progress towards achieving strategic goals and objec- tives by comparing performance against targets and thresholds.

Both dashboards and scorecards are visual display mechanisms within a performance measurement system that convey critical information. The primary difference between dashboards and scorecards is that dashboards monitor operational processes such as those used in project management, whereas scorecards chart the progress of tactical goals. Table 15–14 and the description following it show how Eckerson compares the features of dash- boards and scorecards.19

Dashboards. Dashboards are more like automobile dashboards. They let operational spe- cialists and their supervisors monitor events generated by key business processes. But unlike

automobiles, most business dashboards do not display events in “real time” as they occur;

they display them in “right time” as users need to view them. This could be every second,

Dashboards and Scorecards 813

18. See note 9, pp. 293, 295. Chapter 12 provides an excellent approach to designing dashboard screens. 19. See note 9, p.13.

Table 15–14. Comparing Features

Feature Dashboard Scorecard

Purpose Measures performance Charts progress Users Supervisors, specialists Executives, managers, and staff Updates Right-time feeds Periodic snapshots Data Events Summaries Display Visual graphs, raw data Visual graphs, comments

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minute, hour, day, week, or month depending on the business process, its volatility, and how

critical it is to the business. However, most elements on a dashboard are updated on an intra-

day basis, with latency measured in either minutes or hours.

Dashboards often display performance visually, using charts or simple graphs, such as

gauges and meters. However, dashboard graphs are often updated in place, causing the

graph to “flicker” or change dynamically. Ironically, people who monitor operational

processes often find the visual glitz distracting and prefer to view the data in its original

form, as numbers or text, perhaps accompanied by visual graphs.

Scorecards. Scorecards, on the other hand, look more like performance charts used to track progress toward achieving goals. Scorecards usually display monthly snapshots of

summarized data for business executives who track strategic and long-term objectives, or

daily and weekly snapshots of data for managers who need to chart the progress of their

group of project toward achieving goals. In both cases, the data are fairly summarized so

users can view their performance status at a glance.

Like dashboards, scorecards also make use of charts and visual graphs to indicate per-

formance state, trends, and variance against goals. The higher up the users are in the orga-

nization, the more they prefer to see performance encoded visually. However, most

scorecards also contain (or should contain) a great deal of textual commentary that inter-

prets performance results, describes action taken, and forecasts future results.

Summary. In the end, it does not really matter whether you use the term dashboard or scorecard as long as the tool helps to focus users and organizations on what really matters.

Both dashboards and scorecards need to display critical performance information on a sin-

gle screen so users can monitor results at a glance.

Although the terms are used interchangeably, most project managers prefer to use dashboards and/or dashboard reporting. Eckerson defines three types of dashboards as shown in Table 15–15 and the description that follows20:

Operational dashboards monitor core operational processes and are used primarily by front-line workers and their supervisors who deal directly with customers or manage the cre-

ation or delivery of organizational products and services. Operational dashboards primarily

deliver detailed information that is only lightly summarized. For example, an online Web

merchant may track transactions at the product level rather than the customer level. In addi-

tion, most metrics in an operational dashboard are updated on an intra-day basis, ranging

from minutes to hours depending on the application. As a result, operational dashboards

814 COST CONTROL

Table 15–15. Three Types of Performance Dashboards

Operational Tactical Strategic

Purpose Monitor operations Measure progress Execute strategy Users Supervisors, specialists Managers, analysts Executives, managers, staff Scope Operational Departmental Enterprise Information Detailed Detailed/summary Detailed/summary Updates Intra-day Daily/weekly Monthly/quarterly Emphasis Monitoring Analysis Management

20. See note 9, pp. 17–18.

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emphasize monitoring more than analysis and management.

Tactical dashboards track departmental processes and projects that are of interest to a segment of the organization or a limited group of people. Managers and business analysts

use tactical dashboards to compare performance of their areas or projects, to budget plans,

forecasts, or last period’s results. For example, a project to reduce the number of errors in

a customer database might use a tactical dashboard to display, monitor and analyze

progress during the previous 12 months toward achieving 99.9 percent defect-free cus-

tomer data by 2007.

Strategic dashboards monitor the execution of strategic objectives and are frequently implemented using a Balanced Scorecard approach, although Total Quality Management, Six

Sigma, and other methodologies are used as well. The goal of a strategic dashboard is to align

the organization around strategic objectives and get every group marching in the same direc-

tion. To do this, organizations roll out customized scorecards to every group in the organiza-

tion and sometimes to every individual as well. These “cascading” scorecards, which are

usually updated weekly or monthly, give executives a powerful tool to communicate strategy,

gain visibility into operations, and identify the key drivers of performance and business value.

Strategic dashboards emphasize management more than monitoring and analysis.

There are three critical steps that must be considered when using dashboards: (1) the target audience for the dashboard, (2) the type of dashboard to be used, and (3) the fre- quency in which the data will be updated. Some project dashboards focus on the key per- formance indicators that are part of earned-value measurement. These dashboards may need to be updated daily or weekly. Dashboards related to the financial health of the com- pany may be updated weekly or quarterly.

15.22 BUSINESS INTELLIGENCE

Corporations have been using the concept of business intelligence (BI) for more than two decades. In recent years, business intelligence applications have been replaced by strategic intelligence (SI) applications. Both applications are designed around the monitoring and surveillance of business metrics. According to Corine Cohen21:

The general surveillance field covers notions of watch, scanning, intelligence, competitive

intelligence, vigilance, business intelligence, economic intelligence, economic and strate-

gic intelligence, etc...

SI is defined here as a formalized process of research, collection, information process-

ing and distribution of knowledge useful to strategic management. Besides its information

function, the main goals of SI are to anticipate environmental threats and opportunities

(anticipatory function), help in strategic decision making and improve competitiveness

and performance of the organization. It requires an organizational network structure, and

human technical and financial resources.

A distinction must therefore be made between Strategic Watch and SI. SI goes beyond

Strategic Watch with its proactivity and its deeper involvement in the strategic decision

Business Ingtelligence 815

21. C. Cohen, Business Intelligence (Wiley and ISTE Ltd Publishers, Hoboken, NJ, 2009), p. xiii.

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process. Watch can (must) indicate the impacts of a detected event for example. However,

it becomes intelligence when it produces recommendations and provides instructions to

the recipient (all the more so when it implements them).

BI and SI applications have taught us that the way we try to monitor and control projects must change. In a project management environment, BI would be represented by metrics and SI would be represented by key performance indicators (KPIs). Key performance indicators are the “strategic” metrics that provide us with the critical information for informed decision- making. BI metrics are simply monitoring metrics whereas SI metrics, or KPIs, provide infor- mation on the future rather than just the present and indicate changes that may be necessary. Since project managers today and in the future will become more business-oriented managers, the relationship between metrics and BI and SI will become more important.

15.23 INFOGRAPHICS

The growth in importance of metrics, KPIs, dashboards, and business intelligence appli- cation has been spectacular. Unfortunately, the result has often been information overload, primarily with dashboard reporting systems. Today, we tend to add in more artwork than we need, a trend that resulted in a new term, “infographics.” Some problems with the growth of infographics include the following:

● There is a heavy focus on the designs, colors, images, and text rather than the qual- ity of the information being presented.

● A decline in the quality of the information makes it difficult for stakeholders to use the data properly.

● There are too many pretty graphics that can be misleading and hard to understand. ● The dashboard has been converted from a project management performance tool

to a marketing/sales tool. ● Some graphic artists do not understand or utilize information visualization best

practices.

We must have better and clearer representation of the metrics we select.

15.24 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses:

● Scope Management ● Cost Management ● Initiating

816 COST CONTROL

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● Planning ● Controlling

Understanding the following principles is beneficial if the reader is using this text to study for the PMP® Certification Exam:

● What is meant by a management cost and control system ● What is meant by earned value measurement ● The meaning of control ● Code of cost accounts

● Work authorization for and its relationship to the code of accounts ● Sources of funds for a project or changes to a project ● Four primary elements of cost monitoring and control: BCWS, BCWP, ACWP, and BAC ● How to calculate the cost and schedule variances, in hours, dollars, and percentages ● Importance of SPI and CPI in trend analysis ● Ways to forecast the time and cost to completion as well as variances at

completion ● Different types of reports: performance, status, forecasting, and exception ● Use of the management reserve ● Escalation factors and how they affect a project ● What is a cost or financial baseline for a project ● Different ways to calculate either BCWP or percent complete

The following multiple-choice questions will be helpful in reviewing the principles of this chapter:

1. In earned value measurement, earned value is represented by: A. BCWS B. BCWP C. ACWP D. None of the above

2. If BCWS 5 1000, BCWP 5 1200, and ACWP 5 1300, the project is: A. Ahead of schedule and under budget B. Ahead of schedule and over budget C. Behind schedule and over budget D. Behind schedule and under budget

3. If BAC 5 $20,000 and the project is 40 percent complete, then the earned value is: A. $5000 B. $8000 C. $20,000 D. Cannot be determined

4. If BAC 5 $12,000 and CPI 5 1.2, then the variance at completion is: A. 2$2000 B. 1$2000 C. 2$3000 D. 1$3000

Studying Tips for the PMI® Project Management Certification Exam 817

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5. If BAC 5 $12,000 and CPI 5 0.8, then the variance at completion is: A. 2$2000 B. 1$2000 C. 2$3000 D. 1$3000

6. If BAC for a work package is $10,000 and BCWP 5 $4,000, then the work package is: A. 40 percent complete B. 80 percent complete C. 100 percent complete D. 120 percent complete

7. If CPI 5 1.1 and SPI 5 0.95, then the trend for the project is: A. Running over budget but ahead of schedule B. Running over budget but behind schedule C. Running under budget but ahead of schedule D. Running under budget but behind schedule

8. The document that describes a work package, identifies the cost centers allowed to charge against this work package, and establishes the charge number for this work package is the: A. Code of accounts B. Work breakdown structure C. Work authorization form D. None of the above

9. Unknown problems such as escalation factors are often budgeted for using the: A. Project manager’s charge number B. Project sponsor’s charge number C. Management reserve D. Configuration management cost account

10. EAC, ETC, SPI, and CPI most often appear in which type of report? A. Performance B. Status C. Forecast D. Exception

11. If BAC 5 $24,000, BCWP 5 12,000, ACWP 5 $10,000, and CPI 5 1.2, then the cost that remains to finish the project is: A. $10,000 B. $12,000 C. $14,000 D. Cannot be determined

12. There are several purposes for the 50–50 rule, but the primary purpose of the 50–50 rule is to calculate: A. BCWS B. BCWP C. ACWP D. BAC

818 COST CONTROL

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13. When a project is completed, which of the following must be true? A. BAC 5 ACWP B. ACWP 5 BCWP C. SV 5 0 D. BAC 5 ETC

14. In March CV 5 2$20,000, and in April CV 5 2$30,000. In order to determine whether or not the situation has really deteriorated because of a larger unfavorable cost variance, we would need to calculate: A. CV in percent B. SV in dollars C. SV in percent D. All of the above

15. If a project manager is looking for revenue for a value-added scope change, the project manager’s first choice would be: A. Management reserve B. Customer-funded scope change C. Undistributed budget D. Retained profits

16. A project was originally scheduled for 20 months. If CPI is 1.25, then the new schedule date is: A. 16 months B. 20 months C. 25 months D. Cannot be determined

17. The cost or financial baseline of a project is composed of: A. Distributed budget only B. Distributed and undistributed budgets only C. Distributed budget, undistributed budget, and the management reserve only D. Distributed budget, undistributed budget, management reserve, and profit only

ANSWERS

1. B

2. B

3. B

4. B

5. C

6. A

7. D

8. C

9. C

10. C

11. A

Answers 819

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12. B

13. C

14. A

15. B

16. D

17. B

PROBLEMS

15–1 Do cost overruns just happen, or are they caused?

15–2 Cemeteries are filled with projects that went out of control. Below are several causes that can easily develop into out-of-control conditions. In which phase of a project should each of these conditions be detected and, if possible, remedied?

a. Customer’s requirements not understood b. Project team formed after bid was prepared c. Accepting unusual terms and conditions d. Permitting a grace period for changing specifications e. Lack of time to research specifications f. Overestimation of company’s capabilities

15–3 Below are several factors that can result in project delays and cost overruns. Explain how these problems can be overcome.

a. Poorly defined milestones b. Poor estimating techniques c. A missing PERT/CPM chart d. Functional managers not having a clear understanding of what has to be done e. Poor programming procedures and techniques f. Changes constantly being made deep in the project’s life cycle

15–4 Under what circumstances would each of the figures in Chapter 13 be applicable for cus- tomer reporting? In-house reporting? Reporting to top-level management?

15–5 What impact would there be on BCWS, BCWP, ACWP, and cost and schedule variances as a result of the:

a. Early start of an activity on a PERT chart? b. Late start of an activity on a PERT chart?

15–6 Alpha Company has implemented a plan whereby functional managers will be held totally responsible for all cost overruns against their (the functional managers’) original esti- mates. Furthermore, all cost overruns must come out of the functional managers’ budgets, whether they be overhead or otherwise, not the project budget. What are the advantages and dis- advantages of this approach?

820 COST CONTROL

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15–7 Karl has decided to retain a management reserve on a $400,000 project that includes a $60,000 profit. At the completion of the project, Karl finds that the management reserve fund contains $40,000. Should Karl book the management reserve as excess profits (i.e., $100,000), or should he just book the target profit of $60,000 and let the functional managers “sandbag” on the slush fund until it is depleted?

15–8 ABC Corporation has recently given out a nine-month contract to a construction subcon- tractor. At the end of the first month, it becomes obvious that the subcontractor is not reporting costs according to an appropriate WBS level. ABC Corporation asks the subcontractor to change its cost reporting procedures. The subcontractor states that this cannot be done without additional funding. This problem has occurred with other subcontractors as well. What can ABC Corporation do about this?

15–9 What would be the result if all project managers decided to withhold a management reserve? What criteria should be used for determining when a management reserve is necessary?

15–10 Alpha Company, a project-driven organization, pays its department managers a quarterly bonus that is dependent on two factors: the departmental overhead rate and direct labor dollars. The exact value of the bonus is proportional to how much these two factors are underrun.

Department man-hours are priced out against the department average, which does not include the department manager’s salary. His salary is included under his departmental over- head rate, but he does have the option of charging his own time as direct labor to the projects for which he must supply resources.

What do you think of this method? Is it adequate inducement for a functional manager to control resources more effectively? How would you feel, as a project manager, knowing that the functional managers got quarterly bonuses and you got none?

15–11 Many executives are reluctant to let project managers have complete control of pro- ject costs because then the project managers must know the exact salaries of almost all project personnel. Can this situation be prevented if the contract requires reporting costs as actuals?

15–12 How can a country’s inflation rate influence the contractual payment policy?

15–13 Consider a situation in which several tasks may be for one to two years rather than the 200 hours normally used in the work-package level of the WBS.

a. How will this affect cost control? b. Can we still use the 50/50 rule? c. How frequently should costs be updated?

15–14 By now you should be familiar with the various tools that can be used for planning, controlling, scheduling, and directing project activities. Table 15–16 contains a partial list of such tools and how they relate to specific project management functions. Complete the table (using the legend at the bottom) to indicate which are very useful and which are somewhat useful.

Obviously there will be some questions about what is very useful and what is somewhat useful. Be able to defend your answers.

Problems 821

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15–15 Complete the table below and plot the EAC as a function of time. What are your conclusions?

822 COST CONTROL

TABLE 15–16. PROJECT PLANNING, CONTROLLING, AND DIRECTING

Useful for

Interface Tool Planning Controlling Directing Relationships

Project organizational charts

Work breakdown structure

Task descriptions

Work packages

Project budget

Project plan

Charts/schedules

Progress reports

Review meetings

s somewhat useful d very useful

Cumulative Cost, in Thousands Variance $

Week BCWS BCWP ACWP Schedule Cost EAC

1 50 50 25 2 70 60 40 3 90 80 67 4 120 105 90 5 130 120 115 6 140 135 130 7 165 150 155 8 200 175 190 9 250 220 230

10 270 260 270 11 300 295 305 12 350 340 340 13 380 360 370 14 420 395 400 15 460 460 450

15–16 Using the information in Chapter 12, problem 12–18, complete Table 15–17.

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TABLE 15–17. PROJECT COSTS

1 2 3 4 5 6 7

Budgeted Cost for Budgeted Cost for Actual Cost for Cost Schedule Activity Percent Complete Work Scheduled Work Performed Work Performed Variance = 4 – 5 Variance = 4 –3

Total

Cost variance ($) = Column 4 – Column 5 = Schedule variance ($) = Column 4 – Column 3 =

Time-to-complete = Column 5

Cost-at-completion = rate of spending 3 Total budget = 3 ( ) = Column 4

Cost-to-complete = (Cost-at-completion) – ACWP =

823

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824 COST CONTROL

Activity Time (Weeks)

AB 7 AC 10 AD 8 BC 4 BE 2 CF 3 DF 5 EF 2 FG 1

15–17 On June 12, 2002, Delta Corporation was awarded a $160,000 contract for testing a product. The contract consisted of $143,000 for labor and materials, and the remaining $17,000 was profit. The contract had a scheduled start date of July 3. The network logic, as defined by the project manager and approved by the customer, consisted of the following:

On August 27, 2002, the executive steering committee received the following report indi- cating the status of the project at the end of the eighth week:

Time Remaining Activity % Complete Actual Cost (Weeks)

AB 100 $23,500 0 AC 60 19,200 4 AD 87.5 37,500 1 BC 50 8,000 2 BE 50 5,500 1

The steering committee could not identify the real status of the project from this brief report. Even after comparing this brief status report with the project planning budget (see Table 15–18), the real status was not readily apparent.

Management instructed the project manager to prepare a better status report that depicted the true status of the project, as well as the amount of profit that could be expected at project completion. Your assignment is to prepare a table such as Table 15–17.

15–18 The Alpha Machine Tool Project Acme Corporation has received a contractual order to build a new tooling machine for Alpha Corporation. The project started several months ago. Table 15–19 is the Monthly Cost Summary for June 2010. Some of the entries in the table have been purposely omitted, but the following additional information is provided to help you answer the questions below:

A. Assume that the overhead of 100% is fixed over the period of performance. B. The report you are given is at a month end, June 30, 2002. C. The 80/20 sharing ratio says that the customer (i.e., Alpha) will pay 80 percent of the

dollars above the target cost and up to the ceiling cost. Likewise, 80 percent of the cost savings below the target cost go back to Alpha.

D. The revised BCWS is revised from the released BCWS. E. The ceiling price is based on cost (i.e., without profit).

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TABLE 15–18. PROJECT PLANNING BUDGET

Week

Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

AB 2000 2000 3000 3000 4000 4000 3000

AC 3000 3000 3000 4000 4000 4000 4000 2000 2000 1000

AD 5000 5000 6000 4000 4000 4000 3000 1000

BC 3000 4000 4000 5000

BE 6000 6000

CF 2000 3000 3000

DF 3000 3000 3000 4000 4000

EF 2000 2000

FG 3000

Note: Table assumes that percent is linear with time and nonlinear with cost.

825

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TABLE 15–19. MONTHLY COST SUMMARY—JUNE 2002

Contract: Alpha Machine Tool Negotiated Cost: $2,500,000 Sharing Ratio: 80/20 PM: Gary Jones Target Fee: 12% Ceiling: 3,000,000 on cost (5 $3.2 M on price) Reporting Period: June 1 - June 30, 2010 Target Price: 2,800,000 Contract: fixed price incentive fee Contract Period: Feb. 1 - Oct. 30, 2010

At Completion, $

Current Month, $ Cumulative to Date, $ Original Level 2 Contracted Released Revised WBS Items BCWS BCWP ACWP SV CV BCWS BCWP ACWP SV CV BCWS BCWS BCWS Var.

Program mgt. 19300 19300 19300 0 0 108000 108000 108000 0 0 200000 200000 200000 Subsystem A 23000 16600 24200 <6400> <7600> 158000 181700 234700 23700 <53000> 250000 200000 225000 <25000> Subsystem B 14000 15200 16800 1200 <1600> 96000 94200 93000 <1800> 1200 200000 200000 200000 Subsystem C 0 0 0 0 0 0 0 0 0 0 300000 275000 275000 Manu. support 11600 10400 12000 <1200> <1600> 73000 74300 75600 1300 <1300> 200000 190000 190000 Quality control 5900 6000 6000 100 0 5900 6000 6000 100 0 100000 100000 100000

TOTAL DIRECT 73800 67500 78300 1250000 1165000 1190000 OVERHEAD, 73800 67500 78300 1250000 1165000 1190000

100% TOTAL 147600 135000 156600 2500000 2330000 2380000

826

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Answer the following questions by extracting data from the Alpha Machine Tool Project’s monthly summary report.

1. What is the total negotiated target value of the contract? _________________________

2. What is the budgeted target value for all work authorized under this contract? _________________________

3. What is the total budgetary amount that Acme had originally allocated/released to the Alpha Project? _________________________

4. What is the new/revised total budgetary amount that Acme has released to the Alpha Project? _________________________

5. How much money, if any, had Acme set aside as a management reserve based upon the original released budget? (burdened) _________________________

6. Has the management reserve been revised, and if so, by how much? (burdened) _________________________

7. Which level-2 WBS elements make up the revised management reserve? _________________________

8. Based upon the reviewed BCWS comple- tion costs, how much profit can Acme expect to make on the Alpha Project? (Hint: Don’t forget sharing ratio) _________________________

9. How much of the distributed budget that has been identified for accomplishment of work is only indirectly attributed to this contract? (i.e., overhead) _________________________

Answer the Following Questions for Direct Labor Only

10. Of the total direct effort budgeted for on this contract, how much work did Acme schedule to be performed this month? _________________________

11. How much of the work scheduled for accomplishment this month was actually earned (i.e., earned value)? _________________________

12. Did Acme do more or less work than planned for this month? How much was the schedule variance (SV)? [$ and %] _________________________

13. What did it actually cost Acme for the work performed this month? _________________________

14. What is the difference between the amount that Acme budgeted for the work performed this month and what the actual cost was? (i.e., CV) [$ and %] _________________________

15. Which WBS level-2 elements are the primary causes for this month’s cost and schedule variances? _________________________

Problems 827

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16. How much cost variance has Acme experienced to date? [$ and %] _________________________

17. How much schedule variance has Acme experienced to date? [$ and %] _________________________

18. Is the cost variance improving or getting worse?

19. Is the schedule variance improving or getting worse? _________________________

20. Does it appear that the scheduled end date will be met? _________________________

21. What is the new estimated burdened cost at completion? _________________________

22. How much profitability/loss can Acme expect from the new estimated cost at completion? _________________________

23. If Acme’s final burdened cost for the program was $3,150,000, how much profit/loss would it experience? _________________________

15–19 Calculate the total price variance for direct labor and the labor rate cost variance from the following data:

Direct Material Direct Labor

Planned price/unit $ 10.00 $ 22.00 Actual units 9,300 12,000 Actual price/unit $ 9.25 $ 22.50 Actual cost $86,025,00 $270,000

15–20 One of your assistant project managers has given you an earned value report that is only partially complete. Can you fill in the missing information?

(All numbers are in thousands of dollars)

WBS Work Packages BCWS BCWP ACWP SV CV

A 103 115 ___ 12 <91>

B 0 ___ 40 ___ ___

D 42 12 33 <30> <21>

H 66 ___ 94 189 161

P 87 77 116 <10> <39>

S 175 ___ 184 <115> <124> ___ ___ ___ _____ ________ ___ ___ _____ _____

473 ––– ___ ___ <144>

828 COST CONTROL

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Problems 829

4.0

4.1

4.1.1 4.2.1

4.1.2 4.2.2

4.1.3

4.1.4

4.2.3

4.2 4.3 4.4 4.5 $ $ $6.0

$2.4

$0.9

$0.6

$1.8

$4.2

$1.1 $1.0

$9.0 $3.0

15–21 The following problem requires an understanding of the WBS, the cost account ele- ments, and cost control analysis. Assume that all costs are in thousands of dollars.

Given the partial WBS shown below, what is the total cost for the WBS element 4.0? Assume that the costs provided are direct labors costs only and that the overhead rate is 100 percent. Which of the following is the value of WBS element 4.0?

a. $60.0 b. $30.0 c. $24.0 d. $54.0

Using the data in Figure 15–29, and the actual costs given below for WBS elements 5.1 through 5.4 and elements 4.1 and 4.2, answer the questions shown below:

Actual Costs

E-1–5.1 $1.0 E-1–5.3 $1.5 E-2–5.2 $1.0 E-2–5.4 $2.0 E-3–5.1 $1.0 E-3–5.3 $2.5 E-4–5.3 $3.0 E-4–5.2 $3.5

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WBS

1.0

2.1

3.1

4.24.1

5.1

E1-5.1 E1-5.3

E2-5.2

E3-5.1

E4-5.1 E4-5.2

E3-5.3

E2-5.4

5.2 5.3 5.4

ORGANIZATION

B -2

C -4

C -3

C -2

C -1

E -4

E -3

E -2

E -1

B -1

D -2

D -1

FIGURE 15–29. Exhibit of cost accounts.

830

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Problems 831

WBS element 5.1 $____ WBS element 5.2 $____ WBS element 5.3 $____ WBS element 5.4 $____ WBS element 4.1 $____ WBS element 4.2 $____

Functional element E-1 $____ Functional element E-2 $____ Functional element E-3 $____ Functional element E-4 $____ Functional element D-1 $____ Functional element D-2 $____

15–22 Companies usually estimate work based upon man-months. If the work must be esti- mated in man-weeks, the man-month is then converted to man-weeks. The problem is in the determination of how many man-hours per month are actually available for actual direct labor work.

Your company has received a request for proposal (RFP) from one of your customers and management has decided to submit a bid. Only one department in your company will be required to perform the work and the department manager estimates that 3000 hours of direct labor will be required.

Your first step is to calculate the number of hours available in a typical man-month. The Human Resources Department provides you with the following yearly history for the average employee in the company:

● Vacation (3 weeks) ● Sick days (4 days) ● Paid holidays (10 days) ● Jury duty (1 day)

a. How many direct labor hours are available per month per person? b. If only one employee can be assigned to the project, what will be the duration of the

effort, in months? c. If the customer wants the job completed within one year, how many employees should

be assigned?

15–23 In a status report, executives want to know not only where we are today, but also where we will end up. Calculating where we will end up financially is not as easy as it sounds. Selecting the wrong formula can leave the executives and customers with a faulty impression.

There are several formulas available for the calculation of the estimated cost at completion (EAC). For simplicity, consider the following three formulas:

I. EAC 5 (ACWP/BCWP) 3 (budget at completion) II. EAC 5 [(ACWP/BCWP) 3 (BCWS for work completed and in progress)] 1

(planned or revised planned costs of work packages not yet begun) III. EAC 5 (actual to date) 1 (all remaining work, including work in progress, to be

completed at the planned or budgeted costs) a. Using the table below, determine the value of EAC for each of the three formu-

las. Assume that A, B, and C are the only work packages in the project, and

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832 COST CONTROL

BCWS(Total) is the total value for PV for each work package rather than PV for the reporting period. Use the following formula for calculating EV:

EV 5 [% Complete] 3 BCWS(Total)

Activity % Complete BCWS(Total) ACWP

A 100 1000 1100 B 50 1000 800 C 0 1000 0

b. Considering only activity B, if the reason for the cost overrun is attributed to a one-time occurrence, which of the three formulas would be best to use?

c. If the reason for the overrun in activity B is because of the higher than expected salaries of the assigned employees and these same employees will be assigned to activity C as well, which of the three formulas would be best to use?

d. Considering only activity B, if the reason for the overrun is attributed to overtime and the overtime will continue but only through the completion of activity B, which of the three formulas would be best to use?

e. Considering your answers to the above four parts, should a company be willing to change the formula for calculating EAC during the execution of the project as well as at each reporting period or gate review meeting?

15–24 Project managers must not only calculate variances but also determine the root cause of the variance. Some variances may be allowable while others must be explained together with a corrective plan for recovery.

In the table below, you must demonstrate your ability to calculate the cost and schedule variances as well as determine the root cause of the variances, if possible. Consider the fol- lowing table, which shows a partial status report for a project composed of five work packages (i.e., activities):

Activity BCWS BCWP ACWP SV CV

A $800 $1000 $1100 B 1200 1000 900 C 800 1000 700 D 1200 1000 1100 E 1000 1000 800

a. Calculate the cost and schedule variances, in dollars, for each activity. b. For each activity, which of the following could be the root cause reason for the vari-

ances? Select as many as you think may apply.

● Accelerated schedule due to higher salaried personnel ● Accelerated schedule due to overlapping of activities ● Accelerated schedule due to overtime ● Accelerated schedule due to additional resources ● Slippage due to lack of resources ● Slippage due to people working on other projects ● Slippage due to mistakes ● People are working but progress is poor

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Problems 833

● On schedule ● On budget ● Over budget

c. Management wants to know the status of the total project at level 1 of the WBS. Add up all of the activity cost and schedule variances to determine the level 1 cost and schedule variances. What are your conclusions?

d. Would your conclusions from part c above change if activities B and D were the only two activities on the critical path?

15–25 Sometimes, the root cause of a variance requires that variance analysis be performed in both hours and dollars. It is possible that calculating the variances in both hours and dollars is the only way to determine the root cause of a problem.

Problem: In Table 15–20, the cost and schedule variances are measured in fully burdened dol- lars for Cost Center 2834 only.

From Table 15-20, you are ahead of schedule and over budget. There could be several pos- sible causes for this, including schedule compression, using higher salaried labor, overtime, additional resources, or other causes. How can we determine which of these causes is the real reason for the variances?

Table 15–21 shows the variance data in both hours and dollars.

a. Calculate the cost variances in both hours and dollars. Compare the results. What are your conclusions?

b. Calculate the planned fully burdened labor rate using BCWS (or BCWP). c. Calculate the actual fully burdened labor rate using ACWP. d. Explain the possible reasons for the differences in labor rates and how this affects

your answer to part a. e. Table 15–22 shows the departmental pay structure for Cost Center 2834. Determine

the departmental overhead rate, in percent. f. How does Table 15–22 affect your answer to part d?

TABLE 15–20. COST CENTER 2834, JUNE

BCWS Dollars 29,750 SV 5 1$4250Hours

BCWP Dollars 34,000 Hours CV 5 2$4400

ACWP Dollars 38,400 Hours

6 6

TABLE 15–21. COST CENTER 2834, JUNE

BCWS Dollars 29,750 Hours 350

BCWP Dollars 34,000 Hours 400

ACWP Dollars 38,400 Hours 320

CV ($$$) 5 negative CV(hrs) 5 positive

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834 COST CONTROL

15–26 Projects that span more than one year or cut across the date of corporate salary increases may require the use of forward-pricing rates. Forward-pricing rates are determined from economic data, industry surveys, and best-guess predictions.

As an example, consider Table 15–22 in the previous problem, which shows the salary structure for an engineering department. For simplicity, we shall make the following assumptions:

● Promotions and salary increases, including cost-of-living adjustments, are effec- tive January 1 and are then held constant for the entire year.

● The overhead rate is 150 percent and fixed for the entire year. ● All projects are priced out using the salary of a pay grade 7. ● Most of the departmental workers are pay grade 7 employees.

Situation: Your company has just won a one-year contract. The contract was planned to start on January 1, 2006, and be completed by December 31, 2006. The work that was to be per- formed by this department was estimated at 1000 hours per month for the duration of the twelve-month project using pay grade 7 employees. The customer informs you that they wish to start the project on July 1 rather than January 1, and they assume that there is no financial impact on the total cost of the project.

The Finance Department provides you with the forward pricing rate data in Table 15–23 and tells you that the overhead rate for 2007 is expected to increase to 155 percent. Is there a financial impact on the total cost of the project, and if so, how much of an impact?

TABLE 15–22. DEPARTMENTAL PAY STRUCTURE

Unburdened Burdened Pay Grade Title Salary Salary

9 Engineering Consultant $53/hr $132.50 8 Senior Engineer 48 120.00 7 Engineer 39 97.50 6 Junior Engineer 34 85.00 5 Apprentice Engineer 29 72.50

TABLE 15–23. DEPARTMENTAL PAY STRUCTURE (dollars/hour)

Salary

Pay Grade Title 2006 2007* 2008*

9 Engineering Consultant 53 56 60 8 Senior Engineer 48 50 53 7 Engineer 39 42 45 6 Junior Engineer 34 36 39 5 Apprentice Engineer 29 31 34

*Projected rates.

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15–27 Pricing out a customer’s request for proposal is a trade-off between time, cost, and accuracy. If time and money are not an issue, then we could determine a very accurate bid. But if the company is reluctant to invest heavily in the preparation of the bid, care must be taken that there are no hidden costs.

Situation: You have been asked to price out a project for a customer, and this pricing is an activity with which you have very little previous experience. Table 15–24 shows the numbers that you arrived at in determining that a bid of $193,166 should be submitted.

Before a bid is submitted to a potential customer, the bid must be reviewed by a commit- tee of senior managers that can question the validity of the numbers as well as look for “hid- den” costs that may have been omitted. For each of the situations below, which line item in the pricing summary would most likely be impacted assuming that these hidden costs were not already included?

a. Management tells you that, during the execution of the project, the customer will want three interface meetings with the customer held at the customer’s location. The Travel Group within your company informs you that airfare, ground travel, meals, and lodg- ing are expected to be approximately $2000 per meeting.

b. One of the executives comments, “The shipping costs for the deliverables, including insurance, packaging, and handling, will be about $1000. I do not see this included in your summary.”

c. The RPF for the project stated that the contract would be firm-fixed-price with a lump-sum payment at the end of the project after approval/acceptance of the final deliverables. The cost of capital is expected to be approximately $6000.

d. Engineering believes that the engineering hours in the summary could be low by about 10 percent if the risks in the estimates provided actually occur. The executives believe that a management reserve of 10 percent should be included in the summary costs.

e. Using the information in parts a through d above, what final price should be submit- ted to the customer?

15–28 A homeowner hires a contractor to build a four-sided square fence around his home. The homeowner provides the materials and the contractor supplies the labor. The contractor estimates each side will cost $2000 and require one week in duration.

Problems 835

TABLE 15–24. PROJECT PRICING SUMMARY

Direct Labor Overhead

Department Hours Rate Dollars % Dollars Total

Engineering 1000 $42.00 42,000 110 46,200 $88,200 Manufacturing 500 $35.00 17,500 200 35,000 $52,500

Total Labor $140,700

Other: Subcontracts $10,000 Consultants $2,000 $12,000

Total labor and material $152,700 Corporate G&A: 10% $ 15,270

$167,970 Profit: 15% $ 25,196

$193,166

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836 COST CONTROL

At the end of week 1, the first side is completed at a cost of $2000. During week 2, the second side is completed but at a cost of $2400 because the contractor damaged a water line that the contractor had to repair. During week 3, the contractor completed only half of the fence for $1000 because it rained for the remaining half of the week.

At the end of week 3, the contractor must prepare an earned value measurement status report. Calculate the following:

BCWS: _____________________________________________________ BCWP: _____________________________________________________ ACWP: _____________________________________________________ BAC: _______________________________________________________ SV($): ______________________________________________________ CV($): ______________________________________________________ EAC 5 ([ACWP/BCWP] 3 BAC): _______________________________ ETC: _______________________________________________________ VAC: _______________________________________________________ % COMPLETE: ______________________________________________ % $$ SPENT: ________________________________________________ CPI: ________________________________________________________ SPI: ________________________________________________________

15–29 The data identified below was listed in a project’s latest status report:

● BCWS 5 $36,000 ● BCWP 5 $30,000 ● ACWP 5 $33,000 ● BAC 5 $120,000 ● Original length of the project 10 months

Using these data, calculate the following:

a. What are the values for CPI and SPI? b. What is the expected cost at completion (EAC)? c. How much money will be needed from the time of the report to complete the project? d. What is the cost variance at completion (VAC)? e. Using SPI, what is the new expected length of the project?

15–30 In the problem in Figure P15–30, the 50% / 50% rule is being used to determine the project's status. Assume that all amounts are in dollars.

Assuming that ACWP = $40,000, determine BCWS, BCWP, BAC, SV, and CV.

15–31 In Figures P15–31A to P15–31C identify the status of part of a project using the graph- ical technique (i.e. S curves) rather that tables. For each of the three figures, select from one of the following fives choices as to what each figure illustrates:

a. Over budget b. Under budget c. Ahead of schedule d. Behind schedule e. Status cannot be determined

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Problems 837

TIME

TIME LINE

LEGEND

COMPLETED

NOT COMPLETED

4,000

10,000

Using the 50/50 Rule

10,000

12,000

4,000

6,000

Figure P15-30

Figure P15-31A

TIME

C U

M U

L A T

IV E

C O

S T

S ,

TIME LINE BCWS

BCWP

Figure P15-31B

TIME

C U

M U

L A T

IV E

C O

S T

S ,

TIME LINE BCWP

ACWP

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Figure P15-31C

TIME

C U

M U

L A T

IV E

C O

S T

S ,

TIME LINE BCWS

ACWP

CASE STUDIES

THE BATHTUB PERIOD

The award of the Scott contract on January 3, 1987, left Park Industries elated. The Scott Project, if managed correctly, offered tremendous opportunities for follow-on work over the next several years. Park’s management considered the Scott Project as strategic in nature.

The Scott Project was a ten-month endeavor to develop a new product for Scott Corporation. Scott informed Park Industries that sole-source production contracts would fol- low, for at least five years, assuming that the initial R&D effort proved satisfactory. All follow- on contracts were to be negotiated on a year-to-year basis.

Jerry Dunlap was selected as project manager. Although he was young and eager, he understood the importance of the effort for future growth of the company. Dunlap was given some of the best employees to fill out his project office as part of Park’s matrix organization. The Scott Project maintained a project office of seven full-time people, including Dunlap, throughout the duration of the project. In addition, eight people from the functional department were selected for representation as functional project team members, four full-time and four half-time.

Although the workload fluctuated, the manpower level for the project office and team members was constant for the duration of the project at 2,080 hours per month. The company assumed that each hour worked incurred a cost of $60.00 per person, fully burdened.

At the end of June, with four months remaining on the project, Scott Corporation informed Park Industries that, owing to a projected cash flow problem, follow-on work would not be awarded until the first week in March (1988). This posed a tremendous problem for Jerry Dunlap because he did not wish to break up the project office. If he permitted his key people to be assigned to other projects, there would be no guarantee that he could get them

838 COST CONTROL

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Case Studies 839

back at the beginning of the follow-on work. Good project office personnel are always in demand.

Jerry estimated that he needed $40,000 per month during the “bathtub” period to support and maintain his key people. Fortunately, the bathtub period fell over Christmas and New Year’s, a time when the plant would be shut down for seventeen days. Between the vacation days that his key employees would be taking, and the small special projects that his people could be temporarily assigned to on other programs, Jerry revised his estimate to $125,000 for the entire bathtub period.

At the weekly team meeting, Jerry told the program team members that they would have to “tighten their belts” in order to establish a management reserve of $125,000. The project team understood the necessity for this action and began rescheduling and replanning until a management reserve of this size could be realized. Because the contract was firm-fixed-price, all schedules for administrative support (i.e., project office and project team members) were extended through February 28 on the supposition that this additional time was needed for final cost data accountability and program report documentation.

Jerry informed his boss, Frank Howard, the division head for project management, as to the problems with the bathtub period. Frank was the intermediary between Jerry and the gen- eral manager. Frank agreed with Jerry’s approach to the problem and requested to be kept informed.

On September 15, Frank told Jerry that he wanted to “book” the management reserve of $125,000 as excess profit since it would influence his (Frank’s) Christmas bonus. Frank and Jerry argued for a while, with Frank constantly saying, “Don’t worry! You’ll get your key peo- ple back. I’ll see to that. But I want those uncommitted funds recorded as profit and the program closed out by November 1.”

Jerry was furious with Frank’s lack of interest in maintaining the current organizational membership.

a. Should Jerry go to the general manager? b. Should the key people be supported on overhead? c. If this were a cost-plus program, would you consider approaching the customer with

your problem in hopes of relief? d. If you were the customer of this cost-plus program, what would your response be for

additional funds for the bathtub period, assuming cost overrun? e. Would your previous answer change if the program had the money available as a result

of an underrun? f. How do you prevent this situation from recurring on all yearly follow-on contracts?

FRANKLIN ELECTRONICS

In October 2003 Franklin Electronics won an 18-month labor-intensive product development contract awarded by Spokane Industries. The award was a cost reimbursable contract with a cost target of $2.66 million and a fixed fee of 6.75 percent of the target. This contract would be Franklin’s first attempt at using formal project management, including a newly developed proj- ect management methodology.

Franklin had won several previous contracts from Spokane Industries, but they were all fixed-price contracts with no requirement to use formal project management with

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840 COST CONTROL

earned value reporting. The terms and conditions of this contract included the following key points:

● Project management (formalized) was to be used. ● Earned value cost schedule reporting was a requirement. ● The first earned value report was due at the end of the second month’s effort

and monthly thereafter. ● There would be two technical interchange meetings, one at the end of the

sixth month and another at the end of the twelfth month.

Earned value reporting was new to Franklin Electronics. In order to respond to the original request for proposal (RFP), a consultant was hired to conduct a four-hour seminar on earned value management. In attendance were the project manager who was assigned to the Spokane RFP and would manage the contract after contract award, the entire cost accounting department, and two line managers. The cost accounting group was not happy about having to learn earned value management techniques, but they reluctantly agreed in order to bid on the Spokane RFP. On previous projects with Spokane Industries, monthly interchange meetings were held. On this contract, it seemed that Spokane Industries believed that fewer interchange meeting would be necessary because the information nec- essary could just as easily be obtained through the earned value status reports. Spokane appeared to have tremendous faith in the ability of the earned value measurement system to provide meaningful information. In the past, Spokane had never mentioned that it was considering the possible implementation of an earned value measurement system as a requirement on all future contracts.

Franklin Electronics won the contact by being the lowest bidder. During the planning phase, a work breakdown structure was developed containing 45 work packages of which only 4 work packages would be occurring during the first four months of the project.

Franklin Electronics designed a very simple status report for the project. The table below contains the financial data provided to Spokane at the end of the third month.

Totals at End of Month 2 Totals at End of Month 3

Work Packages PV EV AC CV SV PV EV AC CV SV

A 38K 30K 36K <6K> <8K> 86K 74K 81K <7K> <12K> B 17K 16K 18K <2K> <1K> 55K 52K 55K <3K> <3K> C 26K 24K 27K <3K> <2K> 72K 68K 73K <5K> <4K> D 40K 20K 23K <3K> <20K> 86K 60K 70K <10K> <26K>

Note: BCWS 5 PV, BCWP 5 EV, and ACWP 5 AC.

A week after sending the status report to Spokane Industries, Franklin’s project manager was asked to attend an emergency meeting requested by Spokane’s vice president for engi- neering, who was functioning as the project sponsor. The vice president was threatening to cancel the project because of poor performance. At the meeting, the vice president com- mented, “Over the past month the cost variance overrun has increased by 78 percent from $14,000 to $25,000, and the schedule variance slippage has increased by 45 percent

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Case Studies 841

from $31,000 to $45,000. At these rates, we are easily looking at a 500 percent cost overrun and a schedule slippage of at least one year. We cannot afford to let this project continue at this lackluster performance rate. If we cannot develop a plan to control time and cost any bet- ter than we have in the past three months, then I will just cancel the contract now, and we will find another contractor who can perform.”

QUESTIONS

1. Are the vice president’s comments about cost and schedule variance correct? 2 What information did the vice president fail to analyze? 3. What additional information should have been included in the status report? 4. Does Franklin Electronics understand earned value measurement? If not, then what

went wrong? 5. Does Spokane Industries understand project management? 6. Does proper earned value measurement serve as a replacement for interchange

meetings? 7. What should the project manager from Franklin say in his defense?

TROUBLE IN PARADISE

As a reward for becoming Acme Corporation’s first PMP, Acme assigned the new PMP, Wiley Coyote, the leadership role of an important project in which the timing of the deliverables was critical to the success of the project. A delay in the schedule could cost Acme a loss of at least $100,000 per month. Wiley Coyote’s first responsibility as project manager was the preparation of a solicitation package for the selection of an engineering contractor.

Eight companies prepared bids based on the solicitation package. Wiley Coyote decided to negotiate only with the low bidder, who happened to be at a significantly lower final cost than the other bidders. The contractor’s project manager, Ima Roadrunner, would be handling the negotiations for the contractor. This was a contractor that Wiley Coyote had never worked with previously. Wiley Coyote reviewed the critical information in the proposal from the contractor:

● All work would be accomplished by engineering. ● Total burdened labor was 2000 hours at $120/hour. ● The duration of the project would be approximately 6 months and would be

completed in 2006 (labor rates might be different in 2007). ● The contractor’s overhead rate applied was 150 percent for engineering. ● All of the assigned workers would be at the same pay grade and would be

assigned full time for the duration of the project. ● Profit requested was 12.5 percent, but subject to negotiations. ● Ima Roadrunner’s salary would be included in the overhead structure. ● No materials were required.

During negotiations, Ima Roadrunner provided Wiley Coyote with the salary structure for engineering, shown in Exhibit 15–1.

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842 COST CONTROL

Wiley Coyote asked Ima Roadrunner for the timing (i.e., manpower curve) of when the resources would be assigned. The result, provided by Ima Roadrunner, is shown in Exhibit 15–2 in the format of an S-curve that also shows the payment plan from the cus- tomer to the contractor.

The solicitation package identified the contract as a fixed-price contract with penal- ties for late delivery. Ima Roadrunner argued that the penalty clauses were unfair in their current wording and that a higher profit margin would be required to compensate for the risks. At this point, Wiley Coyote’s superior intellect became apparent; he agreed to elim- inate the penalty clauses if Ima Roadrunner agreed to lower the profit margin from 12.5 to 10 percent. Ima Roadrunner countered that the contract should then be a fixed-price- incentive-fee contract so that Ima Roadrunner could make up the lost 2.5 percent of profit by completing the project under budget. Both parties agreed to this and the deal was done.

The contract did not call for any type of earned value reporting, but Ima Roadrunner, who had very limited knowledge of earned value measurement and had never used it before, agreed to provide a monthly report that would show simply planned value (BCWS), earned value (BCWP), and actual costs (ACWP). Wiley Coyote agreed to this. After all, now that Wiley Coyote was a PMP, he knew how to extract all of the remaining information, such as variance analyses, cost-at-completion, and cost-to-completion, from these three values in the monthly report.

Exhibit 15–1. Departmental pay structure

Unburdened Burdened Pay Grade Title Salary Salary

9 Eng. Consultant $53/hr. $132.50 8 Senior Engineer 48 120.00 7 Engineer 39 97.50 6 Junior Engineer 34 85.00 5 Apprentice Eng. 29 72.50

Exhibit 15–2. S-curve or spending curve

C U

M U

L A

T IV

E C

O S

T , $ FINANCIAL

BASELINE (BCWS)

CUSTOMER’S PAYMENT PLAN

$ $

PROJECT COMPLETION

TIME

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Case Studies 843

At the end of the first month, Wiley Coyote received the highly simplified earned value status report shown in Exhibit 15–3. Wiley Coyote was delighted with the results thus far. Now it looked like the project would be completed at least one month ahead of schedule and significantly under budget. Wiley Coyote provided Acme with significant cost savings by going with the lowest cost supplier, got the profit margin reduced by 20 percent, and would most likely come in ahead of schedule and at additional cost savings. Wiley Coyote was about to become a “superstar” in the eyes of Acme’s executives. Everyone would realize that Wiley Coyote had finally outsmarted the Roadrunner. Wiley Coyote now began planning how he would spend the huge bonus he expected to receive at the completion of the project.

At the end of the fifth month, Ima Roadrunner informed Wiley Coyote of the good news that the project would be completed within cost, but there was also bad news that the completion date would be at the end of month 8, making the project two months late and at a significant loss to Acme Corporation. Wiley Coyote’s thoughts on how to spend his bonus were now replaced with creative ideas on how to update his resume. Today, Wiley Coyote is on the lecture circuit discussing ways to identify warning signs of a potential project disaster.

Once again, the Roadrunner outsmarted Wiley Coyote. You have been hired in as a consultant to Acme Corporation to analyze what went wrong and to prepare a list of lessons learned for other project managers. Using the information in the case and all three exhibits, identify what went wrong. Also, were there any early warning signs, especially at the end of the first month, which should have warned Wiley Coyote that disaster might be imminent?

Exhibit 15–3. End of month 1

Hours

Dollars

Hours

Dollars

Hours

350

Eng. Cost

Center

$42,000 BCWS

$48,000 BCWP

400

$34,000 ACWP

400

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Trade-off Analysis in a Project Environment

“When we try to pick out anything by itself,

we find it hitched to everything else in the

universe.”—MUIR’S LAW

845

4th Edition) Study Guide, 11th Edition) Certification Exam

None • Multiple Choice Exam • Integration Management

• Procurement Management

• Scope Management

16.0 INTRODUCTION

Successful project management is both an art and a science and attempts to control corporate resources within the constraints of time, cost, and performance. Most projects are unique, one-of-kind activities for which

there may not have been reasonable standards for forward planning. As a result, the project manager may find it extremely difficult to stay within the time–cost–performance triangle of Figure 16–1.

The time–cost–performance triangle is the “magic combination” that is continuously pursued by the project manager throughout the life cycle of the project. If the project were to flow smoothly, according to plan, there might not be a need for trade-off analysis. Unfortunately, this rarely happens.

PMBOK® Guide, 5th Edition Triple-Constraint Definition

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Trade-offs are illustrated in Figure 16–2, where the Ds represent deviations from the original estimates. The time and cost deviations are normally overruns, whereas the performance error will be an underrun. No two projects are exactly alike, and trade-off analysis will be an ongoing effort throughout the life of the project, continuously influenced by both the internal and the external environment. Experienced project managers have predetermined trade-offs in reserve, recognizing that trade-offs are part of a continuous thought process.

Trade-offs are always based on the constraints of the project. Table 16–1 illustrates the types of constraints commonly imposed. Situations A and B are the typical trade-offs encountered in project man- agement. For example, situation A-3 portrays most research and development projects. The performance of an R&D project is usually well defined, and it is cost and time that may be allowed to go beyond bud- get and schedule. The determination of what to sacrifice is based on the available alternatives. If there are no alternatives to the product being developed and the potential usage is great, then cost and time are the trade-offs.

Most capital equipment projects would fall into situation A-1 or B-2, where time is of the essence. The sooner the piece of equipment gets into production, the sooner the return of investment can be realized. Often there are performance constraints that determine the profit potential of the project. If the project potential is determined to be great, cost will be the slippage factor, as in situation B-2.

Non–process-type equipment, such as air pollution control equipment, usually develops a scenario around situation B-3. Performance is fixed by the Environmental Protection Agency. The deadline for com-

pliance can be delayed through litigation, but if the lawsuits fail, most firms then try to comply with the least expensive equipment that will meet the minimum requirements.

The professional consulting firm operates primarily under situation B-1. In situation C, the trade-off analysis will be completed based on the selection criteria and constraints. If everything is fixed (C-1), there is no room for any outcome other than total success, and if everything is variable (C-2), there are no constraints and thus no trade-off.

Many factors go into the decision to sacrifice either time, cost, or performance. It should be noted, how- ever, that it is not always possible to sacrifice one of these items without affecting the others. For example, reducing the time could have a serious impact on performance and cost (especially if overtime is required).

846 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

RESOURCES

PERFORMANCE

TI M

E C

O S T

FIGURE 16–1. Overview of project management.

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There are several factors, such as those shown in Figure 16–3, that tend to “force” trade-offs. Poorly written documents (e.g., statements of work, contracts, and specifications) are almost always inward forces for conflict in which the project manager tends to look for performance relief. In many projects, the initial sale and negotiation, as well as the specification writing, are done by highly technical people who are driven to create a monument rather than meet the operational needs of the customer. When the

Introduction 847

C O

S T

TIM E

PERFORMANCE

DEVIATIONS FROM ORIGINAL ESTIMATE

FIGURE 16–2. Project management with trade-offs.

TABLE 16–1. CATEGORIES OF CONSTRAINTS

Time Cost Performance

A. One Element Fixed at a Time A-1 Fixed Variable Variable A-2 Variable Fixed Variable A-3 Variable Variable Fixed

B. Two Elements Fixed at a Time B-1 Fixed Fixed Variable B-2 Fixed Variable Fixed B-3 Variable Fixed Fixed

C. Three Elements Fixed or Variable C-1 Fixed Fixed Fixed C-2 Variable Variable Variable

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operating forces dominate outward from the project to the customer, project managers may tend to seek cost relief.

16.1 METHODOLOGY FOR TRADE-OFF ANALYSIS

Any process for managing time, cost, and performance trade-offs should emphasize the systems approach to management by recognizing that even the smallest change in a project or system could easily affect all of the organization’s systems. A typical systems model is shown in Figure 16–4. Because of this, it is often better to develop a process for decision- making/trade-off analysis rather than to maintain hard-and-fast rules on trade-offs. The following six steps may help:

● Recognizing and understanding the basis for project conflicts ● Reviewing the project objectives ● Analyzing the project environment and status ● Identifying the alternative courses of action ● Analyzing and selecting the best alternative ● Revising the project plan

The first step in any decision-making process must be recognition and understanding of the conflict. Most projects have management cost and control systems that compare actual versus planned results, scrutinize the results through variance analyses, and provide status reports so that corrective action can be taken to resolve the problems. Project

848 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

TIME CONTROLS

RESPONSE SERVICE

RELIABILITY

RESOURCES

MA RKE

PO SIT

ION PROFIT

R E

P U

TA T

IO N

C O

PER FO

R M

AN C E

FIGURE 16–3. Trade-off forcing factors.

PMBOK® Guide, 5th Edition 3.6 Project Planning Group

Planning Process Group Triangle

Chapter 4 Integration Management

Chapter 5 Scope Management

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managers must carefully evaluate information about project problems because it may not always be what it appears to be. Typical questions to ask are:

● Is the information pertinent? ● Is the information current? ● Are the data complete? ● Who has determined that this situation exists? ● How does he know this information is correct? ● If this information is true, what are the implications for the project?

The reason for this first step is to understand the cause of the conflict and the need for trade-offs. Most causes can be categorized as human errors or failures, uncertain problems, and totally unexpected problems, as shown below:

● Human errors/failures ● Impossible schedule commitments ● Poor control of design changes ● Poor project cost accounting ● Machine failures ● Test failures ● Failure to receive a critical input ● Failure to receive anticipated approvals

● Uncertain problems ● Too many concurrent projects ● Labor contract expiration

Methodology for Trade-off Analysis 849

CONSTRAINTS • Physical • Financial • Timing • Policy

SELECTION CRITERIA • Performance • Cost/benefit • Response time • Policy

SYSTEM

O B J E C T I V E

REQUIREMENT

ALTERNATIVE

T R A D E O F F

FEEDBACK

TRANS- LATION

ANALYSIS TRADE- OFF

SYNTHESIS

FIGURE 16–4. The systems approach.

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● Change in project leadership ● Possibility of project cancellation

● Unexpected problems ● Overcommitted company resources ● Conflicting project priorities ● Cash flow problems ● Labor contract disputes ● Delay in material shipment ● “Fast-track” people having been promoted off the project ● “Temporary” employees having to be returned to their home base

● Inaccurate original forecast ● Change in market conditions ● New standards having been developed

The second step in the decision-making process is a complete review of the project objectives as seen by the various participants in the projects, ranging from top management to project team members. These objectives and/or priorities were originally set after con- sidering many environmental factors, some of which may have changed over the lifetime of the project.

The nature of these objectives will usually determine the degree of rigidity that has been established between time, cost, and performance. This may require reviewing project documentation, including:

● Project objectives ● Project integration into sponsor’s objectives and strategic plan ● Statement of work ● Schedule, cost, and performance specifications ● Resources consumed and projected

The third step is the analysis of the project environment and status, including a detailed measurement of the actual time, cost, and performance results with the original

or revised project plan. This step should not turn into a “witch hunt” but should focus on project results, problems, and roadblocks. Factors such as financial risk, potential follow-up contracts, the status of other projects, and relative competitive positions are just a few of the environmental factors that should be reviewed. Some companies have established poli- cies toward trade-off analysis, such as “never compromise performance.” Even these policies, however, have been known to change when environmental factors add to the financial risk of the company. The following topics may be applicable under step 3:

● Discuss the project with the project management office to: ● Determine relative priorities for time, cost, and performance ● Determine impact on firm’s profitability and strategic plan ● Get a management assessment (even a hunch as to what the problems are)

● If the project is a contract with an outside customer, meet with the customer’s proj- ect manager to assess his views relative to project status and assess the customer’s priorities for time, cost, and performance.

850 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

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● Meet with the functional managers to determine their views on the problem and to gain an insight regarding their commitment to a successful project. Where does this project sit in their priority list?

● Review in detail the status of each project work package. Obtain a clear and detailed appraisal by the responsible project office personnel as to: ● Time to complete ● Cost to complete ● Work to complete

● Review past data to assess credibility of cost and schedule information in the pre- vious step.

The project manager may have sufficient background to quickly assess the signifi- cance of a particular variance and the probable impact of that variance on project team performance. Knowledge of the project requirements (possibly with the assistance of the project sponsor) will usually help a project manager determine whether corrective action must be taken at all, or whether the project should simply be permitted to continue as originally conceived.

Whether or not immediate action is required, a quick analysis of why a potential problem has developed is in order. Obviously, it will not help to “cure the symptoms” if the “disease” itself is not remedied. The project manager must remain objective in such problem identification, since he himself is a key member of the project team and may be personally responsible for problems that are occurring. Suspect areas typically include:

● Inadequate planning. Either planning was not done in sufficient detail or controls were not established to determine that the project is proceeding according to the approved plan.

● Scope changes. Cost and schedule overruns are the normal result of scope changes that are permitted without formal incorporation in the project plan or increase in the resources authorized for the project.

● Poor performance. Because of the high level of interdependencies that exist within any project team structure, unacceptable performance by one individual may quickly undermine the performance of the entire team.

● Excess performance. Frequently an overzealous team member will unintentionally distort the planned balance between cost, schedule, and performance on the project.

● Environmental restraints—particularly on projects involving “third-party approvals” or dependent on outside resources. Changes, delays, or nonperfor- mance by parties outside the project team may have an adverse impact on the team performance.

Some projects appear to be out of tolerance when, in fact, they are not. For example, some construction projects are so front-loaded with costs that there appears to be a major dis- crepancy when one actually does not exist. The front-end loading of cost was planned for.

The fourth step in the project trade-off process is to list alternative courses of action. This step usually means brainstorming the possible methods of completing the project by compromising some combination of time, cost, or performance. Hopefully, this step will

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refine these possible alternatives into the three or four most likely scenarios for project completion. At this point, some intuitive decision-making may be required to keep the list of alternatives at a manageable level.

In order fully to identify the alternatives, the project manager must have specific answers to key questions involving time, cost, and performance:

● Time ● Is a time delay acceptable to the customer? ● Will the time delay change the completion date for other proj-

ects and other customers?

● What is the cause for the time delay? ● Can resources be recommitted to meet the new schedule? ● What will be the cost for the new schedule? ● Will the increased time give us added improvement? ● Will an extension of this project cause delays on other projects in the customer’s

house? ● What will the customer’s response be? ● Will the increased time change our learning curve? ● Will this hurt our company’s ability to procure future contracts?

● Cost ● What is causing the cost overrun? ● What can be done to reduce the remaining costs? ● Will the customer accept an additional charge? ● Should we absorb the extra cost? ● Can we renegotiate the time or performance standards to stay within cost? ● Are the budgeted costs for the remainder of the project accurate?

● Will there be any net value gains for the increased funding? ● Is this the only way to satisfy performance? ● Will this hurt our company’s ability to procure future contracts? ● Is this the only way to maintain the schedule?

● Performance ● Can the original specifications be met? ● If not, at what cost can we guarantee compliance? ● Are the specifications negotiable? ● What are the advantages to the company and customer for specification

changes? ● What are the disadvantages to the company and customer for performance

changes? ● Are we increasing or decreasing performance? ● Will the customer accept a change? ● Will there be a product or employee liability incurred? ● Will the change in specifications cause a redistribution of project resources? ● Will this change hurt our company’s ability to procure future contracts?

Once the answers to these questions are obtained, it is often best to plot the results graphically. Graphical methods have been used during the past two decades to determine

852 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

PMBOK® Guide, 5th Edition 3.6 Monitoring and Controlling

Process Group

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crashing costs for shortening the length of a project. To use the graphical techniques, we must decide on which of the three parameters to hold fixed.

With performance fixed, cost can be expressed as a function of time. Sample curves appear in Figures 16–5 and 16–6. In Figure 16–5, the cir- cled X indicates the target cost and target time. Unfortunately, the cost to complete the project at the target time is higher than the budgeted

cost. It may be possible to add resources and work overtime so that the time target can be met. Depending upon the way that overtime is burdened, it may be possible to find a minimum point in the curve where further delays will cause the total cost to escalate.

Curve A in Figure 16–6 shows the case where “time is money,” and any additional time will increase the cost to complete. Factors such as management support time will always increase the cost to complete. There are, however, some situations where the increased costs occur in plateaus. This is shown in curve B of Figure 16–6. This could result from having to wait for temperature conditioning of a component before additional work can be com- pleted, or simply waiting for nonscheduled resources to be available. In the latter case, the trade-off decision points may be at the end of each plateau.

With performance fixed, there are four methods available for constructing and ana- lyzing the time–cost curves:

● Additional resources may be required. This will usually drive up the cost very fast. Assuming that the resources are available, cost control problems can occur as a result of adding resources after initial project budgeting.

Methodology for Trade-off Analysis 853

Situation 1: Performance Is Held Constant (to Specifications)

C O

S T

T O

C O

M P

L E

T E

TARGET COST, TIME

ADDITIONAL TIME REQUIRED

FIGURE 16–5. Trade-offs with fixed performance.

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● The scope of work may be redefined and some work deleted without changing the project performance requirements. Performance standards may have been set too high, or the probability of success demanded of the project team may have been simply unrealistic. Reductions in cost and improvements in schedules would typically result from relaxing performance specifications, provided that the lower quality level will still meet the requirements of the customer.

● Available resources may be shifted in order to balance project costs or to speed up activities that are on the “critical” path work element that is trailing. This process of replanning shifts elements from noncritical to critical activities.

● Given a schedule problem, a change in the logic diagram may be needed to move from the current position to the desired position. Such a change could easily result in the replanning and reallocation of resources. An example of this would be to convert from “serial” to “parallel” work efforts. This is often risky.

Trade-offs with fixed performance levels must take into account the dependence of the firm on the customer, priority of the project within the firm, and potential for future busi- ness. A basic assumption here is that the firm may never sacrifice its reputation by deliv- ering a product that doesn’t perform to the specifications. The exception might be a change that would enhance performance and pull the project back on schedule. This is always worth investigating before entering into time–cost trade-offs.

Time and cost are interrelated in a labor-intensive project. As delivery slips, costs usu- ally rise. Slipping delivery schedules and minimizing cost growth are usually the recom- mended alternative for projects in which the dependence of the firm on the customer, the priority of the project within the firm’s stream of projects, and the future business poten- tial in terms of sales represent a low- to medium-risk. Even in some high-risk situations,

854 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

TARGET TIME, COST

C O

S T

T O

C O

M P

L E

T E

ADDITIONAL TIME REQUIRED

FIGURE 16–6. Trade-offs with fixed performance.

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the contractor may have to absorb the additional cost. This decision is often based on estimating the future projects from this customer so that the loss is amortized against future business. Not all projects are financial successes.

A company’s reputation for excellence is often hard to establish and can be extremely fragile. It is probably a contractor’s greatest asset. This is particularly true in high-liability contracts, where the consequences of failure are extremely serious. There are companies that have been very successful in aerospace and advanced technology contracting but have seldom been the low bidder. Where the government is the contractor, performance is rated far above cost. Similarly, the consequences of a commercial aircraft crash are of such magnitude that the cost and time are relatively insignificant compared with precision man- ufacturing and extremely high reliability.

Sometimes projects may have fixed time and costs, leaving only the performance vari- able for trade-offs. However, as shown in the following scenario, the eventual outcome may be to modify the “fixed” cost constraint.

The hypothetical situation involves a government hardware subcontract, fixed-price, with delivery to the major government contractor. The major contractor had a very tight schedule, and the hardware being supplied had only a one-week “window” in which to be delivered, or the major contractor would suffer a major delay. Any delay at this point would place the general contractor in serious trouble. Both the government contracting officer and the purchasing manager of the general contractor had “emphasized” the importance of mak- ing the delivery schedule. There was no financial penalty for being late, but the contracting officer had stated in writing that any follow-on contracts, which were heavily counted on by the company’s top management, would be placed with other vendors if delivery was not made on time.

Quality (performance) was critical but had never been a serious problem. In fact, per- formance had exceeded the contractual requirements because it had been company policy to be the “best” in the industry. This policy had, at times, caused cost problems, but it had ensured follow-on orders.

This project was in trouble at the halfway point, three months into the six-month sched- ule. The latest progress report indicated that the delivery would be delayed by three weeks. Costs were on target to date, but the shipping delay was expected to result in extra costs that would amount to 20 percent of the planned profit.

The project got off schedule when the flow of raw materials from a major vendor was interrupted for three weeks by a quality problem that was not discovered until the mater- ial was placed in production. Since the manufacturing time was process controlled, it was very difficult to make up lost time.

The first decision was that everything possible would be done to make delivery within one week of the original schedule. The potential lost revenue from future orders was so great that delivery must be made “at all costs,” to quote the company president.

The quality system was then thoroughly investigated. It appeared that by eliminating two redundant inspection operations, one week could be saved in the total schedule. These two time-consuming inspection operations had been added when a quality problem developed on a former contract. The problem had been solved, and with present controls there was no reason to believe the inspections were still necessary. They would be eliminated with no determinable risk in performance.

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Another two weeks were made up by working three production people seven days a week for the remainder of the project. This would permit delivery on the specified date of the contract, and would allow one week for other unforeseen problems so there would be a high probability of delivery within the required “window.”

The cost of the seven-day-per-week work had the net effort of reducing the projected profit by 40 percent. Eliminating the two inspection operations saved 10 percent of the profit.

The plan outlined above met the time and performance specifications with increased cost that eventually reduced profit by an estimated 30 percent. The key to this situation was that only the labor, material, and overhead costs of the project were fixed, and the con- tractor was willing to accept a reduced profit.

With cost fixed, performance will vary as a function of time, as shown in Figure 16–7. The decision of whether to adhere to the target sched-

ule data is usually determined by the level of performance. In curve A, performance may increase rapidly to the 90 percent level at the beginning of the project. A 10 percent increase in time may give a 20 percent increase in performance. After a certain point, a 10 percent increase in time may give only a 1 percent increase in performance. The company may not wish to risk the additional time necessary to attain the 100 percent performance level if it is possible to do so. In curve C, the additional time must be sacrificed because it is unlikely that the customer will be happy with a 30 to 40 percent performance level. Curve B is the most difficult curve to analyze unless the customer has specified exactly which level of performance will be acceptable.

856 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

Situation 2: Cost Is Fixed

X TIME

P E

R F

O R

M A

N C

TA R

G E

FIGURE 16–7. Trade-offs with fixed cost.

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If cost is fixed, then it is imperative that the project have a carefully worded and understood contract with clear specifications as to the required level of performance and very clear statements of inclusion and exclusion. Careful attention to costs incurred because of customer changes or additional requirements can help reduce the possibility of a cost overrun. Experience in contracting ensures that costs that may be overlooked by the inexperienced project manager are included, thus minimizing the need for such trade-offs downstream. Common, overlooked items that can drive up costs include:

● Excessive detailed reporting ● Unnecessary documentation

● Excessive tracking documentation for time, cost, and performance ● Detailed specification development for equipment that could be purchased

externally for less cost ● Wrong type of contract for this type of project

Often with a fixed-cost constraint, the first item that is sacrificed is performance. But such an approach can contain hidden disasters over the life of a project if the sacrificed performance turns out to have been essential to meeting some unspecified requirement such as long-term maintenance. In the long run, a degraded performance can actually increase costs rather than decrease them. Therefore, the project manager should be sure he has a good understanding of the real costs associated with trade-offs in performance.

Figure 16–8 identifies the situation in which time is fixed and cost varies with performance. Figure 16–8 is similar to Figure 16–7 in that

the rate of change of performance with cost is the controlling factor. If performance is at the 90 percent level with the target cost, then the contractor may request performance relief. This is shown in curve A. However, if the actual situation reflects curve B or C, additional costs must be incurred with the same considerations of situation 1—namely, how important is the customer and what emphasis should be placed on his follow-on business?

Completing the project on schedule can be extremely important in certain cases. For example, if an aircraft pump is not delivered when the engine is ready for shipment, it can hold up the engine manufacturer, the airframe manufacturer, and ultimately the customer. All three can incur substantial losses due to the delay of a single component. Moreover, customers who are unable to perform and who incur large unanticipated costs tend to have long memories. An irate vice president in the customer’s shop can kill further contracts out of all proportion to the real failure to deliver on time.

Sometimes, even though time is supposedly fixed, there may be latitude without inconvenience to the customer. This could come about because the entire program (of which your project is just one subcontract) is behind schedule, and the customer is not ready for your particular project.

Another aspect of the time factor is that “early warning” of a time overrun can often mitigate the damage to the customer and greatly increase his favorable response. Careful planning and tracking, close coordination with all functions involved, and realistic dealing with time schedules before and during the project can ensure early notification to the

Methodology for Trade-off Analysis 857

Situation 3: Time Is Fixed

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customer and the possible negotiation of a trade-off of time and dollars or even technical per- formance. The last thing that a customer wants is to have a favorable progress report right up to the end of scheduled time and then to be surprised with a serious schedule overrun.

When time is fixed, the customer may find that he has some flexibility in determining how to arrive at the desired performance level. As shown in Figure 16–9, the contractor may be willing to accept additional costs to maximize employee safety.

Another common situation is that in which neither time, cost, nor per- formance is fixed. The best method for graphically showing the trade- off relationships is to develop parametric curves as in Figure 16–10. Cost and time trade-offs can now be analyzed for various levels of per-

formance. The curves can also be redrawn for various cost levels (i.e., 100, 120, 150 percent of target cost) and schedule levels.

Another method for showing a family of curves is illustrated in Figure 16–11. Here, the contractor may have several different cost paths for achieving the desired time and per- formance constraints. The final path selected depends on the size of the risk that the con- tractor wishes to take.

There have been several attempts to display the three-dimensional trade-off problem graphically. Unfortunately, such a procedure is quite complex and difficult to follow. A more common approach is to use some sort of computer model and handle the trade-off as

858 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

TARGET COST

C O

S T

PERFORMANCE

TA R

G E

T P

E R

F O

R M

A N

C E

FIGURE 16–8. Trade-offs with fixed time.

Situation 4: No Constraints Are Fixed

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Methodology for Trade-off Analysis 859

-EMPLOYEE SAFETY FACTOR

FAIR GOOD

EXCELLENT

P E

R F

O R

M A

N C

COST

FIGURE 16–9. Performance versus cost.

C O

S T

TIME

100% PER

FOR MAN

75% PERF

ORM ANCE

50% PE RFORM

ANCE

FIGURE 16–10. Trade-off analysis with family of curves.

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though it were a linear programming or dynamic programming problem. This too is often difficult to perform and manage.

Trade-offs can also be necessary at any point during the life cycle of a project. Figure 16–12 identifies how the relative importance of the constraints of time, cost, and perfor- mance can change over the life cycle of the project. At project initiation, costs may not have accrued to a point where they are important. On the other hand, project performance may become even more important than the schedule. At this point, additional

860 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

PERFORMANCE GOAL

P E

R F

O R

M A

N C

TIME

T IM

E G

O A

COST A

COST B

COST C

FIGURE 16–11. Cost–time–performance family of curves.

R E

LA T

IV E

IM P

O R

TA N

C E

TIME

COST

PERFORMANCE

SCHEDULE

FIGURE 16–12. Life-cycle trade-offs. (Schedule not necessarily typical.)

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performance can be “bought.” As the project nears termination, the relative importance of the cost constraint may increase drastically, especially if project profits are the company’s major source of revenue. Likewise, it is probable that the impact of performance and schedule will be lower.

Once the alternative courses of action are determined, step 5 in the methodology is employed in order to analyze and select the feasible alternatives. Analyzing the alternatives should include the preparation of the revised project objectives for cost, performance, and time, along with an analysis of the required resources, general schedules, and revised proj- ect plans necessary to support each scenario. It is then the function of top management in conjunction with the project and functional managers to choose the solution that mini- mizes the overall impact to the company. This impact need not be measured just in short- term financial results, but should include long-term strategic and market considerations.

The following tasks can be included in this step:

● Prepare a formal project update report including alternative work scopes, sched- ules, and costs to achieve. ● Minimum cost overrun ● Conformance to project objectives ● Minimum schedule overrun

● Construct a decision tree including costs, work objectives, and schedules, and an estimate of the probability of success for each condition leading to the decision point.

● Present to internal and external project management the several alternatives along with an estimate of success probability.

● With management’s agreement, select the appropriate completion strategy, and begin implementation. This assumes that management does not insist on an impos- sible task.

The last item requires further clarification. Many companies use a checklist to estab- lish the criteria for alternative evaluation as well as for assessment of potential future prob- lems. The following questions may be part of such a checklist:

● Will other projects be affected? ● Will rework be required in previous tasks? ● Are repair and/or maintenance made more difficult? ● Will additional tasks be required in the future? ● How will project personnel react? ● What is the effect on the project life cycle? ● Will project flexibility be reduced? ● What is the effect on key employees? ● What is the effect on the customer(s)?

The probability of occurrence and severity should be assessed for all potential future problems. If there is a high probability that the problem will recur and be severe, a plan should be developed to reduce this probability. Internal restrictions, such as manpower,

Methodology for Trade-off Analysis 861

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materials, machines, money, management, time, policies, quality, and changing require- ments, can cause problems throughout the life cycle of a project. External restrictions of capital, completion dates, and liability also limit project flexibility.

One of the best methods for comparing the alternatives is to list them and then rank them in order of perceived importance relative to certain factors such as customer, potential fol- low-on business, cost deficit, and loss of goodwill. This is shown in Table 16–2. In the table each of the objectives is weighted according to some method established by management. The percentages represent the degree of satisfactory completion for each alternative. This type of analysis, often referred to as decision-making under risk, is commonly taught in operations research and management science coursework. Weighting factors are often used to assist in the decision-making process. Unfortunately, this can add mass confusion to the already confused process.

Table 16–3 shows that some companies perform trade-off analysis by equating all alter- natives to a lowest common denominator—dollars. Although this conversion can be very dif- ficult, it does ensure that we are comparing “apples to apples.” All resources such as capital equipment can be expressed in terms of dollars. Difficulties arise in assigning dollar values to such items as environmental pollution, safety standards, or the possible loss of life.

There are often several types of corrective action that can be utilized, including:

● Overtime ● Double shifts ● Expediting ● Additional manpower ● More money ● Change of vendors ● Change of specifications ● Shift of project resources ● Waiving equipment inspections ● Change in statement of work ● Change in work breakdown structure ● Substitution of equipment

862 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

TABLE 16–2. WEIGHING THE ALTERNATIVES

Objectives Increase Ready Meet Meet Future on Current Current Maximize Business Time Cost Specs Profits

Alternatives 0.4 0.25 0.10 0.20 .05

Add resources 100% 90% 30% 90% 10% Reduce scope of work 60% 90% 90% 30% 95% Reduce specification change 90% 80% 95% 5% 80% Complete project late 80% 0% 20% 95% 0% Bill customer for added cost 30% 85% 0% 60% 95%

Weights

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● Substitution of materials ● Use of outside contractors ● Providing bonus payments to contractors ● Single-sourcing ● Waiving drawing approvals

The corrective actions defined above can be used for time, cost, and performance. However, there are specific alternatives for each area. Assuming that a PERT/CPM analysis was done initially to schedule the project, then the following options are available for schedule manipulation:

● Prioritize all tasks and see the effect on the critical path of eliminating low-priority efforts.

● Use resource leveling. ● Carry the work breakdown structure to one more level, and reassess the time esti-

mates for each task.

Performance trade-offs can be obtained as follows:

● Excessive or tight specifications that are not critical to the project may be eased. (Many times standard specifications such as mil-specs are used without regard for their necessity.)

● Requirements for testing can be altered to accommodate automation (such as accelerated life testing) to minimize costs.

● Set an absolute minimum acceptable performance requirement below which you will not pursue the project. This gives a bound at the low end of performance that can’t be crossed in choosing between trade-off alternatives.

● Give up only those performance requirements that have little or no bearing on the overall project goals (including implied goals) and their achievement. This may require the project manager to itemize and prioritize major and minor objectives.

Methodology for Trade-off Analysis 863

TABLE 16–3. TRADE-OFF ANALYSIS FOR IMPROVING PERFORMANCE CAPABILITY

Time to Ranking Capital Complete, Project in

Assumption Description Expenditure, $ Months Profit, $ Profit, $

1 No change 0 6 100,000 5 2 Hire higher-salaried 0 5 105,000 3

people 3 Refurbish equipment 10,000 7 110,000 2 4 Purchase new 85,000 9 94,000 6

equipment 5 Change 0 6 125,000 1

specifications 6 Subcontract 0 6 103,000 4

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● Consider absorbing tasks with dedicated project office personnel. This is a resource trade-off that can be effective when the tasks to be performed require in-depth knowledge of the project. An example would be the use of dedicated pro- ject personnel to perform information gathering on rehabilitation-type projects. The improved performance of these people in the design and testing phases due to their strong background can save considerable time and effort.

The most promising areas for cost analysis include:

● Incremental costing (using sensitivity analysis)

● Reallocation of resources ● Material substitution where lower-cost materials are utilized without changing

project specifications

Depending on the magnitude of the problem, the timeliness of its identification, and the potential impact on the project results, it may be that no actions exist that will bring the pro- ject in on time, within budget, and at an acceptable level of performance. The following viable alternatives usually remain:

● A renegotiation of project performance criteria could be attempted with the project sponsor. Such action would be based on a pragmatic view of the acceptability of the probable outcome. Personal convenience of the project manager is not a factor. Professional and legal liability for the project manager, project team, or parent organization may be very real concerns.

● If renegotiation is not considered a viable alternative, or if it is rejected, the only remaining option is to “stop loss” in completing the project. Such planning should involve both line and project management, since the parent organization is at this point seeking to defend itself. Options include: ● Completing the project on schedule, to the minimum quality level required by

the project sponsor. This results in cost overruns (financial loss) but should pro- duce a reasonably satisfied project sponsor. (Project sponsors are not really comfortable when they know a project team is operating in a “stop-loss” mode!)

● Controlling costs and performance, but permitting the schedule to slide. The degree of unhappiness this generates with the project sponsor will be deter- mined by the specific situation. Risks include loss of future work or conse- quential damages.

● Maintaining schedule and cost performance by allowing quality to slip. The high-risk approach has a low probability of achieving total success and a high probability of achieving total failure. Quality work done on the project will be lost if the final results are below minimum standards.

● Seeking to achieve desired costs, schedule, and performance results in the light of impossible circumstances. This approach “hopes” that the inevitable won’t happen, and offers the opportunity to fail simultaneously in all areas. Criminal liability could become an issue.

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● Project cancellation, in an effort to limit exposure beyond that already encoun-

tered. This approach might terminate the career of a project manager but could

enhance the career of the staff counsel!

The sixth and final step in the methodology of the management of project trade-offs is

to obtain management approval and replan the project. The project manager usually identi-

fies the alternatives and prepares his recommendation. He then submits his recommendation

to top management for approval. Top-management involvement is necessary because the pro-

ject manager may try to make corrective action in a vacuum. Top management normally

makes decisions based on the following:

● The firm’s policies on quality, integrity, and image

● The ability to develop a long-term client relationship

● Type of project (R&D, modernization, new product)

● Size and complexity of the project

● Other projects underway or planned

● Company’s cash flow

● Bottom line—ROI

● Competitive risks

● Technical risks

● Impact on affiliated organizations

After choosing a new course of action from the list of alternatives, management and

especially the project team must focus on achieving the revised objectives. This may

require a detailed replanning of the project, including new schedules, PERT charts, work

breakdown structures, and other key benchmarks. The entire management team (i.e., top

management, functional managers, and project managers) must all be committed to

achieving the revised project plan.

16.2 CONTRACTS: THEIR INFLUENCE ON PROJECTS

The final decision on whether to trade-off cost, time, or performance can

vary depending on the type of contract. Table 16–4 identifies seven com-

mon types of contracts and the order in which trade-offs will be made.

The firm-fixed-price (FFP) contract. Time, cost, and performance are all specified within the contract, and are the contractor’s responsibility.

Because all constraints are equally important with respect to this type of contract, the

sequence of resources sacrificed is the same as for the project-driven organization shown

previously in Table 16–1.

The fixed-price-incentive-fee (FPIF) contract. Cost is measured to determine the incentive fee, and thus is the last constraint to be considered for trade-off. Because perfor-

mance is usually more important than schedule for project completion, time is considered

the first constraint for trade-off, and performance is the second.

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12.3 Control Procurements

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The cost-plus-incentive-fee (CPIF) contract. The costs are reimbursed and measured for determination of the incentive fee. Thus cost is the last constraint to be considered for trade-off. As with the FPIF contract, performance is usually more important than schedule for project completion, and so the sequence is the same as for the FPIF contract.

The cost-plus-award-fee (CPAF) contract. The costs are reimbursed to the contractor, but the award fee is based on performance by the contractor. Thus cost would be the first constraint to be considered for trade-off, and performance would be the last constraint to be considered.

The cost-plus-fixed-fee (CPFF) contract. Costs are reimbursed to the contractor. Thus, cost would be the first constraint to be considered for trade-off. Although there are no incentives for efficiency in time or performance, there may be penalties for bad perfor- mance. Thus time is the second constraint to be considered for trade-off, and performance is the third.

16.3 INDUSTRY TRADE-OFF PREFERENCES

Table 16–5 identifies twenty-one industries that were surveyed on their preferential process for trade-offs. Obviously, there are variables that affect each decision. The data in the table reflect the interviewees’ general responses, neglecting external considerations, which might have altered the order of preference.

Table 16–6 shows the relative grouping of Table 16–5 into four categories: project-

driven, non–project-driven, nonprofit, and banks. In all projects in the banking industry, whether regulated or nonregulated, cost is the first

resource to be sacrificed. The major reason for this trade-off is that banks in general do not have a quantitative estimation of what actual costs they incur in providing a given service. One example of this phenomenon is that a number of commercial banks heavily emphasize the use of Functional Cost Analysis, a publication of the Federal Reserve, for pricing their services. This publication is a summary of data received from member banks, of which the user is one. This results in questionable output because of inaccuracies of the input.

866 TRADE-OFF ANALYSIS IN A PROJECT ENVIRONMENT

TABLE 16–4. SEQUENCE OF RESOURCES SACRIFICED BASED ON TYPE OF CONTRACT

Firm- Fixed-Price- Fixed- Incentive- Cost-Plus- Cost-Plus- Cost-Plus- Price Fee Cost Cost Incentive- Award-Fee Fixed-Fee (FFP) (FPIF) Contract Sharing Fee (CPIF) (CPAF) (CPFF)

Time 2 1 2 2 1 2 2 Cost 1 3 3 3 3 1 1 Performance 3 2 1 1 2 3 3

1 = first to be sacrificed. 2 = second to be sacrificed. 3 = third to be sacrificed.

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In cases where federal regulations prescribe time constraints, cost is the only resource of consideration, since performance standards are also delineated by regulatory bodies.

In nonregulated banking projects, the next resource to be sacrificed depends on the competitive environment. When other competitors have developed a new service or prod- uct that a particular bank does not yet offer, then the resource of time will be less critical

Industry Trade-off Preferences 867

TABLE 16–5. INDUSTRY GENERAL PREFERENCE FOR TRADE-OFFS

Industry Time Cost Performance

Construction 1 3 2 Chemical 2 1 3 Electronics 2 3 1 Automotive manu. 2 1 3 Data processing 2 1 3 Government 2 1 3 Health (nonprofit) 2 3 1 Medicine (profit) 1 3 2 Nuclear 2 1 3 Manu. (plastics) 2 3 1 Manu. (metals) 1 2 3 Consulting (mgt.) 2 1 3 Consulting (eng.) 3 1 2 Office products 2 1 3 Machine tool 2 1 3 Oil 2 1 3 Primary batteries 1 3 2 Utilities 1 3 2 Aerospace 2 1 3 Retailing 3 2 1 Banking 2 1 3

Note: Numbers in table indicate the order (first, second, third) in which the three parameters are sacrificed.

TABLE 16–6. SPECIAL CASES

Type of Organization

Project-Driven Organizations Banks

Early Life- Late-Life- Non–Project- Cycle Cycle Driven Nonprofit Phases Phases Organizations Organizations Leader Follower

Time 2 1 1 2 3 2 Cost 1 3 3 3 1 1 Performance 3 2 2 1 2 3

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than the performance criteria. A specific case is the development of the automatic teller machine (ATM). After the initial introduction of the system by some banks (leaders), the remainder of the competitors (followers) chose to provide a more advanced ATM with little consideration for the time involved for procurement and installation. On the other hand, with the introduction of negotiable order of withdrawal (NOW) accounts, the January 1, 1981, change in federal regulations allowed banks and savings and loans to offer interest-bearing checking accounts. The ensuing scramble to offer the service by that date led to varying performance levels, especially on the part of savings and loans. In this instance the competitors sacrificed performance in order to provide a timely service.

In some banking projects, the time factor is extremely important. A number of projects depend on federal laws. The date that a specific law goes into effect sets the dead- line for the project.

Generally, in a nonprofit organization, performance is the first resource that will be com- promised. The United Way, free clinics, March of Dimes, American Cancer Society, and Goodwill are among the many nonprofit agencies that serve community needs. They derive their income from donations and/or federal grants, and this funding mechanism places a major constraint on their operations. Cost overruns are prohibited by the very nature of the organization. Inexperienced staff and time constraints result in poor customer service.

The non–project-driven organization is structured along the lines of the traditional vertical hierarchy. Functional managers in areas such as marketing, engineering, account- ing, and sales are involved in planning, organizing, staffing, and controlling their func- tional areas. Many projects that materialize, specifically in a manufacturing concern, are a result of a need to improve a product or process and can be initiated by customer request, competitive climate, or internal operations. The first resource to be sacrificed in the non–project-driven organization is time, followed by performance and cost, respectively. In most manufacturing concerns, budgetary constraints outweigh performance criteria.

In a non–project-driven organization, new projects will take a back seat to the day- to-day operations of the functional departments. The organizational funds are allocated to individual departments rather than to the project itself. When functional managers are required to maintain a certain productivity level in addition to supporting projects, their main emphasis will be on operations at the expense of project development. When it becomes necessary for the firm to curtail costs, special projects will be deleted in order to maintain corporate profit margins.

Resource trade-offs in a project-driven organization depend on the life-cycle phase of a given project. During the conceptual, definition, and production phases and into the oper- ational phase of the project, the trade-off priorities are cost first, then time, and finally per- formance. In these early planning phases the project is being designed to meet certain performance and time standards. At this point the cost estimates are based on the figures supplied to the project manager by the functional managers.

During the operational phase the cost factor increases in importance over time and performance, both of which begin to decrease. In this phase the organization attempts to recover its investment in the project and therefore emphasizes cost control. The perfor- mance standards may have been compromised, and the project may be behind schedule, but management will analyze the cost figures to judge the success of the project.

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The project-driven organization is unique in that the resource trade-offs may vary in priority, depending on the specific project. Research and development projects may have a fixed performance level, whereas construction projects normally are constrained by a date of completion.

16.4 CONCLUSION

It is obvious from the above discussion that a project manager does have options to con- trol a project during its execution. Project managers must be willing to control minor trade- offs as well as major ones. However, the availability of specific options is a function of the particular project environment.

In this chapter we discussed trade-offs solely on the triple constraint. In reality, the trade-off problem is much more complicated because today we have competing con- straints, including such topics as quality, image, risk, reputation, goodwill, and legal liability.

Probably the greatest contribution a project manager makes to a project team organi- zation is stability in adverse conditions. Interpersonal relationships have a great deal to do with the alternatives available and their probability of success since team performance will be required. Through a combination of management skill and sensitivity, project managers can make the trade-offs, encourage the team members, and reassure the project sponsor in order to produce a satisfactory project.

It should be noted in this chapter that we are discussing just the triple constraints of time, cost, and scope. In today’s world of project management, there are multiple con- straints among which tradeoffs can take place rather than just three constraints.

16.5 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses:

● Integration Management

● Scope Management

● Procurement Management

● Initiating

● Planning

● Execution

● Controlling

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Understanding the following principles is beneficial if the reader is using this text to study for the PMP® Certification Exam:

● What is meant by a trade-off

● Who are the major players in performing trade-offs

● That assumptions and circumstances can change mandating that trade-offs take place

The following multiple-choice questions will be helpful in reviewing the principles of this chapter:

1. Trade-offs are almost always necessary because: A. Project managers are incapable of planning correctly. B. Line managers are unable to provide accurate estimates. C. Executives are unable to properly define project objectives. D. Circumstances can change, thus mandating trade-offs to take place.

2. The person who may be ultimately responsible for approving the trade-off is the: A. Project manager B. Line manager C. Project sponsor D. Customer

3. The most common trade-offs occur on: A. Time, cost, and quality B. Risk, cost, and quality C. Risk, time, and quality D. Scope, quality, and risk

4. If the start date of a project is delayed but the budget and specifications remain fixed, what would the project manager most likely trade off first? A. Scope B. Time C. Quality D. Risk

ANSWERS

1. D

2. D

3. A

4. C

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Contract Management1

975

Related Case Studies (from Related Workbook Exercises PMBOK Guide, Kerzner/Project Management (from Kerzner/Project Management 5th Edition, Reference Case Studies, 4th Edition) Workbook and PMP/CAPM Exam Section for the PMP

Study Guide, 11th Edition) Certification Exam

• The Scheduling Dilemma* • Multiple Choice Exam • Procurement • To Bid or Not to Bid* • Crossword Puzzle on Procurement Management • The Management Reserved* Management

19.0 INTRODUCTION

In general, companies provide services or products based on the require- ments set forth in invitations for competitive bids issued by the client or the results of direct contract negotiations with the client. One of the most important factors in preparing a proposal and estimating the cost and

profit of a project is the type of contract expected. The confidence by which a bid is prepared is usually dependent on how much of a risk the contractor will incur through the

PMBOK® Guide, 5th Edition Chapter 12 Procurement

Management

*Case Study also appears at end of chapter. 1. The title of this chapter has been changed from Procurement Management in the Ninth Edition to Contract Management in this edition. Contract management includes procurement management. Procurement manage- ment is the buyer’s side of contract management, and sales/proposal management is the seller’s side of contract management. All those sellers (contractors) managing project contracts may not find it necessary to use the PMBOK® Guide, Chapter 12, because they may not be procuring anything.

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contract. Certain types of contracts provide relief for the contractor since onerous risks2

exist. The cost must therefore consider how well the contract type covers certain high- and low-risk areas.

Prospective clients are always concerned when, during a competitive bidding process, one bid is much lower than the others. The client may question the validity of the bid and whether the contract can be achieved for the low bid. In cases such as this, the client usu- ally imposes incentive and penalty clauses in the contract for self-protection.

Because of the risk factor, competitors must negotiate not only for the target cost figures but also for the type of contract involved since risk protection is the predominant influential factor. The size and experience of the client’s own staff, urgency of completion, availability of qualified contractors, and other factors must be carefully evaluated. The advantages and disadvantages of all basic contractual arrangements must be recognized to select the optimum arrangement for a particular project.

19.1 PROCUREMENT

Procurement can be defined as the acquisition of goods or services. Pro- curement (and contracting) is a process that involves two parties with different objectives who interact on a given market segment. Good pro- curement practices can increase corporate profitability by taking advantage of quantity discounts, minimizing cash flow problems, and seeking out

quality suppliers. Because procurement contributes to profitability, procurement is often centralized, which results in standardized practices and lower paperwork costs.

All procurement strategies are frameworks by which an organization attains its objectives. There are two basic procurement strategies:

● Corporate Procurement Strategy: The relationship of specific procurement actions to the corporate strategy. An example of this would be centralized procurement.

● Project Procurement Strategy: The relationship of specific procurement actions to the operating environment of the project. An example of this would be when the project manager is allowed to perform sole source procurement without necessar- ily involving the centralized procurement group, such as purchasing one ounce of a special chemical for an R&D project.

Project procurement strategies can differ from corporate procurement strategies because of constraints, availability of critical resources, and specific customer requirements. Corporate strategies might promote purchasing small quantities from several qualified vendors, whereas project strategies may dictate sole source procurement.

976 CONTRACT MANAGEMENT

PMBOK® Guide, 5th Edition Chapter 12 Introduction

12.1 Plan Procurement

Management

2. Onerous risks are unfair risks that the contractor may have to bear. Quite often, the contract negotiations may not reach agreement on what is or is not an onerous risk.

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Procurement planning usually involves the selection of one of the following as the pri- mary objective:

● Procure all goods/services from a single source. ● Procure all goods/services from multiple sources. ● Procure only a small portion of the goods/services. ● Procure none of the goods/services.

Another critical factor is the environment in which procurement must take place. There are two environments: macro and micro. The macro environment includes the general external variables that can influence how and when we do procurement. The PMBOK® Guide refers to this as

“Enterprise Environmental Factors.” These include recessions, inflation, cost of borrowing money, whether a buyer or seller’s market exists, and unemployment. As an example, a for- eign corporation had undertaken a large project that involved the hiring of several con- tractors. Because of the country’s high unemployment rate, the decision was made to use only domestic suppliers/contractors and to give first preference to contractors in cities where unemployment was the greatest, even though there were other more qualified suppliers/contractors.

The microenvironment is the internal procurement processes of the firm, especially the policies and procedures imposed by the firm, project, or client in the way that procure- ment will take place. This includes the procurement/contracting system, which contains four processes according to the PMBOK® Guide, Fourth Edition:

● Plan Procurements ● Conduct Procurements ● Administer Procurements ● Close Procurements

It is important to understand that, in certain environments such as major projects for the Department of Defense (DoD), the contracting process is used as the vehicle for tran- sitioning the project from one life-cycle phase to the next. For example, a contract can be awarded for the design, development, and testing of an advanced jet aircraft engine. The contract is completed when the aircraft engine testing is completed. If the decision is made at the phase gate review to proceed to aircraft engine production, the contracting process will be reinitiated for the new effort. Thus, the above four PMBOK® Guide processes would be repeated for each life-cycle phase. As the project progresses from

one phase to the next, and additional project knowledge is acquired through each com- pleted phase, the level of uncertainty (and risk) is reduced. The reduction in project risk allows the use of lower-risk contracts throughout the project life cycle. During higher-risk project phases such as conceptual, development, and testing, cost-type contracts are tradi- tionally used. During the lower-risk project phases such as production and sustainment, fixed-priced contracts are typically used.

It is also important to note that the above four PMBOK® Guide processes focus only on the buyer’s side of contract management.

Procurement 977

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Factors

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Contract management is defined as “art and science of managing a contractual agree- ment throughout the contracting process.”3 Since contracts involve at least two parties— the buyer and the seller (contractor), contract management processes are performed by both the buyer and seller. The seller’s contract management processes, which correspond to the buyer’s processes, consist of the following activities4:

● Presales Activity: The process of identifying prospective and current cus- tomers, determining customer’s needs and plans, and evaluating the competitive environment.

● Bid/No Bid Decision-Making: The process of evaluating the buyer’s solicitation, assessing the competitive environment and risks against the opportunities of a potential business deal, and then deciding whether to proceed.

● Bid/Proposal Preparation: The process of developing offers in response to a buyer’s solicitation or based on perceived buyer needs, for the purpose of per- suading the buyer to enter into a contract.

● Contract Negotiation and Formation: The process of reaching a common understanding of the nature of the project and negotiating the contract terms and conditions for the purpose of developing a set of shared expectations and understandings.

● Contract Administration: The process of ensuring that each party’s performance meets contractual requirements.

● Contract Closeout: The process of verifying that all administrative matters are concluded on a contract that is otherwise physically complete. This involves com- pleting and settling the contract, including resolving any open items.

As can be seen from the previous discussion, the last two phases of the seller’s contract management processes are identical to the buyer’s contract management processes. This is because the buyer and seller are both performing the same contract management activities and working off of the same contract document.

19.2 PLAN PROCUREMENTS

The first step in the procurement process is the planning for purchases and acquisitions, specifically the development of a procurement plan that states what to procure, when, and how. This process includes the following:

● Defining the need for the project ● Development of the procurement statement of work, specifications, and work

breakdown structure

978 CONTRACT MANAGEMENT

PMBOK® Guide, 5th Edition 12.1 Plan Procurements

3. Gregory A. Garrett and Rene G. Rendon, Contract Management: Organizational Assessment Tools (Ashburn, VA: National Contract Management Association, 2005), p. 270. 4. See note 3.

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● Preparing a WBS dictionary, if necessary ● Performing a make or buy analysis ● Laying out the major milestones and the timing/schedule ● Determining if long lead procurement is necessary ● Cost estimating, including life-cycle costing ● Determining whether qualified sellers exist ● Identifying the source selection criteria ● Preparing a listing of possible project/procurement risks (i.e., a risk register) ● Developing a procurement plan ● Obtaining authorization and approval to proceed

Previously, in Chapter 11, we discussed the statement of work and the scope statement. There could be separate and different statements of work for each product to be procured. The statement of work (SOW) is a nar- rative description of the work to be accomplished and/or the resources to

be supplied. The identification of resources to be supplied has taken on paramount impor- tance during the last 10 years or so. During the 1970s and 1980s, small companies were bidding on megajobs only to subcontract out more than 99 percent of all of the work. Lawsuits were abundant and the solution was to put clauses in the SOW requiring that the contractor identify the names and resumes of the talented internal resources that would be committed to the project, including the percentage of their time on the project.

In addition to SOWs, organizations also use statements of objectives (SOOs) for projects that are designed as “performance-based” effort. Performance-based projects are now the preference in the federal government. SOOs are used when the procuring organization wants to leverage the advanced technologies, capabilities, and expertise of the potential contractors in the marketplace. Instead of using a SOW, which describes in specific detail to the con- tractor what work needs to be performed and how it should be performed, the SOO only describes the end objectives of the project (what are the project’s end objectives). In response to a solicitation containing a SOO, the potential contractors develop and propose their own SOW that provides the detailed specifics on how they intend to perform the work. The source selection process entails comparing the various contractor-developed SOWs, each contractor applying its own unique technologies, capabilities, and expertise to the project effort. The proposal evaluation process includes making trade-offs between differing levels of proposed performance (as reflected in the contractor SOW), as well as proposed price.

Specifications are written, pictorial, or graphic information that describe, define, or specify the services or items to be procured. There are three types of specifications:

● Design Specifications: These detail what is to be done in terms of physical char- acteristics. The risk of performance is on the buyer.

● Performance Specifications: These specify measurable capabilities the end prod- uct must achieve in terms of operational characteristics. The risk of performance is on the contractor.

● Functional Specifications: This is when the seller describes the end use of the item to stimulate competition among commercial items, at a lower overall cost. This is a sub- set of the performance specification, and the risk of performance is on the contractor.

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of Work

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There are always options in the way the end item can be obtained. Feasible procurement alternatives include make or buy, lease or buy, buy or rent, and lease or rent. Buying

domestic or international is also of critical importance, especially to the United Auto Workers Union. Factors involving the make or buy analysis are shown below:

● The make decision ● Less costly (but not always!!) ● Easy integration of operations ● Utilize existing capacity that is idle ● Maintain direct control ● Maintain design/production secrecy ● Avoid unreliable supplier base ● Stabilize existing workforce

● The buy decision ● Less costly (but not always!!) ● Utilize skills of suppliers ● Small volume requirement (not cost effective to produce) ● Having limited capacity or capability ● Augment existing labor force ● Maintain multiple sources (qualified vendor list) ● Indirect control

The lease or rent decision is usually a financial endeavor. Leases are usually longer term than renting. Consider the following example. A company is willing to rent you a piece of equipment at a cost of $100 per day. You can lease the equipment for $60 per day plus a one-time cost of $5000. What is the breakeven point, in days, where leasing and renting are the same?

Let X be the number of days.

$100X � $5000 � $60X

Renting Leasing

Solving, X � 125 days

Therefore, if the firm wishes to use this equipment for more than 125 days, it would be more cost effective to sign a lease agreement rather than a rental agreement.

Procurement planning must address the risks on the contract as well as the risks with procurement. Some companies have project management manuals with sections that specifically address procurement risks using templates. As an example, the following is a partial list of procurement risks as identified in the ABB Project Management Manual5:

↑ ↑

980 CONTRACT MANAGEMENT

PMBOK® Guide, 5th Edition 12.1.2.1 Make or Buy Analysis

5. Adapted from Harold Kerzner, Advanced Project Management: Best Practices on Implementation, 2nd ed. (Hoboken, NJ: Wiley, 2004), pp. 346–348.

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Conducting the Procurements 981

● Contract and agreements (penalty/liquidated damages, specifications open to mis- interpretation, vague wording, permits/licenses, paperwork requirements)

● Responsibility and liability (force majeure, liability limits for each party, unclear scope limitations)

● Financial (letters of credit, payment plans, inflation, currency exchange, bonds) ● Political (political stability, changes in legislation, import/export restrictions,

arbitration laws) ● Warranty (nonstandard requirements, repairs) ● Schedule (unrealistic delivery time, work by others not finished on time, approval

process, limitations on available resources)

● Technical and technology (nonstandard solutions, quality assurance regulations, inspections, customer acceptance criteria)

● Resources (availability, skill levels, local versus external)

The procurement plan will address the following questions:

● How much procurement will be necessary? ● Will they be standard or specialized procurement activities? ● Will we make some of the products or purchase all of them? ● Will there be qualified suppliers? ● Will we need to prequalify some of the suppliers? ● Will we use open bidding or bidding from a preferred supplier list? ● How will we manage multiple suppliers? ● Are there items that require long lead procurement? ● What type of contract will be used, considering the contractual risks? ● Will we need different contract types for multiple suppliers? ● What evaluation criteria will be used to score the proposals?

19.3 CONDUCTING THE PROCUREMENTS

Once the requirements are identified and a procurement plan has been prepared, a requisition form for each item to be procured is sent to pro- curement to begin the procurement or requisition process. The process of conducting the procurements includes:

● Evaluating/confirming specifications (are they current?) ● Confirming qualified sources ● Reviewing past performance of sources ● Reviewing of team or partnership agreements ● Producing the solicitation package

The solicitation package is prepared during the procurements planning process but utilized during the next process, conduct procurements. In most situations, the same solicitation

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package for each deliverable must be sent to each possible supplier so that the playing field is level. A typical solicitation package would include:

● Bid documents (usually standardized) ● Listing of qualified vendors (expected to bid) ● Proposal evaluation criteria (source selection criteria) ● Bidder conferences ● How change requests will be managed ● Supplier payment plan

Standardized bid documents usually include standard forms for compliance with EEO, affirmative action, OSHA/EPA, minority hiring, and so on. A listing of qualified vendors appears in order to drive down the cost. Quite often, one vendor will not bid on the job because it knows that it cannot submit a lower bid than one of the other vendors. The cost of bidding on a job is an expensive process.

The solicitation package also describes the manner in which solicitation questions will be addressed, namely bidder conferences. Bidder confer- ences are used so that no single bidder has more knowledge than others.

If a potential bidder has a question concerning the solicitation package, then it must wait for the bidders’ conference to ask the question so that all bidders will be privileged to the same information. This is particularly important in government contracting. There may be several bidders’ conferences between solicitation and award. Project management may or may not be involved in the bidders’ conferences, either from the customer’s side or the contractor’s side. Some companies do not use bidder conferences and allow bidders to send in questions. However, the answer to each question is provided to all bidders.

The solicitation package usually provides bidders with information on how the bids will be evaluated. Contracts are not necessarily awarded to the lowest bidders. Some pro- posal evaluation scoring models assign points in regard to each of the following, and the company with the greatest number of points may be awarded the contract:

● Understanding of the requirements ● Overall bid price ● Technical superiority ● Management capability ● Previous performance (or references) ● Financial strength (ability to stay in business) ● Intellectual property rights ● Production capacity (based upon existing contracts and potential new contracts)

Bidder conferences are also held as part of debriefing sessions whereby the bidders are informed as to why they did not win the contract. Under some circumstances, bidders who feel that their bid or proposal was not evaluated correctly can submit a “bid protest,” which may require a detailed reappraisal of their bid. The bid protest is not necessarily a complaint that the wrong company won the contract, but rather a complaint that their pro- posal was not evaluated correctly.

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19.4 CONDUCT PROCUREMENTS: REQUEST SELLER RESPONSES

Selection of the acquisition method is the critical element to request seller responses. There are three common methods for acquisition:

● Advertising ● Negotiation ● Small purchases (i.e., office supplies)

Advertising is when a company goes out for sealed bids. There are no negotiations. Competitive market forces determine the price and the award goes to the lowest bidder.

Negotiation is when the price is determined through a bargaining process. In such a situation, the customer may go out for a:

● Request for information (RFI) ● Request for quotation (RFQ) ● Request for proposal (RFP) ● Invitation for bids (IFB)

The RFP is the most costly endeavor for the seller. Large proposals may contain separate volumes for cost, technical performance, management history, quality, facilities, subcontractor management, and others. Bidders may be hesitant to spend large sums of money bidding on a contract unless the bidder believes that they have a high probability of winning the contract or will be reimbursed by the buyer for all bidding costs.

As mentioned previously, some companies utilize an invitation for bid (IFB) process. Using the IFB process, only selected companies are allowed to bid. Either all or part of the companies on the buyer’s preferred contractor list may be allowed to bid.

In government agencies, IFBs are used in sealed bidding procurements. In govern- ment sealed bid procurements, the competing offerors submit priced bids in response to IFBs. These IFBs contain all of the necessary technical documents, specifications, and drawings needed for a bidder to develop a priced offer. Thus, in sealed bid procurement, there are no discussions or negotiations, and the contract is always awarded to the lowest acceptable offer using a firm fixed-priced contract.

19.5 CONDUCT PROCUREMENTS: SELECT SELLERS

Part of source selection process includes the application of the evaluation criteria to the contractor’s proposals. As previously stated, the proposal evaluation criteria were determined, developed, and included in the solici-

tation during the plan procurement phase of the contracting process. The evaluation criteria reflect the selected contract award strategy, which is typically either a price-based award strategy or best-value award strategy. The priced-based award strategy is used when the contract will be awarded to the lowest priced, technically acceptable proposal. The best-value award strategy is used when the contract may be awarded to either the lowest

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priced, technically acceptable offer or a higher-priced proposal offering a higher level of performance. During a best-value source selection, the procuring organization conducts trade-offs among price, performance, and other nonprice factors to select the proposal that offers the overall best value to the buyer.

While several criteria can be used, the most common are time, cost, expected man- agement team of the project (i.e., quality of assigned resources), and previous performance history. As an example, assume that 100 points maximum can be given to each of the four criteria. The seller that is selected would have the greatest number of total points out of 400 points. Weighing factors can also be applied to each of the four criteria. As an exam- ple, previous performance may be worth 200 points, thus giving 500 points as a maximum. Therefore, the lowest price supplier may be downgraded significantly because of past per- formance and not receive the contract.

Selecting the appropriate seller is not necessarily left exclusively to the evaluation criteria. A negotiation process can be part of the selection process because the buyer may like several of the ideas among the many bidders and then may try to have the preferred seller take on added work at no additional cost to the buyer. The negotiation process also includes inclusion and exclusions. The negotiation process can be competitive or non- competitive. Noncompetitive processes are called sole-source procurement.

On large contracts, the negotiation process goes well beyond negotiation of the bottom line. Separate negotiations can be made on:

● Final price of the contract ● Profit margins ● Type of contract ● Length of the contract ● Timing for each of the deliverables ● Quantity of deliverables ● Quality of the deliverables ● Payment schedule ● Assignment of critical personnel ● Ownership of the intellectual property ● Warrantees ● Cancellation and termination liability fees and conditions ● Number and frequency of reports ● Number, frequency, and location of customer-contractor interface meetings

Vendor relations are critical during contract negotiations. The integrity of the rela- tionship and previous history can shorten the negotiation process. The three major factors of negotiations are:

● Compromise ability ● Adaptability ● Good faith

Negotiations should be planned for. A typical list of activities would include:

● Develop objectives (i.e., min-max positions) ● Evaluate your opponent

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● Define your strategy and tactics ● Gather the facts ● Perform a complete price/cost analysis ● Arrange “hygiene” factors

If you are the buyer, what is the maximum you will be willing to pay? If you are the seller, what is the minimum you are willing to accept? You must determine what motivates your opponent. Is your opponent interested in profitability, keeping people employed, developing a new technology, or using your name as a reference? This knowledge could certainly affect your strategy and tactics.

Hygiene factors include where the negotiations will take place. In a restaurant? Hotel? Office? Square table or round table? Morning or afternoon? Who faces the windows and who faces the walls?

There should be a postnegotiation critique in order to review what was learned. The first type of postnegotiation critique is internal to your firm. The second type of postnego- tiation critique is with all of the losing bidders to explain why they did not win the contract.

Once negotiations are completed, each selected seller will receive a signed contract. Unfortunately there are several types of contracts. The negotiation process also includes the selection of the type of contract, and the final type of contract may be different than what was identified in the solicitation package.

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Conclusion: The objective of the conduct procurements process is to negotiate a contract type and price that will result in reasonable contractor risk and provide the contractor with the great-

est incentive for efficient and economic performance.

There are some basic contractual terms that should be understood before looking at the various contracts. These include:

● Agent: The person or group of people officially authorized to make decisions and represent their firm. This includes signing the contract.

● Arbitration: The settling of a dispute by a third party who renders a decision. The third party is not a court of law, and the decision may or may not be legally binding.

● Breach of Contract: To violate a law by an act or omission or to break a legal obligation.

● Contract: An agreement entered into by two or more parties and the agreement can be enforced in a court of law.

● Executed Contract: A contract that has been completed by all concerned parties. ● Force Majeure Clause: A provision in a contract that excuses the parties

involved from any liability or contractual obligations because of acts of God, wars, terrorism, or other such events.

● Good Faith: Honesty and fair dealings between all parties involved in the contract. ● Infringement: A violation of someone’s legally recognized right. ● Liquidated Damages: An amount specified in a contract that stipulates the rea-

sonable estimation of damages that will occur as a result of a breach of contract. ● Negligence: The failure to exercise one’s activity in such a manner that a reason-

able person would do in a similar situation.

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● Noncompete Clause: A covenant providing restrictions on starting up a compet- ing business or working for a competitor within a specified time period.

● Nondisclosure Clause: A covenant providing restrictions on certain proprietary information such that it cannot be disclosed without written permission.

● Nonconformance: Performance of work in such a manner that it does not con- form to contractual specifications or requirements.

● Penalty Clause: An agreement or covenant, identified in financial terms, for fail- ure to perform.

● Privity of Contract: The relationship that exists between the buyer and seller of a contract.

● Termination or Termination Liability: An agreement between the buyer and seller as to how much money the seller will receive should the project be termi- nated prior to the scheduled completion date and without all of the contractual deliverable being completed.

● Truth in Negotiations: This clause in the contract states that both the buyer and seller have been truthful in the information provided during contract negotiations.

● Waiver: An intentional relinquishment of a legal right. ● Warranty: A promise, either verbal or written, that certain facts are true as represented.

There are certain basic elements of most contracts:

● Mutual Agreement: There must be an offer and acceptance. ● Consideration: There must be a down payment. ● Contract Capability: The contract is binding only if the con-

tractor has the capability to perform the work. ● Legal Purpose: The contract must be for a legal purpose. ● Form Provided by Law: The contract must reflect the contractor’s legal obliga-

tion, or lack of obligation, to deliver end products.

The two most common contract forms are completion contracts and term contracts.

● Completion Contract: The contractor is required to deliver a definitive end prod- uct. Upon delivery and formal acceptance by the customer, the contract is consid- ered complete, and final payment can be made.

● Term Contract: The contract is required to deliver a specific “level of effort,” not an end product. The effort is expressed in woman/man-days (months or years) over a specific period of time using specified personnel skill levels and facilities. When the contracted effort is performed, the contractor is under no further obligation. Final payment is made, irrespective of what is actually accomplished technically.

The final contract is usually referred to as a definitive contract, which follows normal con- tracting procedures such as the negotiation of all contractual terms, condition cost, and sched- ule prior to initiation of performance. Unfortunately, negotiating the contract and preparing it for signatures may require months of preparation. If the customer needs the work to begin immediately or if long-lead procurement is necessary, then the customer may provide the con- tractor with a letter contract or letter of intent. The letter contract is a preliminary written

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instrument authorizing the contractor to begin immediately the manufacture of supplies or the performance of services. The final contract price may be negotiated after performance begins, but the contractor may not exceed the “not to exceed” face value of the contract. The defini- tive contract must still be negotiated.

The type of contract selected is based upon the following:

● Overall degree of cost and schedule risk ● Type and complexity of requirement (technical risk) ● Extent of price competition ● Cost/price analysis

● Urgency of the requirements ● Performance period ● Contractor’s responsibility (and risk) ● Contractor’s accounting system (is it capable of earned value reporting?) ● Concurrent contracts (will my contract take a back seat to existing work?) ● Extent of subcontracting (how much work will the contractor outsource?)

19.6 TYPES OF CONTRACTS

Before analyzing the various types of contracts, one should be familiar

with the terminology found in them.

● The target cost or estimated cost is the level of cost that the contractor will most likely obtain under normal performance conditions. The target cost serves as a basis for

measuring the true cost at the end of production or development. The target cost may

vary for different types of contracts even though the contract objectives are the same.

The target cost is the most important variable affecting research and development.

● Target or expected profit is the profit value that is negotiated for, and set forth, in the contract. The expected profit is usually the largest portion of the total profit.

● Profit ceiling and profit floor are the maximum and minimum values, respectively, of the total profit. These quantities are often included in contract negotiations.

● Price ceiling or ceiling price is the amount of money for which the government is responsible. It is usually measured as a given percentage of the target cost, and

is generally greater than the target cost.

● Maximum and minimum fees are percentages of the target cost and establish the outside limits of the contractor’s profit.

● The sharing arrangement or formula gives the cost responsibility of the customer to the cost responsibility of the contractor for each dollar spent. Whether that

dollar is an overrun or an underrun dollar, the sharing arrangement has the same

impact on the contractor. This sharing arrangement may vary depending on whether

the contractor is operating above or below target costs. The production point is usu- ally that level of production above which the sharing arrangement commences.

● Point of total assumption is the point (cost or price) where the contractor assumes all liability for additional costs.

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Because no single form of contract agreement fits every situation or project, compa- nies normally perform work in the United States under a wide variety of contractual arrangements, such as:

● Cost-plus percentage fee ● Cost-plus fixed fee ● Cost-plus guaranteed maximum ● Cost-plus guaranteed maximum and shared savings ● Cost-plus incentive (award fee) ● Cost and cost sharing ● Fixed price or lump sum ● Fixed price with redetermination ● Fixed price incentive fee ● Fixed price with economic price adjustment ● Fixed price incentive with successive targets ● Fixed price for services, material, and labor at cost (purchase orders, blanket agreements) ● Time and material/labor hours only ● Bonus-penalty ● Combinations ● Joint venture

At one end of the range is the cost-plus, a fixed-fee type of contract where the company’s profit, rather than price, is fixed and the company’s responsibility, except for its own negligence, is minimal. At the other end of the range is the lump sum or turnkey type of contract under which the company has assumed full responsibility, in the form of profit or losses, for timely performance and for all costs under or over the fixed contract price. In between are various types of contracts, such as the guaranteed maximum, incen- tive types of contracts, and the bonus-penalty type of contract. These contracts provide for varying degrees of cost responsibility and profit depending on the level of performance. Contracts that cover the furnishing of consulting services are generally on a per diem basis at one end of the range and on a fixed-price basis at the other end of the range.

There are generally five types of contracts to consider: fixed-price (FP), cost- plus-fixed-fee (CPFF), or cost-plus-percentage-fee (CPPF), guaranteed maximum-shared savings (GMSS), fixed-price-incentive-fee (FPIF), and cost-plus-incentive-fee (CPIF) contracts. Each type is discussed separately.

● Under a fixed-price or lump-sum contract, the contractor must carefully estimate the target cost. The contractor is required to perform the work at the negotiated contract value. If the estimated target cost was low, the total profit is reduced and may even vanish. The contractor may not be able to underbid the competitors if the expected cost is overestimated. Thus the contractor assumes a large risk.

This contract provides maximum protection to the owner for the ultimate cost of the project, but has the disadvantage of requiring a long period for preparation and adjudications of bids. Also, there is the possibility that, because of a lack of knowledge of local conditions, all contractors may necessarily include an excessive amount of contingency. This form of contract should never be considered by the

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owner unless, at the time bid invitations are issued, the building requirements are known exactly. Changes requested by the owner after award of a contract on a lump sum basis lead to troublesome and sometimes costly extras.

● Traditionally, the cost-plus-fixed-fee contract has been employed when it was believed that accurate pricing could not be achieved any other way. In the CPFF contract, the cost may vary but the fee remains firm. Because, in a cost-plus contract, the contractor agrees only to use his best efforts to perform the work, good performance and poor performance are, in effect, rewarded equally. The total dol- lar profit tends to produce low rates of return, reflecting the small amount of risk that the contractor assumes. The fixed fee is usually a small percentage of the total or true cost. The cost-plus contract requires that the company books be audited.

With this form of contract the engineering-construction contractor bids a fixed dollar fee or profit for the services to be supplied by the contractor, with engi- neering, materials, and field labor costs to be reimbursed at actual cost. This form of bid can be prepared quickly at a minimal expense to contractor and is a simple bid for the owner to evaluate. Additionally, it has the advantage of establishing incentive to the contractor for quick completion of the job.

If it is a cost-plus-percentage-fee contract, it provides maximum flexibility to the owner and permits owner and contractor to work together cooperatively on all technical, commercial, and financial problems. However, it does not provide financial assurance of ultimate cost. Higher building cost may result, although not necessarily so, because of lack of financial incentive to the contractor compared with other forms. The only meaningful incentive that is evident today is the increased competition and prospects for follow-on contracts.

● Under the guaranteed maximum-share savings contract, the contractor is paid a fixed fee for his profit and reimbursed for the actual cost of engineering, materi- als, construction labor, and all other job costs, but only up to the ceiling figure established as the “guaranteed maximum.” Savings below the guaranteed maxi- mum are shared between owner and contractor, whereas contractor assumes the responsibility for any overrun beyond the guaranteed maximum price.

This contract form essentially combines the advantages as well as a few of the disadvantages of both lump sum and cost-plus contracts. This is the best form for a negotiated contract because it establishes a maximum price at the earliest possible date and protects the owner against being overcharged, even though the contract is awarded without competitive tenders. The guaranteed maximum-share savings contract is unique in that the owner and contractor share the financial risk and both have a real incentive to complete the project at lowest possible cost.

● Fixed-price-incentive-fee contracts are the same as fixed-price contracts except that they have a provision for adjustment of the total profit by a formula that depends on the final total cost at completion of the project and that has been agreed to in advance by both the owner and the contractor. To use this type of contract, the project or contract requirements must be firmly established. This contract pro- vides an incentive to the contractor to reduce costs and therefore increase profit. Both the owner and contractor share in the risk and savings.

● Cost-plus-incentive-fee contracts are the same as cost-plus contracts except that they have a provision for adjustment of the fee as determined by a formula that compares

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the total project costs to the target cost. This formula is agreed to in advance by both the owner and contractor. This contract is usually used for long-duration or R&D-type projects. The company places more risk on the contractor and forces him to plan ahead carefully and strive to keep costs down. Incentive contracts are covered in greater detail in Section 19.7.

● Another type of contract incentives are award fees. Whereas incentive fees are objec- tively determined, that is, based on objective calculations comparing actual cost to tar- get costs, actual delivery to target delivery, or actual performance to target performance, award fees are more subjectively determined. Award fees are used when it is not feasi- ble or effective to determine objective contract incentives. Award fees are earned when the contractor meets higher (over and above the basic requirements of the contract) lev- els of performance, quality, timeliness, or responsiveness in performing the contract effort. Award fee contracts include an award fee plan that explains the award fee eval- uation criteria for any given time period (typically one year), as well as the total dollar amount of the award fee pool. Typically a contract award fee evaluation board convenes at the end of each award fee period to evaluate the contractor’s performance in relation to the award fee criteria established in the award fee plan. The award fee determination official, either the project manager or a level above the project manager, makes the actual determination on the amount of award fee earned by the contractor for that spe- cific period. Award fee provisions can be part of cost or fixed-priced contracts.

For major services contracts, award term incentives are used as incentives for the contractor to achieve higher levels of performance, quality, timeliness, or responsiveness in performing the services contract effort. Award term is similar to award fee, but instead of awarding the successful contractor additional dollars (fee), the contractor earns additional time (contract performance periods) on the service contract. Thus, instead of ending the final contract period of performance, and then having to recompete for the follow-on contract, the successful contractor is awarded with time extensions (additional periods of performance) to the contract performance period.

Other types of contracts that are not used frequently include:

● The fixed-price incentive successive targets contract is an infrequently used contract type. It has been used in the past in acquiring systems with very long lead time requirements where follow-on production contracts must be awarded before design or even production confirmation costs have been confirmed. Pricing data for the follow-on contract is inconclusive. This type of contract can be used in lieu of a let- ter contract or cost-plus arrangement.

● The fixed-price with redetermination contract can be either prospective or retroac- tive. The prospective type allows for future negotiations of two or more firm, fixed-price contracts at prearranged times. This is often used when future costs and pricing are expected to change significantly. The retroactive FPR contract allows for adjusting contract price after performance has been completed.

● Cost (CR) and cost-sharing (CS) contracts have limited use. Cost contracts have a “no fee” feature that has limited use except for nonprofit educational institutions conducting research. Cost-sharing contracts are used for basic and applied research where the con- tractor is expected to benefit from the R&D by transferring knowledge to other parts of the business for commercial gain and to improve the contractor’s competitive position.

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Table 19–1 identifies the advantages and disadvantages of various contracting meth- ods that are commonly used.

The type of contract that is acceptable to the client and the company is determined by the circumstances of each individual project and the prevailing economic and competitive conditions. Generally, when work is hard to find, clients insist on fixed-price bids. This type of proposal is usually a burden to the contractor because of the proposal costs involved (about 1 percent of the total installed cost of the project), and the higher risk involved in the execution of the project on such a basis.

When there is an upsurge in business, clients are unable to insist on fixed-price bids and more work is awarded on a cost-plus basis. In fact, where a special capacity position exists, or where time is a factor, the client occasionally negotiates a cost-plus contract with only one contractor. Another technique is to award a project on a cost-plus basis with the understanding that the contract will be converted at a later date, when the scope has been better defined and unknowns identified, to another form, such as a lump sum for services. This approach is appealing to both the client and the contractor.

As we mentioned earlier, the client frequently has a standard form of contract that is used as the basis of negotiation or the basis of requests for proposals. A company should review the client’s document carefully to assure itself that it understands how the client’s document differs from what is its preferred position. Any additional duties or responsibil- ities assigned to your company merit careful scrutiny if the additional legal consequences and increased financial risks are to be evaluated properly.

It is important that you use an adequate and realistic description of the work to be undertaken and a careful evaluation and pricing of the scope of the work to be performed and the responsibilities and obligations assumed. The preparation of a proposal requires a clear understanding between the client and your company as to the rights, duties, and responsibilities of your company. The proposal defines what it intends to do and can do, what it neither intends doing nor is qualified to undertake, and the manner and basis of its compensation. Thorough analysis of these matters before, not after, submission of the pro- posal is essential.

19.7 INCENTIVE CONTRACTS

To alleviate some of the previously mentioned problem areas, clients, especially the government, have been placing incentive objectives into their contracts. The fixed-price-incentive-fee (FPIF) contract is an exam-

ple of this. The essence of the incentive contract is that it offers a contractor more profit if costs are reduced or performance is improved and less profit if costs are raised or if per- formance goals are not met. Cost incentives take the form of a sharing formula generally expressed as a ratio. For example, if a 90/10 formula were negotiated, the government would pay for 90 cents and the contractor 10 cents for every dollar above the target cost. Thus it benefits both the contractor and the government to reduce costs, because the con- tractor must consider that 10 percent of every dollar must be spent by the company. Expected profits can thus be increased by making maximum use of the contractor’s man- agerial skills.

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TABLE 19–1. CONTRACT COMPARISON

Contract Type Advantages Disadvantages

Cost-plus-fee • Provides maximum flexibility • No assurance of actual final cost to owner

• Minimizes contractor profits • No financial incentive to minimize time and cost

• Minimizes negotiations and • Permits specification of high-cost preliminary specification costs features by owner’s staff

• Permits quicker start, earlier • Permits excessive design changes by completion owner’s staff increasing time and costs

• Permits choice of best-qualified, not lowest-bidding, contractor

• Permits use of same contractor from consultation to completion, usually increasing quality and efficiency

Guaranteed maximum- • Provides firm assurance of ultimate • Requires complete auditing by share savings cost at earliest possible date owner’s staff

• Insures prompt advice to • Requires completion of definitive owner of delays and extra engineering before negotiation of costs resulting from changes contract

• Provides incentive for quickest completion

• Owner and contractor share financial risk and have mutual incentive for possible savings

• Ideal contract to establish owner– contractor cooperation throughout execution of project

Fixed price/lump sum • Provides firm assurance of • Requires exact knowledge if what is ultimate cost wanted before contract award

• Insures prompt advice to owner • Requires substantial time and cost to of delays and extra costs develop inquiry specs, solicit, and resulting from changes evaluate bids. Delays completion

3–4 months

• Requires minimum owner • High bidding costs and risks may follow-up on work reduce qualified bidders

• Provides maximum incentive for • Cost may be increased by excessive quickest completion at lowest cost contingencies in bids to cover high-

• Involves minimal auditing by risk work owner’s staff

Fixed price for services, • Essentially same as cost-plus-fee • May encourage reduction of economic material, and labor contract studies and detailing of drawings:

produce higher costs for operation,

• Fixes slightly higher construction, maintenance percentage of total cost

• Eliminates checking and • Other disadvantages same as cost-plus- verifying contractor’s services fee contract

Fixed price for • Maximum price assured for • Same extended time required for imported goods and high percentage of plant costs inquiry specs, quotations, and services, local costs evaluation as fixed lump-sum for reimbursable complete project

• Avoids excessive contingencies • Requires careful definition of items in bids for unpredictable and supplied locally to insure highly variable local costs comparable bids

• Permits selection of local suppliers • No financial incentive to minimize and subcontractors by owner field and local costs

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In the FPIF contract, the contractor agrees to perform a service at a given fixed cost. If the total cost is less than the target cost, then the contractor has made a profit according to the incentive-fee formula. If the total cost exceeds the target cost, then the contractor loses money.

Consider the following example, which appears in Figure 19–1. The contractor has a target cost and target profit. However, there is a price ceiling of $11,500, which is the max- imum price that the contractor will be paid. If the contractor performs the work below the target cost of $10,000, then additional profit will be made. For example, by performing the work for $9,000, the contractor will receive a profit of $1,150, which is the target profit of $850 plus $300 for 30% of the underrun. The contractor will receive a total price of $10,150.

If the cost exceeds the target cost, then the contractor must pay 30% of the overrun out of the contractor’s profits. However, the fixed-price-incentive-fee (FPIF) contract has a point of total assumption. In this example, the point of total assumption is the point where all additional costs are burdened by the contractor. From Figure 19–1, the point of total assumption is when the cost reaches $10,928. At this point, the final price of $11,500 is reached. If the cost continues to increase, then all profits may disappear and the con- tractor may be forced to pay the majority of the overrun.

When the contract is completed, the contractor submits a statement of costs incurred in the performance of the contract. The costs are audited to determine allowability and

Incentive Contracts 993

14,000 FINAL COST

CONTRACTOR’S PROFIT

POINT OF TOTAL ASSUMPTION

9K 10K 10.9K 11.5K 12K 13K

12,000 10,000 8,000 6,000 4,000

2,000 0

22,000

SHARING

TARGET COST

TARGET PROFIT

TARGET PRICE

PRICE CEILING

CONTRACTOR SHARE

BUYER SHARE

70/30

10,000

850

10,850

11,500

30%

70%

NEGOTIATED COST

PROFIT

FINAL PRICE

DETAIL

9,000

1,150

10,150

10,000

850

10,850

10,928

572

11,500

12,000

2500

11,500

10,000 29,000

1,000

1,000 330%

300 1850 1,150

1,150 19,000 10,150

13,000

21,500

11,500

(1) (3)

(2)

FIGURE 19–1. Fixed-price-incentive-fee (FPIF) contract with firm target.

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questionable charges are removed. This determines the negotiated cost. The negotiated cost is then subtracted from the target cost. This number is then multiplied by the sharing ratio. If the number is positive, it is added to the target profit. If it is negative, it is sub- tracted. The new number, the final profit, is then added to the negotiated cost to determine the final price. The final price never exceeds the price ceiling.

Figure 19–2 shows a typical cost-plus-incentive-fee (CPIF) contract. In this contract, the contractor is reimbursed 100% of the costs. However, there is a maximum fee (i.e., profit) of $1,350 and a minimum fee of $300. The final allowable profit will vary between the minimum and maximum fee. Because there appears more financial risk for the customer in a CPIF con- tract, the target fee is usually less than in an FPIF contract, and the contractor’s portion of the sharing ratio is smaller.

19.8 CONTRACT TYPE VERSUS RISK

The amount of profit on a contract is most frequently based upon how the risks are to be shared between the contractor and the customer. For example, on a firm-fixed-price contract, the contractor absorbs 100 percent

994 CONTRACT MANAGEMENT

15,000

PROJECT COST

CONTRACTOR'S PROFIT

4K 6K 9K 10K 13K 14K

13,000 11,000 9,000 7,000 5,000

3,000 1,000

21,000

MAX MIN

SHARING

TARGET COST

TARGET FEE

MAXIMUM FEE

MINIMUM FEE

CONTRACTOR SHARE

BUYER SHARE

85/15

10,000

750

1,350

300

15%

85%

CONTRACTOR'S COST

FEE

FINAL PRICE

DETAIL

4,000

1,350

5,350

6,000

1,350

7,350

9,000

900

9,900

10,000

750

10,750

13,000

300

13,300

10,000 24,000

6,000

6,000 315%

900 1750 1,650

1,350 14,000

5,350

14,000

300

14,300

LIMITED BY THE MAXIMUM AND MINIMUM FEE CLAUSES IN THE CONTRACT.

(1) (3)

(2)

EXCEEDS $1,350 FEE LIMIT AND IS ADJUSTED DOWN TO $1,350.

FIGURE 19–2. Cost-plus-incentive-fee (CPIF) contract.

PMBOK® Guide, 5th Edition 12.1.1.3 & 12.1.1.7 Risk-Related

Contract Decisions

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of the risks (especially financial) and expects to receive a larger profit than on other types of contracts. On cost, cost-plus, and cost-sharing contracts, the customer absorbs up to 100 percent of the risks and expects the contractor to work for a lower than expected profit margin or perhaps no profit at all.

All other types of contracts may have a risk sharing formula between the customer and the contractor. Figure 19–3 shows the relative degree of risk between the customer and the contractor for a variety of contracts.

19.9 CONTRACT ADMINISTRATION

The contract administrator is responsible for compliance by the seller to the buyer’s contractual terms and conditions and to make sure that the final product is fit for use. Contract administrators can shut down a man- ufacturing plant by allowing the seller to make late deliveries. Although

a contract administrator is a member of the project team for project reporting purposes (dotted line reporting), the contract administrator can report to a line function such as corporate legal and may even be an attorney. The functions of the corporate administrator include:

● Change management ● Specification interpretation ● Adherence to quality requirements ● Inspections and audits ● Warranties ● Performance reporting ● Records management

Contract Administration 995

FFP

COST

FPR

FPIS

FPIF

CPIF

CPAF

CPFF

FPE

GOVERNMENT OR

CLIENT

CONTRACTOR

100%

FIGURE 19–3. Contract types and risk types.

PMBOK® Guide, 5th Edition 12.3 Contract Administration

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● Contractor (seller) management ● Contractor (seller) performance report card ● Documenting seller’s performance (for future source selection teams) ● Production surveillance ● Approval of waivers ● Breach of contract ● Claims administration ● Resolution of disputes ● Payment schedules ● Project termination

● Project closure

The larger the contract, the greater the need for the contract administrator to resolve ambi- guity in the contract. Sometimes, large contracts that are prepared by teams of attorneys con- tain an order of precedence clause. The order of precedence specifies that any inconsistency in the solicitation of the contract shall be resolved in a given order of procedure such as:

A. Specifications (first priority) B. Other instructions (second priority) C. Other documents, such as exhibits, attachments, appendices, SOW, contract data

requirements list (CDRL), etc. (third priority) D. Contract clauses (fourth priority) E. The schedule (fifth priority)

Generally speaking, an ambiguous contract will be interpreted against the party who drafted the document. However, there is an offsetting rule called Patent Ambiguity. This includes the following:

● The offeror in a “bid” situation is expected to be knowledgeable about ordinary and normal industrial or construction practices pertinent to its work.

● The presumption is made that the offeror has made reasonable and complete review of the contractual documents before preparing and submitting them.

● Failure to notify of patent ambiguity works against the offeror if the claim is later submitted based on ambiguity.

Perhaps the majority of the contract administrator’s time is spent handling changes. The following definitions describe the types of changes:

● Administrative change: A unilateral contractual change, in writing, that does not affect the substantive rights of the parties (i.e., a change in the paying office or the appropriation funding).

● Change order: A written order, signed by the contracting officer, directing the contractor to make a change.

● Contract modification: Any written change in the terms of the contract.

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● Undefinitized contractual action: Any contractual action that authorizes the commencement of work prior to the establishment of a final definitive price.

● Supplemental agreement: A contract modification that is accompanied by the mutual action of both parties.

● Constructive change: Any effective change to the contract caused by the actions or inaction of personnel in authority, or by circumstances that cause a contractor to perform work differently than required by written contract. The contractor may file a claim for equitable adjustment in the contract.

Typical causes of constructive changes include:

● Defective specification with impossibility of performance ● Erroneous interpretation of contract ● Overinspection of work ● Failure to disclose superior knowledge ● Acceleration of performance ● Late or unsuitable owner or customer furnished property ● Failure to cooperate ● Improperly exercised options ● Misusing proprietary data

Based on the type of contract, terms, and conditions, the customer may have the right to terminate a contract for convenience at any time. However, the customer must compen- sate the contractor for his preparations and for any completed and accepted work relating to the terminated part of the contract.

The following are reasons for termination for convenience of the customer:

● Elimination of the requirement ● Technological advances in the state-of-the-art ● Budgetary changes ● Related requirements and/or procurements ● Anticipating profits not allowed

The following are reasons for termination for default due to contractor’s actions:

● Contractor fails to make delivery on scheduled date. ● Contractor fails to make progress so as to endanger performance of the contract

and its terms. ● Contractor fails to perform any other provisions of the contract.

If a contract is terminated due to default, then the contractor may not be entitled to compensation of work in progress but not yet accepted by the customer. The customer may even be entitled to repayment from the contractor of any advances or progress payments applicable to such work. Also, the contractor may be liable for any excess reprocurement

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costs. However, contractors can seek relief through negotiations, a Board of Contracts Appeals, or Claims Court.

The contract administrator is responsible for performance control. This includes inspection, acceptance, and breach of contract/default. If the goods/services do not comply with the contract, then the contract administrator has the right to:

● Reject the entire shipment ● Accept the entire shipment (barring latent defects) ● Accept part of the shipment

In government contracts, the government has the right to have the goods repaired with the costs charged back to the supplier or fix the goods themselves and charge the cost of repairs to the supplier. If the goods are then acceptable to the government, then the gov- ernment may reduce the contract amount by an appropriate amount to reflect the reduced value of the contract.

Project managers often do financial closeout once the goods are shipped to the customer. This poses a problem if the goods must be repaired. Billing the cost of repairs against a financially closed out project is called backcharging. Most companies do not perform finan- cial closeout until at least 90 days after delivery of goods.

19.10 CONTRACT CLOSURE

The contract administrator is responsible for verification that all of the work performed and deliverables produced are acceptable to the buyer. Contractual closure is then followed up with administrative closure, which includes:

● Documented verification that the output was accepted by the buyer ● Debriefing the seller on their overall performance ● Documenting seller’s performance (documentation will be used in future source

selections when evaluating contractor’s past performance) ● Identifying room for improvement on future contracts ● Archiving all necessary project documentation ● Performing a lessons-learned review ● Identifying best practices

The seller also performs administrative closure once contractual closure is recognized. For the seller, an important subset of administrative closure is financial closure, which is the closing out of all open charge numbers. If financial closure occurs before contractual closure, then the project manager runs the risk that the charge numbers may have to be reopened to account for the cost of repairs or defects. Back-charging can be a mon- umental headache for the project manager especially if the accounting group identified the unused money in the code of accounts as excess profits.

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19.11 USING A CHECKLIST

To assist a company in evaluating inquiries and preparing proposals and contracts, a check- list of contract considerations and provisions can be helpful in the evaluation of each pro- posal and form of contract to insure that appropriate safeguards are incorporated. This checklist is also used for sales letters and brochures that may promise or represent a com- mercial commitment. Its primary purpose is to remind users of the legal and commercial factors that should be considered in preparing proposals and contracts. Table 19–2 shows the typical major headings that would be considered in a checklist. A key word concept also provides an excellent checklist of the key issues to be considered. It will be useful as a reminder in preparation for contractor-client agreement discussions.

The following contract provisions will minimize risk, and should be included in pro- posals and contracts:

● Scope of services and description of project ● Contract administration ● Terms of payment ● Client obligation and supplied items ● Warranties and guarantees ● Liability limitation and consequential damages ● Indemnity ● Taxes ● Patent indemnification ● Confidential information ● Termination provisions ● Changes and extras ● Assignments ● Delays, including force majeure ● Insurance requirements

Using a Checklist 999

TABLE 19–2. TYPICAL MAIN HEADING FOR A CONTRACT PROVISIONS CHECKLIST

I. Definitions of contract terms II. Definition of project scope

III. Scope of services and work to be performed IV. Facilities to be furnished by client (for service company use) V. Changes and extras

VI. Warranties and guarantees VII. Compensation to service company

VIII. Terms of payment IX. Definition of fee base (cost of the project) X. State sales and/or use taxes

XI. Taxes (other than sales use taxes) XII. Insurance coverages

XIII. Other contractual provisions (including certain general provisions) XIV. Miscellaneous general provisions

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● Arbitration ● Escalation (lump sum) ● Time of completion

Because of the variations among proposals and contracts, it is not feasible to prepare material specifically suited for each situation. It is also not practical to establish a standard form of contract or standard provisions to be included in a contract.

However, an increasing number of clients have certain set ideas as to the content of the proposal and contract. Therefore, it would be extremely helpful to develop a standard list and file of draft contract clauses that could be used with some modification for each bid. In addition, because clients occasionally ask for a “typical” contract, the draft clauses can be combined into a “typical” or “draft” contract that can be given to a client. Even though this “typical” contract agreement may not be sufficient for every situation, it can be a starting place. It would also be valuable to maintain a summary of commercially oriented company policies for reference in reviewing a client’s contract provisions.

Negotiating for the type of contract is a two-way street. The contractor desires a cer- tain type of contract to reduce risk. The client desires a certain type of contract to reduce costs. Often the client and contractor disagree. It is not uncommon in industry for prospec- tive projects to be canceled because of lack of funds, disagreements in contract negotiations, or changing of priorities.

19.12 PROPOSAL-CONTRACTUAL INTERACTION

It is critical during the proposal preparation stage that contract terms and conditions be reviewed and approved before submission of a proposal to the client. The contracts (legal) representative is responsible for the preparation of the contract portion of the pro- posal. Generally, contracts with the legal department are handled through or in coordina- tion with the proposal group. The contract representative determines or assists with the following:

● Type of contract ● Required terms and conditions ● Any special requirements ● Cash-flow requirements ● Patent and proprietary data ● Insurance and tax considerations ● Finance and accounting

The sales department, through the proposal group, has the final responsibility for the content and outcome of all proposals and contracts that it handles. However, there are cer- tain aspects that should be reviewed with others who can offer guidance, advice, and assistance to facilitate the effort. In general, contract agreements should be reviewed by the following departments:

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● Proposal ● Legal ● Insurance ● Tax ● Project management ● Engineering ● Estimating ● Construction (if required) ● Purchasing (if required)

Responsibility for collecting and editing contract comments rests with the proposal manager. In preparing contract comments, consideration should be given to comments pre- viously submitted to the client for the same form of agreement, and also previous agree- ments signed with the client.

Contract comments should be reviewed for their substance and ultimate risk to the company. It must be recognized that in most instances, the client is not willing to make a large number of revisions to his proposed form of agreement. The burden of proof that a contract change is required rests with the company; therefore each comment submitted must have a good case behind it.

Occasionally, a company is confronted with a serious contract comment for which it is very difficult to express their position. In such instances, it is better to flag the item for further discussion with the client at the conference table. A good example of this is taxes on cost-plus foreign projects. Normally, when submitting a proposal for such work, a company does not have sufficient definitive information to establish its position relative to how it would like to handle taxes; that is:

● What is the client’s position on taxes? ● Will one or two agreements be used for the work? Who will the contracting par-

ties be? ● Time will not permit nor is the cost justifiable for a complete tax assessment. ● Contract procedures have not been established. Would we buy in the name of the

company or as agents without liability for the client?

The legal department should be advised of information pertinent to its functions as promptly as possible as negotiations develop. Proposal personnel should also be familiar with the standard contract forms the company uses, its contract terms, and available con- ditions, including those developed jointly between sales and the legal department, as well as the functions, duties, and responsibilities of the legal department. In addition, key areas that are normally negotiated should be discussed so that proposal personnel have a better understanding of the commercial risks involved and why the company has certain positions.

By the time the client has reviewed the proposal, the company’s legal position is fixed commercially if not legally. Therefore, sales and proposal personnel should understand and be prepared to put forward the company’s position on commercially significant legal con- siderations, both in general and on specific issues that arise in connection with a particular

Proposal-Contractual Interaction 1001

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project. In this way, sales will be in a position to assert, and sell, the company’s position at the appropriate time.

Proposals should send all bid documents, including the client’s form of contract, or equiv- alent information, along with the proposal outline or instructions to the legal department upon receipt of documents from the client. The instructions or outline should indicate the assignment of responsibility and include background information on matters that are pertinent to sales strat- egy or specific problems such as guarantees, previous experience with client, and so on.

Proposals should discuss briefly with the legal department what is planned by way of the project, the sales effort, and commercial considerations. If there is a kickoff meeting, a representative of the legal department should attend if it is appropriate. The legal department should make a preliminary review of the documents before any such discus- sion or meeting.

The legal department reviews the documents and prepares a memorandum of com- ment and any required contract documents, obtaining input where necessary or advisable. If the client has included a contract agreement with the inquiry, the legal department reviews it to see if it has any flaws or is against some set policy of the company. Unless a lesser level of effort is agreed upon, this memorandum will cover all legal issues. This does not necessarily mean that all such issues must be raised with the client.

The purpose of the memorandum is to alert the proposal department to the issues and suggest solutions, usually in the form of contract comments. The memo may make related appropriate commercial suggestions. If required, the legal department will submit a pro- posed form of contract, joint venture agreement, and so on. Generally, the legal department follows standards that have been worked out with sales and uses standard forms and con- tract language that were found to be salable in the past and to offer sufficient protection.

At the same time, proposals reviews the documents and advises the legal department of any pertinent issues known by or determined by proposals. This is essential not only because proposals has the final responsibility but also because proposals is responsible for providing information to, and getting comments from, others, such as purchasing, engineering, and estimating.

Proposals reviews and arranges for any other review of the legal department’s comments and documents and suggests the final form of comments, contract documents, and other rel- evant documents including the offer letter. Proposals reviews proposed final forms with the legal department as promptly as possible and prior to any commercial commitment.

Normal practice is to validate proposals for a period of thirty to sixty days following date of submission. Validation of proposals for periods in excess of this period may be required by special circumstances and should be done only with management’s concur- rence. Occasionally, it is desirable to validate a bid for fewer than thirty days. The validity period is especially important on lump sum bids. On such bids, the validity period must be consistent with validity times of quotations received for major equipment items. If these are not consistent, additional escalation on equipment and materials may have to be included in the lump sum price, and the company’s competitive position could thereby be jeopardized.

Occasionally, you may be requested to submit with your proposals a schedule cover- ing hourly rate ranges to reimbursable personnel. For this purpose, you should develop a standard schedule covering hourly rate ranges and average rates for all personnel in the reimbursable category. The hourly rate ranges are based on the lowest-paid person and

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the highest-paid person in any specific job classification. In this connection, if there are any oddball situations, the effect of such is not included. Average rates are based on the average of all personnel in any given job classification.

One area that is critical to the development of a good contract is the definition of the scope of work covered by the contract. This is of particular importance to the proposal manager, who is responsible for having the proper people prepared for the scope of work description. What is prepared during proposal production most likely governs the contract preparation and eventually becomes part of that contract. The degree to which the project scope of work must be described in a contract depends on the pricing mechanism and con- tract form used.

A contract priced on a straight per diem basis or on the basis of reimbursement of all costs plus a fee does not normally require a precise description of either the services to be performed or the work to be accomplished.

Usually, a general description is adequate. This, however, is not the case if the con- tract is priced by other methods, especially fixed price, cost sharing, or guaranteed maxi- mum. For these forms of contracts, it is essential that considerable care be taken to set forth in the contract documents the precise nature of the work to be accomplished as well as the services to be performed.

In the absence of a detailed description of the work prepared by the client, you must be prepared to develop such a description for inclusion in your proposal. When preparing the description of the work for inclusion in the contract documents, the basic premise to be fol- lowed must be that the language in the contract will be strictly interpreted during various stages of performance. The proper preparation of the description of the work as well as the evaluation of the requirements demands coordination among sales, administration, cost, and technical personnel both inside and outside the organization. Technical personnel within the organization or technical consultants from outside must inform management whether there is an in-house capability to successfully complete the work. Determination also must be made of whether suitable subcontracts or purchase orders can be awarded. In the major areas, firm commitments should be obtained. Technical projections must be effected relative to a host of problems, including delivery or scheduling requirements, the possibility of changes in the proposed scope of work, client control over the work, quality control, and procedures.

An inadequate or unrealistic description of the work to be undertaken or evaluation of the project requirements marks the beginning of an unhappy contract experience.

19.13 SUMMARY

While it is essential that companies obtain good contracts with a minimum of risk provi- sions, it is equally important that those contracts be effectively administered. The following guidelines can aid a company in preparing its proposals and contracts and administering operations:

● Use of the checklist in the preparation of all proposals and contracts ● Evaluation of risks by reference to the suggested contract provisions wherever

appropriate

Summary 1003

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● Review by the legal department prior to submission to the client of all major pro- posals and contracts and of other contracts with questionable provisions

● Appropriate pricing or insuring of risks under the contract ● Improving contract administration at appropriate levels ● Periodic review and updating of the entire contract procedure including basic risk

areas, administration, and so on.

19.14 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and domain groups in the PMBOK® Guide. This chapter addresses:

● Procurement Management

Understanding the following principles is beneficial if the reader is using this text to study for the PMP® Certification Exam:

● What is meant by procurement planning ● What is meant by solicitation and a solicitation package ● Different types of contracts and relative degree of risk associated with each one ● Role of the contract administrator ● What is meant by contractual closure or closeout

The following multiple-choice questions will be helpful in reviewing the principles of this chapter:

1. The contractual statement-of-work document is: A. A nonbinding legal document used to identify the responsibilities of the contractor B. A definition of the contracted work for government contracts only C. A narrative description of the work/deliverables to be accomplished and/or the resource

skills required D. A form of specification

2. A written or pictorial document that describes, defines, or specifies the services or items to be procured is: A. A specification document B. A Gantt chart C. A blueprint D. A risk management plan

3. The “order of precedence” is: A. The document that specifies the order (priority) in which project documents will be used

when it becomes necessary to resolve inconsistencies between project documents

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B. The order in which project tasks should be completed C. The relationship that project tasks have to one another D. The ordered list (by quality) of the screened vendors for a project deliverable

4. In which type of contract arrangement is the contractor least likely to want to control costs? A. Cost plus percentage of cost B. Firm-fixed price C. Time and materials D. Purchase order

5. In which type of contract arrangement is the contractor most likely to want to control costs? A. Cost plus percentage of cost B. Firm-fixed price C. Time and materials D. Fixed-price-incentive-fee

6. In which type of contract arrangement is the contractor at the most risk of absorbing all cost overruns? A. Cost plus percentage of cost B. Firm-fixed price C. Time and materials D. Cost-plus-incentive-fee

7. In which type of contract arrangement is the customer at the most risk of absorbing exces- sive cost overruns? A. Cost plus percentage of cost B. Firm-fixed price C. Time and materials D. Fixed-price-incentive-fee

8. What is the primary objective the customer’s project manager focuses on when selecting a contract type? A. Transferring all risk to the contractor B. Creating reasonable contractor risk with provisions for efficient and economical per-

formance incentives for the contractor C. Retaining all project risk, thus reducing project contract costs D. None of the above

9. Which type of contract arrangement is specifically designed to give a contractor relief for inflation or material/labor cost increases on a long-term contract? A. Cost plus percentage of cost B. Firm-fixed price C. Time and materials D. Firm-fixed price with economic price adjustment

10. Which of the following is not a factor to consider when selecting a contract type? A. Type/complexity of the requirement B. Urgency of the requirement C. Extent of price competition D. All are factors to consider.

11. In a fixed-price-incentive-fee contract, the “point of total assumption” refers to the point in the project cost curve where: A. The customer assumes responsibility for every additional dollar that is spent in fulfill-

ment of the contract.

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B. The contractor assumes responsibility for every additional dollar that is spent in fulfill- ment of the contract.

C. The price ceiling is reached after the contractor recovers the target profit. D. None of the above

12. A written preliminary contractual instrument prepared prior to the issuance of a definitive contract that authorizes the contractor to begin work immediately, within certain limita- tions, is known as a: A. Definitive contract B. Preliminary contract C. Letter contract/letter of intent D. Purchase order

13. A contract entered into after following normal procedures (i.e., negotiation of terms, con- ditions, cost, and schedule) but prior to initiation of performance is known as a: A. Definitive contract B. Completed contract C. Letter contract/letter of intent D. Pricing arrangement

14. Which of the following is not a function of the contract administration activity? A. Contract change management B. Specification interpretation C. Determination of contract breach D. Selection of the project manager

15. A fixed-price contract is typically sought by the project manager from the customer’s organization when: A. The risk and consequences associated with the contracted task are large and the

customer wishes to transfer the risk. B. The project manager’s company is proficient at dealing with the contracted activities. C. Neither the contractor nor the project manager understand the scope of the task. D. The project manager’s company has excess production capacity.

16. Which of the following are typical actions a customer would take if the customer received nonconforming materials or products and the customer did not have the ability to bring the goods into conformance? A. Reject the entire shipment but pay the full cost of the contract B. Accept the entire shipment, no questions asked C. Accept the shipment on condition that the nonconforming products will be brought into

conformance by the vendor at the vendor’s expense. D. Accept the shipment and resell it to a competitor

17. If a project manager requires the use of a piece of equipment, what is the breakeven point where leasing and renting are the same?

Cost Categories Renting Costs Leasing Costs

Annual maintenance $ 0.00 $3,000.00 Daily operation $ 0.00 $ 70.00 Daily rental $100.00 $ 0.00

A. 300 days B. 30 days

1006 CONTRACT MANAGEMENT

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C. 100 days D. 700 days

18. In which type of incentive contract is there a maximum or minimum value established on the profits allowed for the contract? A. Cost-plus-incentive-fee contract B. Fixed-price-incentive-fee contract C. Time-and-material-incentive-fee contract D. Split-pricing-incentive-fee contract

19. In which type of incentive contract is there a maximum or minimum value established on the final price of the contract? A. Cost-plus-incentive-fee contract B. Fixed-price-incentive-fee contract C. Time-and-material-incentive-fee contract D. Split-pricing-incentive-fee contract

20. A cost-plus-incentive-fee contract has the following characteristics: ● Sharing ratio: 80/20 ● Target cost: $100,000 ● Target fee: $12,000 ● Maximum fee: $14,000 ● Minimum fee: $9,000

How much will the contractor be reimbursed if the cost of performing the work is $95,000? A. $98,000 B. $100,000 C. $108,000 D. $114,000

21. Using the same data from Problem 20, and the same contract type, how much will the con- tractor be reimbursed if the cost of performing the work is $85,000? A. $97,000 B. $99,000 C. $112,000 D. $114,000

22. Using the same data from Problem 20, and the same contract type, how much will the con- tractor be reimbursed if the cost of performing the work is $120,000? A. $112,000 B. $119,000 C. $126,000 D. $129,000

23. A fixed-price-incentive-fee contract has the following characteristics: ● Sharing ratio: 70/30 ● Target cost: $100,000 ● Target fee: $8,000 ● Price ceiling: $110,000

How much will the contractor be reimbursed if the cost of performing the work is $90,000? A. $91,000 B. $101,000 C. $103,000 D. $110,000

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24. Using the same data from Problem 23, and the same contract type, how much will the con- tractor be reimbursed if the cost of performing the work is $102,000? A. $104,000 B. $107,400 C. $109,400 D. $110,000

25. Using the same data from Problem 23, and the same contract type, how much will the con- tractor be reimbursed if the cost of performing the work is $105,000? A. $105,000 B. $106,500 C. $110,000 D. $111,500

ANSWERS

1. C

2. A

3. A

4. A

5. B

6. B

7. A

8. B

9. D

10. D

11. B

12. C

13. A

14. D

15. A

16. C

17. C

18. A

19. B

20. C

21. B

22. D

23. B

24. C

25. C

1008 CONTRACT MANAGEMENT

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THE SCHEDULING DILEMMA1

Sarah’s project had now become more complex than she had anticipated. Sarah’s company had a philosophy that the project manager would be

assigned during proposal preparation, assist in the preparation of the proposal, and take on the role of the project manager after contract award, assuming the company would be awarded the contract.

Usually, contract go-ahead would take place within a week or two after contract award. That made project staffing relatively easy for most of the project managers. It also allowed the company to include in the proposal a detailed schedule based upon resources that would be assigned upon contract award and go-ahead. During proposal preparation, the functional man- agers would anticipate who would be available for assignment to this project over the next few weeks. The functional managers could then estimate with reasonable accuracy the duration and effort required based upon the grade level of the resources to be assigned. Since the go-ahead date was usually within two weeks of contract award and the contract award was usually within a week or so after proposal submittal, the schedule that appeared in the proposal was usually the same schedule for the actual project with very few changes. This entire process was based upon the actual availability of resources rather than the functional managers assuming unlim- ited resources and using various estimating techniques.

While this approach worked well on most projects, Sarah’s new project had a go-ahead date of three months after contract award. For the functional managers, this created a problem estimating the effort and duration. Estimating now had to be made based upon the assumption of unlimited availability rather than the availability of limited resources. Functional managers were unsure as to who would be available three or four months from now, yet some type of schedule had to appear in the proposal.

Sarah knew the risks. When the proposal was being prepared for Sarah’s proposal, the functional managers assumed that the average worker in the department would be available and assigned to the project after go-ahead. The effort and duration estimates were then made based upon the average employee. If, after go-ahead, above-average employees would be assigned to her project, she could possibly see the schedule accelerated but had to make sure that cost over- runs did not happen because the fully loaded salary of the workers may be higher that what was estimated in the proposal. If below-average workers are assigned, a schedule slippage might occur and Sarah would have to look at possible schedule compression techniques, hopefully without incurring added costs.

Sarah’s company was awarded the contract. Sarah had silently hoped that the company would not get the contract, but it did. As expected, the go-

ahead date was three months from now. This created a problem for Sarah because she was unsure as to when to begin the preparation of the detailed schedule. The functional managers told her that they could not commit to an effort and duration based upon actual limited resource avail- ability until somewhere around two to three weeks prior to the actual go-ahead date. The

Case Studies 1009

CASE STUDIES

Background

Award of Contract

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resources were already spread thin across several projects and many of the projects were having trouble. Sarah was afraid that the worse case scenario would come true and that the actual com- pletion date would be longer than what was in the proposal. Sarah was certainly not happy about explaining this to the client should it be necessary to do so.

As the go-ahead date neared, Sarah negotiated with the functional managers for resources. Unfortunately, her worst fears came true when, for the most

part, she was provided with only average or above-average resources. The best resources were in demand elsewhere and it was obvious that they would not be available for her project.

Using the efforts and durations provided by the functional managers, Sarah prepared the new schedule. Much to her chagrin, she would be at least two weeks late on the four-month pro- ject. The client would have to be told about this. But before telling the client, Sarah decided to look at ways to compress the schedule. Working overtime was a possibility, but Sarah knew that overtime could lead to burned-out workers and the possibility of mistakes being made would increase. Also, Sarah knew that the workers really did not want to work overtime. Crashing the project by adding more resources was impossible because there were no other resources avail- able. Outsourcing some of the work was not possible as well because of the statement of work identified proprietary information provided by the client and that the contract would not allow any outsourcing of the work to a third party. Because of the nature of the work, doing some of the work in parallel rather than series was not possible. There was always a chance that the assigned resources could get the job done ahead of schedule but Sarah believed that a schedule delay was inevitable.

Sarah had to make a decision about when and how to inform the client of the impending schedule delay. If she told the truth to the client right now,

the client might understand but might also believe that her company lied in the proposal. That would be an embarrassment for her company. If she delayed informing the client, there might a chance that the original schedule in the proposal would be adhered to, however slim. If the client is informed at the last minute about the delay, it could be costly for the client and equally embarrassing for her company.

QUESTIONS

1. Is this a common situation for most companies or an exception to the rule? 2. Can policies be established as part of competitive bidding to alleviate the pain of this

occurring on other possible contracts where contract go-ahead date is several months after contract award?

3. Is it possible to convince a client that the schedule (and possibly the budget) is just a rough guess during competitive bidding and finalization of the schedule (and budget) can be made only after go-ahead?

4. What schedule compression techniques were considered in the case? Were there any techniques she did not consider?

5. Was Sarah correct in her analysis that these techniques probably would not work on her project?

6. If one of these techniques were to be used, which one has the greatest likelihood for pos- sible schedule compression?

1010 CONTRACT MANAGEMENT

Approaching Go-Ahead Date

Time for a Decision

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TO BID OR NOT TO BID2

Marvin was the president and chief executive officer (CEO) of his com- pany. The decision of whether or not to bid on a job above a certain dollar

value rested entirely upon his shoulders. In the past, his company would bid on all jobs that were a good fit with his company’s strategic objectives and the company’s win-to-loss ratio was excellent. But to bid on this job would be difficult. The client was requesting certain informa- tion in the request for proposal (RFP) that Marvin did not want to release. If Marvin did not comply with the requirements of the RFP, his company’s bid would be considered as nonresponsive.

Marvin’s company was highly successful at winning contracts through competitive bidding. The company was project-driven and all of the rev-

enue that came into the company came through winning contracts. Almost all of the clients pro- vided the company with long-term contracts as well as follow-on contracts. Almost all of the contracts were firm-fixed-price contracts. Business was certainly good, at least up until now.

Marvin established a policy whereby 5 percent of sales would be used for responding to RFPs. This was referred to as a bid-and-proposal (B&P) budget. The cost for bidding on con- tracts was quite high and clients knew that requiring the company to spend a great deal of money bidding on a job might force a no-bid on the job. That could eventually hurt the indus- try by reducing the number of bidders in the marketplace.

Marvin’s company used parametric and analogy estimating on all contracts. This allowed Marvin’s people to estimate the work at level 1 or level 2 of the work breakdown structure (WBS). From a financial perspective, this was the most cost-effective way to bid on a project knowing full well that there were risks with the accuracy of the estimates at these levels of the WBS. But over the years continuous improvements to the company’s estimating process reduced much of the uncertainty in the estimates.

One of Marvin’s most important clients announced it would be going out for bids for a potential ten-year contract. This contract was larger than any

other contract that Marvin’s company had ever received and could provide an excellent cash flow stream for ten years or even longer. Winning the contract was essential.

Because most of the previous contracts were firm-fixed-price, only summary-level pricing at the top two levels of the WBS was provided in the proposal. That was usually sufficient for the company’s clients to evaluate the cost portion of the bid.

The RFP was finally released. For this project, the contract type would be cost-reim- bursable. A WBS created by the client was included in the RFP, and the WBS was broken down into five levels. Each bidder had to provide pricing information for each work package in the WBS. By doing this, the client could compare the cost of each work package from each bidder. The client would then be comparing apples and apples from each bidder rather than apples and oranges. To make matters worse, each bidder had to agree to use the WBS created by the client during project execution and to report costs according to the WBS.

Case Studies 1011

Background

Bidding Process

New RFP

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Marvin saw the risks right away. If Marvin decided to bid on the job, the company would be releasing its detailed cost structure to the client. All costs would then be clearly exposed to the client. If Marvin were to bid on this project, releasing the detailed cost information could have a serious impact on future bids even if the contracts in the future were firm-fixed-price.

Marvin convened a team composed of his senior officers. During the discussions which followed, the team identified the pros and cons of bidding on the job:

● Pros:

● A lucrative ten-year (or longer) contract

● The ability to have the client treat Marvin’s company as a strategic partner rather

than just a supplier

● Possibly lower profit margins on this and other future contracts but greater overall

profits and earnings per share because of the larger business base

● Establishment of a workable standard for winning more large contracts

● Cons:

● Release of the company’s cost structure

● Risk that competitors will see the cost structure and hire away some of the com-

pany’s talented people by offering them more pay

● Inability to compete on price and having entire cost structure exposed could be a

limiting factor on future bids

● If the company does not bid on this job, the company could be removed from the

client’s bidder list

● Clients must force Marvin’s company to accept lower profit margins

Marvin then asked the team, “Should we bid on the job?”

QUESTIONS

1. What other factors should Marvin and his team consider? 2. Should they bid on the job?

THE MANAGEMENT RESERVE3

A project sponsor forces the project management to include a man- agement reserve in the cost of a project. However, the project sponsor

intends to use the management reserve for his own “pet” project and this creates problems for the project manager.

The Structural Engineering Department at Avcon, Inc. made a break- through in the development of a high-quality, low-weight composite

material. Avcon believed that the new material could be manufactured inexpensively and Avcon’s clients would benefit by lowering their manufacturing and shipping costs.

1012 CONTRACT MANAGEMENT

Background

Sole-Source Contract

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News of the breakthrough spread through the industry. Avcon was asked by one of its most important clients to submit an unsolicited proposal for design, development, and test- ing of products for the client using the new material. Jane would be the project manager. She had worked with the client previously as the project manager on several other projects that were considered successes.

Because of the relative newness of the technology, both Avcon and the client understood that this could not be a firm-fixed-price contract.

They ultimately agreed to a cost-plus-incentive-fee contract type. However, the target costs still had to be determined.

Jane worked with all of the functional managers to determine what their efforts would be on this contract. The only unknown was the time and cost needed for structural testing. Structural testing would be done by the Structural Engineering Department, which was responsible for making the technical breakthrough.

Tim was head of the Structural Engineering Department. Jane set up a meeting to dis- cuss the cost of testing on this project. During the meeting, Tim replied:

A full test matrix will cost about $100,000. I believe that we should price out the full test

matrix and also include a management reserve of at least $100,000 should anything go

wrong.

Jane was a little perplexed about adding in a management reserve. Time was usually right on the money on his estimates and Jane knew from previous experience that a full test matrix may not be needed. But Tim was the subject matter expert and Jane reluctantly agreed to include in the contract a management reserve of $100,000. As Jane was about to exit Tim’s office, Tim remarked:

Jane, I had requested to be your project sponsor on this effort and management has given

me the ok. You and I will be working together on this effort. As such, I would like to see all

of the cost figures before submitting the final bid to the client.

Jane had worked with Tim before but not in a situation where Tim would be the project sponsor. However, it was common on some con-

tracts that lower and middle levels of management would assume the sponsorship role rather than having all sponsorship at the top of the organization. Jane met with Tim and showed him the following information, which would appear in the proposal:

● Sharing ratio: 90-10% ● Contract cost target: $800,000 ● Contract profit target: $50,000 ● Management reserve: $100,000 ● Profit ceiling: $70,000 ● Profit floor: $35,000

Case Studies 1013

Meeting with Tim

Reviewing Cost Figures

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Tim looked at the numbers and Jane could see that he was somewhat unhappy. Tim then stated:

Jane, I do not want to identify to the client that we have a management reserve. Let’s place the management reserve in with the $800,000 and change the target cost to $900,000. I know that the cost baseline should not include the manage- ment reserve, but in this case I believe it is necessary to do so.

Jane knew that the cost baseline of a project does not include the management reserve, but there was nothing she could do; Tim was the sponsor and had the final say. Jane sim- ply could not understand why Tim was trying to hide the management reserve.

Tim instructed Jane to include in the structural test matrix work pack- age the entire management reserve of $100,000. Jane knew from pre-

vious experience that a full test matrix was not required and that the typical cost of this work package should be between $75,000 and $90,000. Establishing a work package of $200,000 meant that Tim had complete control over the management reserve and how it would be used.

Jane was now convinced that Tim had a hidden agenda. Unsure what to do next, Jane contacted a colleague in the Project Management Office. The colleague informed Jane that Tim had tried unsuccessfully to get some of his pet projects included in the portfolio of projects, but management refused to include any of Tim’s projects in the budget for the portfolio.

It was now clear what Tim was asking Jane to be part of and why Tim had requested to be the project sponsor. Tim was forcing Jane to violate PMI®’s Code of Ethics and Professional Conduct.

QUESTIONS

1. Why did Tim want to add in a management reserve? 2. Why did Tim want to become the project sponsor? 3. Are Tim’s actions a violation of the Code of Ethics and Professional Conduct? 4. If Jane follows Tim instructions, is Jane also in violation of the Code of Ethics and

Professional Conduct? 5. What are Jane’s options if she decides not to follow Tim’s instructions?

1014 CONTRACT MANAGEMENT

Execution Begins

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Quality Management1

1015

4th Edition) Study Guide, 11th Edition) Certification Exam

None • Constructing Process Charts • Quality • Constructing Cause-and-Effect Management

Charts and Pareto Charts • The Diagnosis of Patterns of

Process Instability, Part (A): X Charts • The Diagnosis of Patterns of

Process Instability, Part (B): R Charts • Quality Circles • Quality Problems • Multiple Choice Exam • Crossword Puzzle on

Quality Management

1. Appreciation is given to Terry Fischer (PMP) and Dr. Frank Anbari (PMP) for their invaluable assistance in the preparation of this chapter.

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20.0 INTRODUCTION

During the past twenty years, there has been a revolution in quality. Improvements have occurred not only in product quality, but also in lead- ership quality and project management quality. The changing views of quality appear in Table 20–1.

Unfortunately, it takes an economic disaster or a recession to get management to recognize the need for improved quality. Prior to the recession of 1979–1982, Ford, General Motors, and Chrysler viewed each other as the competition rather than the Japanese. Prior to the recession of 1989–1994, high-tech engi- neering companies never fully recognized the need for shortening product development time and the rela- tionship between project management, total quality management, and concurrent engineering.

The push for higher levels of quality appears to be customer driven. Customers are now demanding:

● Higher performance requirements ● Faster product development ● Higher technology levels ● Materials and processes pushed to the limit ● Lower contractor profit margins ● Fewer defects/rejects

One of the critical factors that can affect quality is market expectations. The variables that affect mar- ket expectations include:

● Salability: the balance between quality and cost ● Produceability: the ability to produce the product with available technology and workers, and at an

acceptable cost

1016 QUALITY MANAGEMENT

TABLE 20–1. CHANGING VIEWS OF QUALITY

Past Present

• Quality is the responsibility of blue-collar • Quality is everyone’s responsibility, including workers and direct labor employees working on white-collar workers, the indirect labor force, the floor and the overhead staff

• Quality defects should be hidden from the • Defects should be high-lighted and brought to the customers (and possibly management) surface for corrective action

• Quality problems lead to blame, faulty • Quality problems lead to cooperative solutions justification, and excuses

• Corrections-to-quality problems should be • Documentation is essential for “lessons learned” accomplished with minimum documentation so that mistakes are not repeated

• Increased quality will increase project costs • Improved quality saves money and increases business

• Quality is internally focused • Quality is customer focused

• Quality will not occur without close supervision • People want to produce quality products of people

• Quality occurs during project execution • Quality occurs at project initiation and must be planned for within the project

PMBOK® Guide, 5th Edition Chapter 8 Quality

8.1.1 Quality Planning Inputs

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● Social acceptability: the degree of conflict between the product or process and the values of society (i.e., safety, environment)

● Operability: the degree to which a product can be operated safely ● Availability: the probability that the product, when used under given conditions, will perform sat-

isfactorily when called upon ● Reliability: the probability of the product performing without failure under given conditions and

for a set period of time ● Maintainability: the ability of the product to be retained in or restored to a performance level when

prescribed maintenance is performed

Customer demands are now being handled using total quality management (TQM). Total quality management is an ever-improving system for integrating various organizational elements into the design, development, and manufacturing efforts, providing cost-effective products or services that are fully acceptable to the ultimate customer. Externally, TQM is customer oriented and provides for more meaningful customer satisfaction. Internally, TQM reduces production line bottlenecks and operating costs, thus enhancing product quality while improving organizational morale.

20.1 DEFINITION OF QUALITY

Mature organizations readily admit that they cannot accurately define quality. The reason is that quality is defined by the customer. The Kodak definition of quality is those products and services that are perceived to

meet or exceed the needs and expectations of the customer at a cost that represents out- standing value. The ISO 9000 definition is “the totality of feature and characteristics of a

Definition of Quality 1017

CONTINUOUS IMPROVEMENT

LEADERSHIP

CUSTOMER FOCUS

ANALYTICAL APPROACH

TEAMWORK

FIGURE 20–1. Kodak’s five quality principles.

PMBOK® Guide, 5th Edition Chapter 8 Introduction

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product or service that bears on its ability to satisfy stated or implied needs.” Terms such as fitness for use, customer satisfaction, and zero defects are goals rather than definitions.

Most organizations view quality more as a process than a product. To be more spe- cific, it is a continuously improving process where lessons learned are used to enhance future products and services in order to

● Retain existing customers ● Win back lost customers ● Win new customers

Therefore, companies are developing quality improvement processes. Figure 20–1 shows the five quality principles that support Kodak’s quality policy. Figure 20–2 shows a more detailed quality improvement process. These two figures seem to illustrate that organizations

1018 QUALITY MANAGEMENT

(1) IDENTIFY OUTPUTS

(2) IDENTIFY CUSTOMER(S)

(3) IDENTIFY CUSTOMERS’ REQUIREMENTS

(4) TRANSLATE REQUIREMENTS INTO SUPPLIER SPECIFICATIONS

PLANNING FOR QUALITY

(5) STEPS IN THE WORK PROCESS

(6) SELECT MEASUREMENTS

(7) DETERMINE PROCESS CAPABILITY

ORGANIZING FOR QUALITY

(9) RECYCLE

(8) EVALUATE

MONITORING FOR QUALITY

REQUIREMENTS MET?

YES

PRODUCE OUTPUT

WORK PROCESS

PROBLEM SOLVING

FIGURE 20–2. The quality improvement process. (Source unknown.)

PMBOK® Guide, 5th Edition 8.1 Quality Planning

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are placing more emphasis on the quality process than on the quality product and, therefore, are actively pursuing quality improvements through a continuous cycle.

20.2 THE QUALITY MOVEMENT

During the past hundred years, the views of quality have changed dra- matically. Prior to World War I, quality was viewed predominantly as inspection, sorting out the good items from the bad. Emphasis was on

problem identification. Following World War I and up to the early 1950s, emphasis was still on sorting good items from bad. However, quality control principles were now emerg- ing in the form of:

● Statistical and mathematical techniques ● Sampling tables ● Process control charts

From the early 1950s to the late 1960s, quality control evolved into quality assurance, with its emphasis on problem avoidance rather than problem detection. Additional quality assurance principles emerged, such as:

● The cost of quality ● Zero-defect programs ● Reliability engineering ● Total quality control

Today, emphasis is being placed on strategic quality management, including such topics as:

● Quality is defined by the customer. ● Quality is linked with profitability on both the market and cost sides. ● Quality has become a competitive weapon. ● Quality is now an integral part of the strategic planning process. ● Quality requires an organization-wide commitment.

Although many experts have contributed to the success of the quality movement, the three most influential contributors are W. Edwards Deming, Joseph M. Juran, and Phillip B. Crosby. Dr. Deming pioneered the use of statistics and sampling methods from 1927 to 1940 at the U.S. Department of Agriculture. During these early years, Dr. Deming was influenced by Dr. Shewhart, and later applied Shewhart’s Plan/Do/Check/Act cycle to cler- ical tasks. Figure 20–3 shows the Deming Cycle for Improvement.

Deming believed that the reason companies were not producing quality products was that management was preoccupied with “today” rather than the future. Deming pos- tulated that 85 percent of all quality problems required management to take the initiative and change the process. Only 15 percent of the quality problems could be controlled by

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the workers on the floor. As an example, the workers on the floor were not at fault because of the poor quality of raw materials that resulted from management’s decision to seek out the lowest cost suppliers. Management needed to change the purchasing policies and pro- cedures and develop long-term relationships with vendors.

Processes had to be placed under statistical analysis and control to demonstrate the repeatability of quality. Furthermore, the ultimate goals should be a continuous refinement of the processes rather than quotas. Statistical process control charts (SPCs) allowed for the identification of common cause and special (assignable) cause variations. Common cause variations are inherent in any process. They include poor lots of raw material, poor product design, unsuitable work conditions, and equipment that cannot meet the design tolerances. These common causes are beyond the control of the workers on the floor and therefore, for improvement to occur, actions by management are necessary.

Special or assignable causes include lack of knowledge by workers, worker mistakes, or workers not paying attention during production. Special causes can be identified by workers on the shop floor and corrected, but management still needs to change the manu- facturing process to reduce common cause variability.

Deming contended that workers simply cannot do their best. They had to be shown what constitutes acceptable quality and that continuous improvement is not only possible, but nec- essary. For this to be accomplished, workers had to be trained in the use of statistical process control charts. Realizing that even training required management’s approval, Deming’s lec- tures became more and more focused toward management and what they must do.

Dr. Juran began conducting quality control courses in Japan in 1954, four years after Dr. Deming. Dr. Juran developed his 10 Steps to Quality Improvement (see Table 20–2), as well as the Juran Trilogy: Quality Improvement, Quality Planning, and Quality Control. Juran stressed that the manufacturer’s view of quality is adherence to specifications but the cus- tomer’s view of quality is “fitness for use.” Juran defined five attributes of “fitness for use.”

1020 QUALITY MANAGEMENT

ACT

CHECK

PLAN

IMMEDIATE REMEDIES FUTURE ACTIONS

AGAINST OBJECTIVES HOW METHODS EXECUTED

OBJECTIVES METHODS

TRAIN EXECUTE

• •

FIGURE 20–3. The Deming Cycle for Improvement.

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TABLE 20–2. VARIOUS APPROACHES TO QUALITY IMPROVEMENT

Deming’s 14 Juran’s 10 Steps Crosby’s 14 Steps Points for to Quality to Quality Management Improvement Improvement

1. Create constancy of purpose for improvement of product and service.

2. Adopt the new philosophy.

3. Cease dependence on inspection to achieve quality.

4. End the practice of awarding business on the basis of price tag alone. Instead, minimize total cost by working with a single supplier.

5. Improve constantly and forever every process for planning, production, and service.

6. Institute training on the job.

7. Adopt and institute leadership.

8. Drive out fear.

9. Break down barriers between staff areas.

10. Eliminate slogans, exhortations, and targets for the work force.

11. Eliminate numerical quotas for the workforce and numerical goals for management.

12. Remove barriers that rob people of workmanship. Eliminate the annual rating or merit system.

13. Institute a vigorous program of education and self-improvement for everyone.

14. Put everybody in the company to work to accomplish the transformation.

1. Build awareness of the need and opportunity for improvement.

2. Set goals for improvement.

3. Organize to reach the goals (establish a quality council, identify problems, select projects, appoint teams, designate facilitators).

4. Provide training.

5. Carry out projects to solve problems.

6. Report progress.

7. Give recognition.

8. Communicate results.

9. Keep score.

10. Maintain momentum by making annual improvement part of the regular systems and processes of the company.

1. Make it clear that management is committed to quality.

2. Form quality improvement teams with representatives from each department.

3. Determine where current and potential quality problems lie.

4. Evaluate the cost of quality and explain its use as a management tool.

5. Raise the quality awareness and personal concern of all employees.

6. Take actions to correct problems identified through previous steps.

7. Establish a committee for the zero-defects program.

8. Train supervisors to actively carry out their part of the quality improvement program.

9. Hold a “zero-defects day” to let all employees realize that there has been a change.

10. Encourage individuals to establish improvement goals for themselves and their groups.

11. Encourage employees to communicate to management the obstacles they face in attaining their improvement goals.

12. Recognize and appreciate those who participate.

13. Establish quality councils to communicate on a regular basis.

14. Do it all over again to emphasize that the quality improvement program never ends.

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● Quality of design: There may be many grades of quality ● Quality of conformance: Provide the proper training; products that maintain spec-

ification tolerances; motivation ● Availability: reliability (i.e., frequency of repairs) and maintainability (i.e., speed

or ease of repair) ● Safety: The potential hazards of product use ● Field use: This refers to the way the product will be used by the customer

Dr. Juran also stressed the cost of quality (Section 20.8) and the legal implications of quality. The legal aspects of quality include:

● Criminal liability ● Civil liability ● Appropriate corporate actions ● Warranties

Juran believes that the contractor’s view of quality is conformance to specification, whereas the customer’s view of quality is fitness for use when delivered and value. Juran also admits that there can exist many grades of quality. The characteristics of quality can be defined as:

● Structural (length, frequency) ● Sensory (taste, beauty, appeal) ● Time-oriented (reliability, maintainability) ● Commercial (warrantee) ● Ethical (courtesy, honesty)

The third major contributor to quality was Phillip B. Crosby. Crosby developed his 14 Steps to Quality Improvement (see Table 20–2) and his Four Absolutes of Quality:

● Quality means conformance to requirements. ● Quality comes from prevention. ● Quality means that the performance standard is “zero defects.” ● Quality is measured by the cost of nonconformance.

Crosby found that the cost of not doing things right the first time could be appreciable. In manufacturing, the price of nonconformance averages 40 percent of operating costs.

20.3 COMPARISON OF THE QUALITY PIONEERS

Deming’s definition of quality is “continuous improvement.” Although variations cannot be entirely eliminated, we can learn more about them and eventually reduce them. The ulti- mate goal obviously is zero defects, but this error-free work may not be economically fea- sible or practical.

Juran believes that for quality to improve, we must resolve “sporadic” problems and “chronic” problems. Sporadic problems are short-term problems that generate sudden changes for the worse in quality; techniques exist for identifying and controlling them.

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“Chronic” problems, on the other hand, may require scientific breakthrough to achieve higher levels of quality. Chronic problems exist because workers may not accept change and refuse to admit that there may be a better way of doing things. Solving chronic problems requires breakthrough projects, specific targets usually established on a yearly basis, strong and visible senior management support, and the use of quality experts to lead the company-wide quality improvement programs. Unlike Deming, who avoids the use of targets and quotas, Juran’s objective is to get management to accept the habit of an annual quality improvement program based upon well-defined targets.

Juran’s method for determining the cost of quality, therefore, suggests that the pursuit of quality will pay for itself only up to a certain point, and beyond that point costs may rise significantly.

Crosby argues that the cost of quality includes only the nonconformance costs, whereas Juran includes both conformance and nonconformance costs. Crosby’s argument is that the conformance costs of prevention and appraisal are not really the cost of quality but more so the cost of doing business. Therefore, Crosby argues that quality is free, and the only associated costs of quality should be those of nonconformance. Crosby does not emphasize analytical techniques other than measurement methods for nonconformance costs, and he relies heavily upon motivation and the role of senior management.

Table 20–3 compares the approach to quality of the three experts. Although all three emphasize the need for quality and the importance/role of senior management, each goes about it differently.

20.4 THE TAGUCHI APPROACH2

After World War II the allied forces found that the quality of the Japanese telephone system was extremely poor and totally unsuitable for long-term

The Taguchi Approach 1023

TABLE 20–3. COMPARISON OF THE EXPERTS

Deming Juran Crosby

Definition of quality Continuous improvement Fitness for use Conformance to requirements

Application Manufacturing-driven Technology-driven People-driven companies companies companies

Target audience Workers Management Workers Emphasis on Tools/system Measurement Motivation (behavioral) Type of tools Statistical process control Analytical, decision-making Minimal use

and cost-of-quality Use of goals and Not used Used for breakthrough Posted goals for workers

targets projects

2. Taken from Ranjit Roy, A Primer on the Taguchi Method (Dearborn, MI: Society of Manufacturing Engineers, 1990), Chapter 2. Reproduced by permission.

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communication purposes. To improve the system, the allied command recommended that Japan establish research facilities similar to the Bell Laboratories in the United States in order to develop a state-of-the-art communication system. The Japanese founded the Electrical Communication Laboratories (ECL) with Dr. Taguchi in charge of improving the R&D productivity and enhancing product quality. He observed that a great deal of time and money was expended in engineering experimentation and testing. Little emphasis was given to the process of creative brainstorming to minimize the expenditure of resources.

Dr. Taguchi started to develop new methods to optimize the process of engineering

experimentation. He developed techniques that are now known as the Taguchi Methods.

His greatest contribution lies not in the mathematical formulation of the design of experi-

ments, but rather in the accompanying philosophy. His approach is more than a method to

lay out experiments. His is a concept that has produced a unique and powerful quality

improvement discipline that differs from traditional practices.

These concepts are:

1. Quality should be designed into the product and not inspected into it.

2. Quality is best achieved by minimizing the deviation from a target. The product

should be so designed that it is immune to uncontrollable environmental factors.

3. The cost of quality should be measured as a function of deviation from the stan-

dard and the losses should be measured system-wide.

Taguchi built on Deming’s observation that 85 percent of poor quality is attributable

to the manufacturing process and only 15 percent to the worker. Hence, he developed man-

ufacturing systems that were “robust” or insensitive to daily and seasonal variations of

environment, machine wear, and other external factors. The three principles were his

guides in developing these systems, testing the factors affecting quality production, and

specifying product parameters.

Taguchi believed that the better way to improve quality was to design and build it into

the product. Quality improvement starts at the very beginning, that is, during the design

stages of a product or a process, and continues through the production phase. He proposed

an “off-line” strategy for developing quality improvement in place of an attempt to inspect

quality into a product on the production line. He observed that poor quality cannot be

improved by the process of inspection, screening, and salvaging. No amount of inspection

can put quality back into the product; it merely treats a symptom. Therefore, quality con-

cepts should be based upon, and developed around, the philosophy of prevention. The

product design must be so robust that it is immune to the influence of uncontrolled envi-

ronmental factors on the manufacturing processes. His second concept deals with actual methods of effecting quality. He contended that

quality is directly related to deviation of a design parameter from the target value, not to conformance to some fixed specifications. A product may be produced with properties skewed toward one end of an acceptance range yet show shorter life expectancy. However, by specifying a target value for the critical property and developing manufacturing processes to meet the target value with little deviation, the life expectancy may be much improved.

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His third concept calls for measuring deviations from a given design parameter in terms of the overall life-cycle costs of the product. These costs would include the cost of scrap, rework, inspection, returns, warranty service calls, and/or product replacement. These costs provide guidance regarding the major parameters to be controlled.

The most severe limitation of the Taguchi method is the need for timing with respect to product/process development. The technique can only be

effective when applied early in the design of the product/process system. After the design variables are determined and their nominal values are specified, experimental design may not be cost-effective. Also, though the method has wide-ranging applications, there are situations in which classical techniques are better suited; in simulation studies involving factors that vary in a continuous manner, such as the torsional strength of a shaft as a function of its diam- eter, the Taguchi method may not be a proper choice.

Taguchi strives to attain quality by reducing the variation around the tar- get. In an effort to reduce variations, he searched for techniques that allow variability to be reduced without necessarily eliminating the causes of variation. Often in an industrial setting, totally removing the causes of

variation can be expensive. A no-cost or low-cost solution may be achieved by adjusting the levels and controlling the variation of other factors. This is what Taguchi tries to do through his parameter design approach where there is no cost or low cost in reducing variability. Furthermore, the cost savings realized far exceed the cost of additional experiments needed to reduce variations.

The Taguchi Approach 1025

Limitations

Selecting Design Parameters for Reduced Variation

INGREDIENTS

A. EGG

B. BUTTER

C. MILK

D. FLOUR

E. SUGAR

HOW MUCH/MANY

FIGURE 20–4. Factors and levels for a pound cake experiment.

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The Taguchi method is most effective when applied to experiments with multiple factors. But the concept of selecting the proper levels of design factors, and reducing the variation of performance around the optimum/target value, can be easily illustrated through an example.

Consider a baking process. Assume several bakers are given the same ingredients to bake a pound cake, the object being to produce the best-tasting cake. Within limits, they can adjust the amount of ingredients, but they can only use the ingredients provided. They are to make the best cake within available design parameters. Taguchi’s approach would be to design an experiment considering all baking ingredients and other influencing factors such as baking temperature, baking time, oven type (if a variable), and so on.

The idea is to combine the factors at appropriate levels, each within the respective acceptable range, to produce the best result and yet exhibit minimum variation around the optimum result. Our objective is to determine the right proportions of the five major ingredients—eggs, butter, milk, flour, and sugar—so that the recipe will produce the best cake most of the time. Based on past experience, the working ranges of these factors are established at the levels shown in Figure 20–4. At this point we face the following ques-

tions. How do we determine the right combination? How many experiments do we need to run and in what combination? Figure 20–5 shows a Taguchi experiment flow diagram.

20.5 THE MALCOLM BALDRIGE NATIONAL QUALITY AWARD

To become a world-class competitor, companies need a model to integrate the continuous improvement tools into a system that involves participative

1026 QUALITY MANAGEMENT

BRAINSTORMING

DESIGN EXPERIMENTS

ANALYSIS OF TEST RESULTS

RUN CONFIRMATION TEST WITH OPTIMUM CONDITION

EXPERIMENT 1 EXPERIMENT 2 . . . EXPERIMENT X

1. WHAT ARE WE AFTER? 2. 3. 4. 5.

FIGURE 20–5. A Taguchi experiment flow diagram. Source: Ranjit Roy, A Primer on the Taguchi Method (Dearborn, MI: Society of Manufacturing Engineers, 1990), p. 231. Reproduced by permission.

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cross-functional implementation. In 1987, this need was recognized at the national level with the establishment of the Malcolm Baldrige National Quality Award. The award is pre- sented to those companies that have achieved a level of world-class competition through quality management of products and services.

The criteria for the award include:

● The leadership category: Examines primarily how the senior executives create and sustain a clear and visible quality value system along with a supporting man- agement system to guide all activities of the company. Also examines the senior executives’ and the company’s leadership and support of quality developments both inside and outside the company.

● The strategic planning category: Examines how the company sets strategic directions, and how it determines key action plans. Also examines how the plans are translated into an effective performance management system.

● The customer and market focus category: Examines how the company determines requirements and expectations of customers and markets. Also examines how the company enhances relationships with customers and determines their satisfaction.

● The information and analysis category: Examines the management and effective- ness of the use of data and information to support key company processes and the company’s performance management system.

● The human resource development and management category: Examines how the workforce is enabled to develop and utilize its full potential, aligned with the com- pany’s objectives. Also examines the company’s efforts to build and maintain an environment conducive to performance excellence, full participation, and personal and organizational growth.

● The process management category: Examines the key aspects of process man- agement, including customer-focused design, product, and service delivery processes, support processes, and supplier and partnering processes involving all work units. The category examines how key processes are designed, effectively managed, and improved to achieve better performance.

● The business results category: Examines the company’s performance and improvement in key business areas: customer satisfaction, financial and market- place performance, human resource, supplier and partner performance, and opera- tional performance. Also examined are performance levels relative to competitors.

Some companies that have been honored with the award include IBM, General Motors, Xerox, Kodak, AT&T, Westinghouse, Federal Express, Ritz-Carlton, Armstrong Building Products, and Motorola. Generally speaking, only two or three companies a year win the award.

20.6 ISO 9000

The International Organization for Standardization (ISO), based in Geneva, Switzerland, is a consortium of approximately 100 of the world’s industrial nations. The American

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National Standards Institute (ANSI) represents the United States. ISO 9000 is not a set of standards for products or services, nor is it specific to any one industry. Instead, it is a qual- ity system standard applicable to any product, service, or process anywhere in the world.

The information included in the ISO 9000 series includes:

ISO 9000: This defines the key terms and acts as a road map for the other standards

within the series.

ISO 9001: This defines the model for a quality system when a contractor demonstrates the

capability to design, produce, and install products or services.

ISO 9002: This is a quality system model for quality assurance in production and

installation.

ISO 9003: This is a quality system model for quality assurance in final inspection and

testing.

ISO 9004: This provides quality management guidelines for any organization wishing

to develop and implement a quality system. Guidelines are also available to

determine the extent to which each quality system model is applicable.

There are several myths concerning the ISO 9000 series. First, ISO 9000 is not a European standard, although it may be necessary to do business within the European

Community. ISO 9000 is based on American quality standards that are still being used.

Second, ISO 9000 is not a paperwork nightmare. Although documentation is a necessary requirement, the magnitude of the documentation is less than most people believe. Third,

becoming ISO 9000 certified does not guarantee that your organization will produce qual- ity products or services. Instead, it confirms that the appropriate system is in place.

ISO 9000 is actually a three-part, never-ending cycle including planning, controlling,

and documentation. Planning is required to ensure that the objectives, goals, authority, and responsibility relationships of each activity are properly defined and understood.

Controlling is required to ensure that the goals and objectives are met, and that problems are anticipated or averted through proper corrective actions. Documentation is used pre- dominantly for feedback on how well the quality management system is performing to sat-

isfy customer’s needs and what changes may be necessary.

There always exists the question of how ISO 9000 relates to the Malcolm Baldrige

Award. ISO 9000 requirements fall predominantly into the “quality assurance of products

and services” section of the Malcolm Baldrige Award. It does touch the other six sections

in varying degrees.

ISO 9000 provides minimum requirements needed for certification. The Malcolm

Baldrige National Quality Award (MBNQA) tries to identify the “best in class.”

Organizations wishing to improve quality are encouraged to consider practices of and

benchmark against past recipients of the MBNQA as “role models.”

The International Organization for Standardization has recently developed the ISO

14000 series standards. ISO 14000 is an evolving series that provides business management

with the structure for managing environmental impacts, including the basic management sys-

tem, performance evaluation, auditing, labeling, and life-cycle assessment.

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20.7 QUALITY MANAGEMENT CONCEPTS

The project manager has the ultimate responsibility for quality manage-

ment on the project. Quality management has equal priority with cost and

schedule management. However, the direct measurement of quality may be

the responsibility of the quality assurance department or the assistant proj-

ect manager for quality. For a labor-intensive project, management support (i.e., the project

office) is typically 12–15 percent of the total labor dollars of the project. Approximately 3–5

percent can be attributed to quality management. Therefore, as much as 20–30 percent of

all the labor in the project office could easily be attributed to quality management.

From a project manager’s perspective, there are six quality management concepts that

should exist to support each and every project. They include:

● Quality policy

● Quality objectives

● Quality assurance

● Quality control

● Quality audit

● Quality program plan

Ideally, these six concepts should be embedded within the corporate culture.

The quality policy is a document that is typically created by quality

experts and fully supported by top management. The policy should

state the quality objectives, the level of quality acceptable to the organization, and the

responsibility of the organization’s members for executing the policy and ensuring quality.

A quality policy would also include statements by top management pledging its support to

the policy. The quality policy is instrumental in creating the organization’s reputation and

quality image.

Many organizations successfully complete a good quality policy but immediately sub-

marine the good intentions of the policy by delegating the implementation of the policy to

lower-level managers. The implementation of the quality policy is the responsibility of top

management. Top management must “walk the walk” as well as “talk the talk.” Employees

will soon see through the ruse of a quality policy that is delegated to middle managers

while top executives move onto “more crucial matters that really impact the bottom line.”

A good quality policy will:

● Be a statement of principles stating what, not how

● Promote consistency throughout the organization and across projects

● Provide an explanation to outsiders of how the organization views quality

● Provide specific guidelines for important quality matters

● Provide provisions for changing/updating the policy

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Quality Policy

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Quality objectives are a part of an organization’s quality policy and consist of specific objectives and the time frame for completing them.

The quality objectives must be selected carefully. Selecting objectives that are not naturally possible can cause frustration and disillusionment. Examples of acceptable quality objec- tives might be: to train all members of the organization on the quality policy and objectives before the end of the current fiscal year, to set up baseline measurements of specific processes by the end of the current quarter, to define the responsibility and authority for meeting the organization’s quality objectives down to each member of the organization by the end of the current fiscal year, etc.

Good quality objectives should:

● Be obtainable ● Define specific goals ● Be understandable ● State specific deadlines

Quality assurance is the collective term for the formal activities and managerial processes that attempt to ensure that products and services

meet the required quality level. Quality assurance also includes efforts external to these processes that provide information for improving the internal processes. It is the quality assurance function that attempts to

ensure that the project scope, cost, and time functions are fully integrated. The Project Management Institute Guide to the Body of Knowledge (PMBOK)® refers

to quality assurance as the management section of quality management. This is the area where the project manager can have the greatest impact on the quality of his project. The project manager needs to establish the administrative processes and procedures necessary to ensure and, often, prove that the scope statement conforms to the actual requirements of the customer. The project manager must work with his team to determine which processes they will use to ensure that all stakeholders have confidence that the quality activities will be properly performed. All relevant legal and regulatory requirements must also be met.

A good quality assurance system will:

● Identify objectives and standards ● Be multifunctional and prevention oriented ● Plan for collection and use of data in a cycle of continuous improvement ● Plan for the establishment and maintenance of performance measures ● Include quality audits

Quality control is a collective term for activities and techniques, within the process, that are intended to create specific quality characteristics.

Such activities include continually monitoring processes, identifying and eliminating problem causes, use of statistical process control to reduce the variability and to increase the efficiency of processes. Quality control certifies that the organization’s quality objectives are being met.

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Quality Objectives

Quality Assurance

Quality Control

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The PMBOK® refers to quality control as the technical aspect of quality management. Project team members who have specific technical expertise on the various aspects of the project play an active role in quality control. They set up the technical processes and pro- cedures that ensure that each step of the project provides a quality output from design and development through implementation and maintenance. Each step’s output must conform to the overall quality standards and quality plans, thus ensuring that quality is achieved.

A good quality control system will:

● Select what to control ● Set standards that provide the basis for decisions regarding possible corrective action ● Establish the measurement methods used ● Compare the actual results to the quality standards ● Act to bring nonconforming processes and material back to the standard based on

the information collected ● Monitor and calibrate measuring devices ● Include detailed documentation for all processes

A quality audit is an independent evaluation performed by qualified personnel that ensures that the project is conforming to the project’s

quality requirements and is following the established quality procedures and policies.

A good quality audit will ensure that:

● The planned quality for the project will be met. ● The products are safe and fit for use. ● All pertinent laws and regulations are followed. ● Data collection and distribution systems are accurate and adequate. ● Proper corrective action is taken when required. ● Improvement opportunities are identified.

The quality plan is created by the project manager and project team members by breaking down the project objectives into a work break-

down structure. Using a treelike diagramming technique, the project activ- ities are broken down into lower-level activities until specific quality actions can be identified. The project manager then ensures that these

actions are documented and implemented in the sequence that will meet the customer’s requirements and expectations. This enables the project manager to assure the customer that he has a road map to delivering a quality product or service and therefore will satisfy the customer’s needs.

A good quality plan will:

● Identify all of the organization’s external and internal customers ● Cause the design of a process that produces the features desired by the customer

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Quality Audit

Quality Plan

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● Bring in suppliers early in the process ● Cause the organization to be responsive to changing customer needs ● Prove that the process is working and that quality goals are being met

20.8 THE COST OF QUALITY

To verify that a product or service meets the customer’s requirements requires the measurement of the costs of quality. For simplicity’s sake, the costs can be classified as “the cost of conformance” and “the cost of non-

conformance.” Conformance costs include items such as training, indoctrination, verifica- tion, validation, testing, maintenance, calibration, and audits. Nonconforming costs include items such as scrap, rework, warranty repairs, product recalls, and complaint handling.

Trying to save a few project dollars by reducing conformance costs could prove disastrous. For example, an American company won a contract as a supplier of Japanese parts. The initial contract called for the delivery of 10,000 parts. During inspection and testing at the customer’s (i.e., Japanese) facility, two rejects were discovered. The Japanese returned all 10,000 components to the American supplier stating that this batch was not acceptable. In this example, the nonconformance cost could easily be an order of magni- tude greater than the conformance cost. The moral is clear: Build it right the first time.

Another common method to classify costs includes the following:

● Prevention costs are the up-front costs oriented toward the satisfaction of cus- tomer’s requirements with the first and all succeeding units of product produced without defects. Included in this are typically such costs as design review, training, quality planning, surveys of vendors, suppliers, and subcontractors, process stud- ies, and related preventive activities.

● Appraisal costs are costs associated with evaluation of product or process to ascertain how well all of the requirements of the customer have been met. Included in this are typically such costs as inspection of product, lab test, vendor control, in-process test- ing, and internal–external design reviews.

● Internal failure costs are those costs associated with the failure of the processes to make products acceptable to the customer, before leaving the control of the orga- nization. Included in this area are scrap, rework, repair, downtime, defect evalua- tion, evaluation of scrap, and corrective actions for these internal failures.

● External failure costs are those costs associated with the determination by the cus- tomer that his requirements have not been satisfied. Included are customer returns and allowances, evaluation of customer complaints, inspection at the customer, and customer visits to resolve quality complaints and necessary corrective action.

Figure 20–6 shows the expected results of the total quality management system on quality costs. Prevention costs are expected to actually rise as more time is spent in pre- vention activities throughout the organization. As processes improve over the long run,

1032 QUALITY MANAGEMENT

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appraisal costs will go down as the need to inspect in quality decreases. The biggest savings will come from the internal failure areas of rework, scrap, reengineering, redo, and so on. The additional time spent in up-front design and development will really pay off here. And, finally, the external costs will also come down as processes yield first-time quality on a reg- ular basis. The improvements will continue to affect the company on a long-term basis in both improved quality and lower costs. Also, as project management matures, there should be further decreases in the cost of both maintaining quality and developing products.

Figure 20–6 shows that prevention costs can increase. This is not always the case.

Prevention costs actually decrease without sacrificing the purpose of prevention if we can

identify and eliminate the costs associated with waste, such as waste due to

● Rejects of completed work

● Design flaws

● Work in progress

● Improperly instructed manpower

● Excess or noncontributing management (who still charge time to the project)

● Improperly assigned manpower

● Improper utilization of facilities

● Excessive expenses that do not necessarily contribute to the project (i.e., unnecessary

meetings, travel, lodgings, etc.)

The Cost of Quality 1033

EXTERNAL FAILURE

INTERNAL FAILURE

APPRAISAL

PREVENTION

CURRENT

SAVINGS

FUTURE 0

100

FIGURE 20–6. Total quality cost.

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Another important aspect of Figure 20–6 is that 50 percent or more of the total cost of

quality can be attributed to the internal and external failure costs. Complete elimination of

failures may seem like an ideal solution but may not be cost-effective. As an example, see

Figure 20–7. There are assumptions in the development of this figure. First, the cost of fail-

ure (i.e., nonconformance) approaches zero as defects become fewer and fewer. Second, the

conformance costs of appraisal and prevention approach infinity as defects become fewer

and fewer.

If the ultimate goal of a quality program is to continuously improve quality, then from

a financial standpoint, quality improvement may not be advisable if the positive economic

return becomes negative. Juran argued that as long as the per unit cost for prevention and

appraisal were less expensive than nonconformance costs, resources should be assigned to

prevention and appraisal. But when prevention and appraisal costs begin to increase the per

unit cost of quality, then the policy should be to maintain quality. The implication here is

that zero defects may not be a practical solution since the total cost of quality would not

be minimized.

Figure 20–6 shows that the external failure costs are much lower than the internal fail-

ure costs. This indicates that most of the failures are being discovered before they leave the

1034 QUALITY MANAGEMENT

100% GOOD100% DEFECTIVE

DEFECT RATE

OPTIMAL COQ

COST OF QUALITY PER GOOD UNIT

OF PRODUCT

TO ` TO `

TOTAL QUALITY COSTS: CONFORMANCE AND NONCONFORMANCE

INTERNAL AND EXTERNAL FAILURE COSTS

MINIMAL COST OF QUALITY

APPRAISAL AND PREVENTION COSTS

FIGURE 20–7. Minimizing the costs of quality (COQ).

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functional areas or plants. This is particularly important if we consider the life-cycle cost

model discussed in Section 14.19. We showed that typical life-cycle costs are:

● R&D: 12 percent ● Acquisition: 28 percent ● Operations and support: 60 percent

Since 60 percent of the life-cycle cost occurs after the product is put into service, then small increases in the R&D and acquisition areas could generate major cost savings in operation and support due to better design, higher quality, less maintenance, and so forth.

20.9 THE SEVEN QUALITY CONTROL TOOLS3

Over the years, statistical methods have become prevalent throughout business, industry, and science. With the availability of advanced, auto- mated systems that collect, tabulate, and analyze data, the practical appli-

cation of these quantitative methods continues to grow. More important than the quantitative methods themselves is their impact on the basic

philosophy of business. The statistical point of view takes decision-making out of the sub- jective autocratic decision-making arena by providing the basis for objective decisions based on quantifiable facts. This change provides some very specific benefits:

● Improved process information ● Better communication ● Discussion based on facts ● Consensus for action ● Information for process changes

Statistical process control (SPC) takes advantage of the natural characteristics of any process. All business activities can be described as specific processes with known toler- ances and measurable variances. The measurement of these variances and the resulting information provide the basis for continuous process improvement. The tools presented here provide both a graphical and measured representation of process data. The systematic application of these tools empowers business people to control products and processes to become world-class competitors.

The basic tools of statistical process control are data figures, Pareto analysis, cause- and-effect analysis, trend analysis, histograms, scatter diagrams, and process control charts. These basic tools provide for the efficient collection of data, identification of patterns in the data, and measurement of variability. Figure 20–8 shows the relationships among these seven tools and their use for the identification and analysis of improvement opportunities. We will review these tools and discuss their implementation and applications.

The Seven Quality Control Tools 1035

3. This section is taken from H. K. Jackson and N. L. Frigon, Achieving the Competitive Edge (New York: Wiley, 1996), Chapters 6 and 7. Reproduced by permission.

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Data tables, or data arrays, provide a systematic method for collecting

and displaying data. In most cases, data tables are forms designed for

the purpose of collecting specific data. These tables are used most frequently where data

are available from automated media. They provide a consistent, effective, and econom-

ical approach to gathering data, organizing them for analysis, and displaying them for pre-

liminary review. Data tables sometimes take the form of manual check sheets where

automated data are not necessary or available. Data figures and check sheets should be

designed to minimize the need for complicated entries. Simple-to-understand, straight-

forward tables are a key to successful data gathering. Figure 20–9 is an example of an attribute (pass/fail) data figure for the correctness of

invoices. From this simple check sheet, several data points become apparent. The total

1036 QUALITY MANAGEMENT

IDENTIFICATION ANALYSIS

DATA TABLES

PARETO ANALYSIS

CAUSE AND

EFFECT ANALYSIS

TREND ANALYSIS

HISTOGRAMS

CONTROL CHARTS

SCATTER DIAGRAMS

FIGURE 20–8. The seven quality control tools.

Data Tables

SUPPLIER

A B C D TOTAL DEFECT

INCORRECT INVOICE

INCORRECT INVENTORY

DAMAGED MATERIAL

INCORRECT TEST DOCUMENTATION

TOTAL 13 6 7 8 34

FIGURE 20–9. Check sheet for material receipt and inspection.

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number of defects is 34. The highest number of defects is from supplier A, and the most frequent defect is incorrect test documentation. We can subject these data to further analy- sis by using Pareto analysis, control charts, and other statistical tools.

In this check sheet, the categories represent defects found during the material receipt and inspection function. The following defect categories provide an explanation of the check sheet:

● Incorrect invoices: The invoice does not match the purchase order. ● Incorrect inventory: The inventory of the material does not match the invoice. ● Damaged material: The material received was damaged and rejected.

● Incorrect test documentation: The required supplier test certificate was not received and the material was rejected.

After identifying a problem, it is necessary to determine its cause. The cause-and-effect relationship is at times obscure. A considerable amount

of analysis often is required to determine the specific cause or causes of the problem. Cause-and-effect analysis uses diagramming techniques to identify the relationship

between an effect and its causes. Cause-and-effect diagrams are also known as fishbone diagrams. Figure 20–10 demonstrates the basic fishbone diagram. Six steps are used to perform a cause-and-effect analysis.

Step 1. Identify the problem. This step often involves the use of other statistical process control tools, such as Pareto analysis, histograms, and control charts, as well as brain- storming. The result is a clear, concise problem statement.

Step 2. Select interdisciplinary brainstorming team. Select an interdisciplinary team, based on the technical, analytical, and management knowledge required to determine the causes of the problem.

The Seven Quality Control Tools 1037

Cause-and-Effect Analysis

ENVIRONMENTMEASUREMENT MEN/ WOMEN (PERSONNEL)

MATERIALMACHINE METHOD

PROBLEM STATEMENT

CAUSE

EFFECT

FIGURE 20–10. Cause-and-effect diagram.

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Step 3. Draw problem box and prime arrow. The problem contains the problem statement being evaluated for cause and effect. The prime arrow functions as the foundation for their major categories.

Step 4. Specify major categories. Identify the major categories contributing to the problem stated in the problem box. The six basic categories for the primary causes of the problems are most frequently personnel, method, materials, machinery, measurements, and environ- ment, as shown in Figure 20–10. Other categories may be specified, based on the needs of the analysis.

Step 5. Identify defect causes. When you have identified the major causes contributing to the problem, you can determine the causes related to each of the major categories. There are three approaches to this analysis: the random method, the systematic method, and the process analysis method.

Random method. List all six major causes contributing to the problem at the same time. Identify the possible causes related to each of the categories, as shown in Figure 20–11.

Systematic method. Focus your analysis on one major category at a time, in descend- ing order of importance. Move to the next most important category only after completing the most important one. This process is diagrammed in Figure 20–12.

Process analysis method. Identify each sequential step in the process and perform cause-and-effect analysis for each step, one at a time. Figure 20–13 represents this approach.

Step 6. Identify corrective action. Based on (1) the cause-and-effect analysis of the problem and (2) the determination of causes contributing to each major category, identify corrective action. The corrective action analysis is performed in the same manner as the cause-and- effect analysis. The cause-and-effect diagram is simply reversed so that the problem box becomes the corrective action box. Figure 20–14 displays the method for identifying cor- rective action.

1038 QUALITY MANAGEMENT

ENVIRONMENTMEASUREMENT PERSONNEL

MATERIALMACHINE METHOD

PROBLEM

WORN CUTTER

EXCESSIVE GEAR WEAR

WORN CALIPERS

WRONG SPECIFICATIONS

SPEED TOO SLOW

TOO FAST

WRONG SEQUENCE

POOR PLANNING

POOR TRAINING BAD ATTITUDE

IMPAIRED VISION

LIGHT EXCESSIVE

INSUFFICIENT TEMP

TOO LOW

TOO HIGH

MATERIAL DAMAGED

INCORRECT MATERIAL

FIGURE 20–11. Random method.

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A histogram is a graphical representation of data as a frequency distrib- ution. This tool is valuable in evaluating both attribute (pass/fail) and

variable (measurement) data. Histograms offer a quick look at the data at a single point in time; they do not display variance or trends over time. A histogram displays how the cumu- lative data look today. It is useful in understanding the relative frequencies (percentages) or frequency (numbers) of the data and how those data are distributed. Figure 20–15 illustrates a histogram of the frequency of defects in a manufacturing process.

A Pareto diagram is a special type of histogram that helps us to iden- tify and prioritize problem areas. The construction of a Pareto diagram

may involve data collected from data figures, maintenance data, repair data, parts scrap rates, or other sources. By identifying types of nonconformity from any of these data

sources, the Pareto diagram directs attention to the most frequently occur- ring element.

There are three uses and types of Pareto analysis. The basic Pareto analysis identifies the vital few contributors that account for most quality

The Seven Quality Control Tools 1039

MACHINE

INCORRECT DIAMETER

WORN CUTTER

EXCESSIVE GEAR WEAR

SPEED

TOO SLOW

TOO FAST

FIGURE 20–12. Systematic method.

ENVIRONMENTMEASUREMENT PERSONNEL

MATERIALMACHINE METHOD

INCORRECT DIAMETER

MEASURE DIAMETER

LATHE SHAFTCUT STOCK

FIGURE 20–13. Process analysis method.

Histogram

Pareto Analysis

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problems in any system. The comparative Pareto analysis focuses on any number of pro- gram options or actions. The weighted Pareto analysis gives a measure of significance to factors that may not appear significant at first—such additional factors as cost, time, and criticality.

The basic Pareto analysis chart provides an evaluation of the most frequent occurrences for any given data set. By applying the Pareto analysis steps to the material receipt and inspection process described in Figure 20–16, we can produce the basic Pareto analysis demonstrated in Figure 20–17. This basic Pareto analysis quantifies and graphs the frequency of occurrence for material receipt and inspection and further identifies the most significant, based on frequency.

A review of this basic Pareto analysis for frequency of occurrences indicates that supplier A is experiencing the most rejections with 38 percent of all the failures.

Pareto analysis diagrams are also used to determine the effect of corrective action, or to analyze the difference between two or more processes and methods. Figure 20–18

1040 QUALITY MANAGEMENT

MEASUREMENT ENVIRONMENTPERSONNEL

MACHINE MATERIALMETHOD

CORRECTIVE ACTION

FIGURE 20–14. Identify corrective action.

100

120

F R

E Q

U E

N C

RUN-UP TEST

SYSTEM INTEGRATION

MOTOR STATIC TEST

MOTOR INTEGRATION

MANUFACTURING PROCESS FAILURES

FIGURE 20–15. Histogram for variables.

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displays the use of this Pareto method to assess the difference in defects after corrective action.

Another pictorial representation of process control data is the scatter plot or scatter diagram. A scatter diagram organizes data using two

variables: an independent variable and a dependent variable. These data are then recorded on a simple graph with X and Y coordinates showing the relationship between the variables. Figure 20–19 displays the relationship between two of the data elements from solder qualification test scores. The

The Seven Quality Control Tools 1041

MATERIAL RECEIPT AND INSPECTION FREQUENCY OF FAILURES

SUPPLIER

FAILING FREQUENCY

PERCENT FAILING

CUMULATIVE PERCENT

100

FIGURE 20–16. Basic Pareto analysis.

Scatter Diagrams

A D C B

SUPPLIERS

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

F R

E Q

U E

N C

P E

R C

E N

T A

G E

0.38 0.63

0.83

1.00

FIGURE 20–17. Basic Pareto analysis.

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independent variable, experience in months, is listed on the X axis. The dependent variable is the score, which is recorded on the Y axis.

These relationships fall into several categories, as shown in Figure 20–20. In the first scatter plot there is no correlation—the data points are widely scattered with no apparent pattern. The second scatter plot shows a curvilinear correlation demonstrated by the U shape of the graph. The third scatter plot has a negative correlation, as indicated by the downward slope. The final scatter plot has a positive correlation with an upward slope.

From Figure 20–19 we can see that the scatter plot for solder certification testing is somewhat curvilinear. The least and the most experienced employees scored highest, whereas those with an intermediate level of experience did relatively poorly. The next tool, trend analysis, will help clarify and quantify these relationships.

1042 QUALITY MANAGEMENT

100 65%

BEFORE CORRECTIVE ACTION

C A

P A

C IT

O R

S O

L D

E R

B E

N T

L E

A D

S H

O R

O T

H E

R S

100 15%

AFTER CORRECTIVE ACTION

S O

L D

E R

S H

O R

B E

N T

L E

A D

C A

P A

C IT

O R

O T

H E

R S

FIGURE 20–18. Comparative Pareto analysis.

EXPERIENCE IN MONTHS

6 21 28 36 43 46 48 58 69 70 73 86 96 112 114 119 X0.50

0.60

0.70

0.80

0.90

1.00

S C

O R

E (

% )

FIGURE 20–19. Solder certification test scores.

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Trend analysis is a statistical method for determining the equation that best fits the data in a scatter plot. Trend analysis quantifies the rela-

tionships of the data, determines the equation, and measures the fit of the equation to the data. This method is also known as curve fitting or least squares.

Trend analysis can determine optimal operating conditions by providing an equation that describes the relationship between the dependent (output) and independent (input) variables. An example is the data set concerning experience and scores on the solder cer- tification test (see Figure 20–21).

The equation of the regression line, or trend line, provides a clear and understandable measure of the change caused in the output variable by every incremental change of the input or independent variable. Using this principle, we can predict the effect of changes in the process.

One of the most important contributions that can be made by trend analysis is fore- casting. Forecasting enables us to predict what is likely to occur in the future. Based on the regression line we can forecast what will happen as the independent variable attains val- ues beyond the existing data.

The use of control charts focuses on the prevention of defects, rather than their detection and rejection. In business, government, and industry,

economy and efficiency are always best served by prevention. It costs much more to produce an unsatisfactory product or service than it does to produce a satisfactory one. There are

The Seven Quality Control Tools 1043

NO CORRELATION X

CURVILINEAR CORRELATION

NEGATIVE CORRELATION X

POSITIVE CORRELATION

FIGURE 20–20. Scatter plot correlation.

Trend Analysis

Control Charts

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many costs associated with producing unsatisfactory goods and services. These costs are in labor, materials, facilities, and the loss of customers. The cost of producing a proper product can be reduced significantly by the application of statistical process control charts.

Control Charts and the Normal Distribution

The construction, use, and interpretation of control charts is based on the normal statisti- cal distribution as indicated in Figure 20–22. The centerline of the control chart represents the average or mean of the data (X�). The upper and lower control limits (UCL and LCL), respectively, represent this mean plus and minus three standard deviations of the data (X� � 3s). Either the lowercase s or the Greek letter (sigma) represents the standard devia- tion for control charts.

The normal distribution and its relationship to control charts is represented on the right of the figure. The normal distribution can be described entirely by its mean and stan- dard deviation. The normal distribution is a bell-shaped curve (sometimes called the Gaussian distribution) that is symmetrical about the mean, slopes downward on both sides to infinity, and theoretically has an infinite range. In the normal distribution 99.73 percent of all measurements lie within X� � 3s and X� � 3s; this is why the limits on control charts are called three-sigma limits.

Companies like Motorola have embarked upon a six-sigma limit rather than a three- sigma limit. The benefit is shown in Table 20–4. With a six-sigma limit, only two defects per billion are allowed. Maintaining a six-sigma limit can be extremely expensive unless the cost can be spread out over, say, 1 billion units produced.

Control chart analysis determines whether the inherent process variability and the process average are at stable levels, whether one or both are out of statistical control (not

1044 QUALITY MANAGEMENT

CERTIFICATION SCORE

0.60 0.75

S O

L D

E R

Q U

A L IT

0.8

0.85

0.9

0.95

1 Y

0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 X

FIGURE 20–21. Scatter plot solder quality and certification score.

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stable), or whether appropriate action needs to be taken. Another purpose of using control charts is to distinguish between the inherent, random variability of a process and the vari- ability attributed to an assignable cause. The sources of random variability are often referred to as common causes. These are the sources that cannot be changed readily, with- out significant restructuring of the process. Special cause variability, by contrast, is subject to correction within the process under process control.

● Common cause variability or variation: This source of random variation is always present in any process. It is that part of the variability inherent in the process itself. The cause of this variation can be corrected only by a management decision to change the basic process.

The Seven Quality Control Tools 1045

TABLE 20–4. ATTRIBUTES OF THE NORMAL (STANDARD) DISTRIBUTION

Defective Specification Range Percent Parts per (in � Sigmas) within Range Billion

1 68.27 317,300,000 2 95.45 45,400,000 3 99.73 2,700,000 4 99.9937 63,000 5 99.999943 57 6 99.9999998 2

XXXXXXXXXXXXX XXXXXXXX XXXXX XXXX XXX XX

XXXXXXXX XXXXXX XXXXX XXX XX X

UPPER SPECIFICATION LIMIT

UPPER CONTROL LIMIT

CENTER LINE OR AVERAGE

LOWER SPECIFICATION LIMIT

LOWER CONTROL LIMIT

USL

UCL

LCL

LSL

FIGURE 20–22. The control chart and the normal curve.

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● Special cause variability or variation: This variation can be controlled at the local or operational level. Special causes are indicated by a point on the control chart that is beyond the control limit or by a persistent trend approaching the control limit.

To use process control measurement data effectively, it is important to understand the concept of variation. No two product or process characteristics are exactly alike, because any process contains many sources of variability. The differences between products may be large, or they may be almost immeasurably small, but they are always present. Some sources of variation in the process can cause immediate differences in the product, such as a change in suppliers or the accuracy of an individual’s work. Other sources of variation, such as tool wear, environmental changes, or increased administrative control, tend to cause changes in the product or service only over a longer period of time.

To control and improve a process, we must trace the total variation back to its sources: common cause and special cause variability. Common causes are the many sources of vari- ation that always exist within a process that is in a state of statistical control. Special causes (often called assignable causes) are any factors causing variation that cannot be adequately explained by any single distribution of the process output, as would be the case if the process were in statistical control. Unless all the special causes of variation are identified and corrected, they will continue to affect the process output in unpredictable ways.

The factors that cause the most variability in the process are the main factors found on cause-and-effect analysis charts: people, machines, methodology, materials, measurement, and environment. These causes can either result from special causes or be common causes inherent in the process.

● The theory of control charts suggests that if the source of variation is from chance alone, the process will remain within the three-sigma limits.

● When the process goes out of control, special causes exist. These need to be inves- tigated, and corrective action must be taken.

Control Chart Types

Just as there are two types of data, continuous and discrete, there are two types of control charts: variable charts for use with continuous data and attribute charts for use with discrete data. Each type of control chart can be used with specific types of data. Table 20–5 provides a brief overview

of the types of control charts and their applications. Variables Charts. Control charts for variables are powerful tools that we can use when

measurements from a process are variable. Examples of variable data are the diameter of a bearing, electrical output, or the torque on a fastener.

As shown in Table 20–5, XX� and R charts are used to measure control processes whose characteristics are continuous variables such as weight, length, ohms, time, or volume. The p and np charts are used to measure and control processes displaying attribute characteristics in a sample. We use p charts when the number of failures is expressed as a fraction, or np charts when the failures are expressed as a number. The c and u charts are used to measure

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the number or portion of defects in a single item. The c control chart is applied when the sample size or area is fixed, and the u chart when the sample size or area is not fixed.

Attribute Charts. Although control charts are most often thought of in terms of variables, there are also versions for attributes. Attribute data have only two values (conforming/non- conforming, pass/fail, go/no-go, present/absent), but they can still be counted, recorded, and analyzed. Some examples are: the presence of a required label, the installation of all required fasteners, the presence of solder drips, or the continuity of an electrical circuit. We also use attribute charts for characteristics that are measurable, if the results are recorded in a simple yes/no fashion, such as the conformance of a shaft diameter when measured on a go/no-go gauge, or the acceptability of threshold margins to a visual or gauge check.

It is possible to use control charts for operations in which attributes are the basis for inspection, in a manner similar to that for variables but with certain differences. If we deal with the fraction rejected out of a sample, the type of control chart used is called a p chart. If we deal with the actual number rejected, the control chart is called an np chart. If arti- cles can have more than one nonconformity, and all are counted for subgroups of fixed size, the control chart is called a c chart. Finally, if the number of nonconformities per unit is the quantity of interest, the control chart is called a u chart.

The power of control charts (Shewhart techniques) lies in their ability to determine if the cause of variation is a special cause that can be affected at the process level, or a com- mon cause that requires a change at the management level. The information from the control chart can then be used to direct the efforts of engineers, technicians, and managers to achieve preventive or corrective action.

The use of statistical control charts is aimed at studying specific ongoing processes in order to keep them in satisfactory control. By contrast, downstream inspection aims to identify defects. In other words, control charts focus on prevention of defects rather than detection and rejection. It seems reasonable, and it has been confirmed in practice, that economy and efficiency are better served by prevention rather than detection.

The Seven Quality Control Tools 1047

TABLE 20–5. TYPES OF CONTROL CHARTS AND APPLICATIONS

Variables Charts Attributes Charts

X and R charts: To observe changes in the mean p chart: For the fraction of attributes nonconforming or and range (variance) of a process. defective in a sample of varying size.

X and s charts: For a variable average and np charts: For the number of attributes nonconforming standard deviation. or defective in a sample of constant size.

X and s2 charts: for a variable average and c charts: For the number of attributes nonconforming variance. or defects in a single item within a subgroup,

lot, or sample area of constant size.

u charts: For the number of attributes nonconforming or defects in a single item within a subgroup, lot, or sample area of varying size.

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Control Chart Components

All control charts have certain features in common (Figure 20–23). Each control chart has a centerline, statistical control limits, and the calculated attribute or control data. Some control charts also contain specification limits.

The centerline is a solid (unbroken) line that represents the mean or arithmetic average of the measurements or counts. This line is also referred to as the X bar line (X�). There are two statistical control limits: the upper control limit for values greater than the mean and the lower control limit for values less than the mean.

Specification limits are used when specific parametric requirements exist for a process, product, or operation. These limits usually apply to the data and are the pass/fail criteria for the operation. They differ from statistical control limits in that they are pre- scribed for a process, rather than resulting from the measurement of the process.

The data element of control charts varies somewhat among variable and attribute con- trol charts. We will discuss specific examples as a part of the discussion on individual control charts.

Control Chart Interpretation

There are many possibilities for interpreting various kinds of patterns and shifts on control charts. If properly interpreted, a control chart can tell us much more than whether the process is in or out of control. Experience and training can help extract clues regarding process behavior, such as that

shown in Figure 20–24. Statistical guidance is invaluable, but an intimate knowledge of the process being studied is vital in bringing about improvements.

A control chart can tell us when to look for trouble, but it cannot by itself tell us where to look, or what cause will be found. Actually, in many cases, one of the greatest

1048 QUALITY MANAGEMENT

UPPER SPECIFICATION LIMIT

UPPER CONTROL LIMIT

LOWER SPECIFICATION LIMIT

LOWER CONTROL LIMIT

USL

UCL

LCL

LSL

DATA

CENTERLINE OR AVERAGE

FIGURE 20–23. Control chart elements.

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benefits from a control chart is that it tells when to leave a process alone. Sometimes the variability is increased unnecessarily when an operator keeps trying to make small corrections, rather than letting the natural range of variability stabilize. The following paragraphs describe some of the ways the underlying distribution patterns can behave or misbehave.

Runs. When several successive points line up on one side of the central line, this pat- tern is called a run. The number of points in that run is called the length of the run. As a rule of thumb, if the run has a length of seven points, there is an abnormality in the process. Figure 20–25 demonstrates a run.

The Seven Quality Control Tools 1049

RUNS

RUN OF 4

TRENDS PERIODICITY

PROCESS

AVERAGE

HUGGING OF THE CENTER LINE

FIGURE 20–24. Control chart interpretation.

UCL

PROCESS AVERAGE

LCL

FIGURE 20–25. Process run.

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Trends. If there is a continued rise of all in a series of points, this pattern is called a trend. In general, if seven consecutive points continue to rise or fall, there is an abnormal- ity. Often, the points go beyond one of the control limits before reaching seven. Figure 20–26 demonstrates a trend.

Periodicity. Points that show the same pattern of change (rise or fall) over equal inter- vals denote periodicity. Figure 20–27 demonstrates periodicity.

Hugging the Centerline or Control Limit. Points on the control chart that are close to the central line, or to the control limit, are said to hug the line. Often, in this situation, a different type of data or data from different factors have been mixed into the subgroup. In such cases it is necessary to change the subgrouping, reassemble the data, and redraw the control chart. To decide whether there is hugging of the centerline, draw two lines on the control chart, one between the centerline and the UCL and the other between the center- line and the LCL. If most of the points are between these two lines, there is an abnormality. To see whether there is hugging of one of the control limits, draw a line two-thirds of the

1050 QUALITY MANAGEMENT

UCL

PROCESS AVERAGE

LCL

FIGURE 20–26. Control chart trends.

UCL

PROCESS AVERAGE

LCL

FIGURE 20–27. Control chart periodicity.

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distance between the centerline and each of the control lines. There is abnormality if 2 out of 3 points, 3 out of 7 points, or 4 out of 10 points lie within the outer one-third zone. The abnormalities should be evaluated for their cause(s) and the corrective action taken. Figure 20–28 demonstrates data hugging the LCL.

Out of Control. An abnormality exists when data points exceed either the upper or lower control limits. Figure 20–29 illustrates this occurrence.

In Control. No obvious abnormalities appear in the control chart. Figure 20–30 demonstrates this desirable process state.

The Seven Quality Control Tools 1051

UCL

PROCESS AVERAGE

LCL

1/3

FIGURE 20–28. Hugging the centerline.

UCL

PROCESS AVERAGE

LCL

PROCESS ELEMENT BELOW LOWER CONTROL LIMIT

FIGURE 20–29. Control chart out of control.

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20.10 PROCESS CAPABILITY (CP)

Process capability, for a stable manufacturing process, is the ability to produce a product that conforms to design specifications. Because day-to-day variations can occur during manufacturing, process capability is a statement about product uniformity. Process capa- bility, as measured by the quality characteristics of the product of the process, is expressed as the mean value plus or minus three standard deviations. Mathematically:

CP � � USL

�

LSL �

It is desirable for CP to be greater than one. This implies that the process of three- sigma limit is well within the customer’s specification limits, as shown in Figure 20–31.

The following are generally accepted rules for CP:

● CP 1.33: The process is well within the customer’s specifications requirements. ● 1.33 � CP 1.0: The process is marginally acceptable. The process may not

completely satisfy the customer’s requirements. Improvements in process control are needed.

● CP � 1.0: The process is unacceptable as is. Improvements are mandatory.

To illustrate the use of the formula, assume that your customer’s requirements are to produce metal rods that are 10 inches � .05 inches. Your manufacturing process has a sigma of 0.008.

CP � � USL

�

LSL �

� � 0.

(

�

.00

)

05 �

� 2.08

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UCL

PROCESS AVERAGE

LCL

FIGURE 20–30. Process in control.

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Looking at Figure 20–31, CP is the relative spread of the process width within the specification width. Unfortunately, the spread of the process capability, even for very good values, could be poorly positioned within the specification width. The process width could easily be hugging either the USL or LSL. Today, process capability is measured by both CP and CPk, where CPk is the capability index with correction (k) for noncentrality. According to Dr. Frank Anbari, the formula for CPk can be simplified as:

CPk � � � where CL is the center of the process, that is, its average.

CL � Closest specification limit ��

Process Capability (CP) 1053

LSL USL

CP ,1

CP 5 USL 2 LSL

CP 51

CP .1

6s 63s

63s

FIGURE 20–31. Calculating process capability.

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Dr. Anbari postulates that the CP provides an upper limit for the CPk, which is reached when the process is fully centered around the nominal dimension.

20.11 ACCEPTANCE SAMPLING

Acceptance sampling is a statistical process of evaluating a portion of a lot for the purpose of accepting or rejecting the entire lot. It is an attempt to monitor the quality of the incoming product or material after the com-

pletion of production. The alternatives to developing a sampling plan would be 100% inspection and 0%

inspection. The costs associated with 100% are prohibitive, and the risks associated with 0% inspection are likewise large. Therefore, some sort of compromise is needed. The three most commonly used sampling plans are:

● Single sampling: This is the acceptance or rejection of a lot based upon one sam- pling run.

● Double sampling: A small sample size is tested. If the results are not conclusive, then a second sample is tested.

● Multiple sampling: This process requires the sampling of several small lots.

Regardless of what type of sampling plan is chosen, sampling errors can occur. A shipment of good-quality items can be rejected if a large portion of defective units are selected at random. Likewise, a bad-quality shipment can be accepted if the tested sample contains a disproportionately large number of quality items. The two major risks are:

● Producer’s risk: This is called the (alpha) risk or type I error. This is the risk to the producer that a good lot will be rejected.

● Consumer’s risk: This is called the � (beta) risk or type II error. This is the con- sumer’s risk of accepting a bad lot.

When a lot is tested for quality, we can look at either “attribute” or “variable” quality data. Attribute quality data are either quantitative or qualitative data for which the product or service is designed and built. Variable quality data are quantitative, continuous mea- surement processes to either accept or reject the lot. The exact measurement can be either destructive or nondestructive testing.

20.12 IMPLEMENTING SIX SIGMA4

Six Sigma is a business initiative first espoused by Motorola in the early

1990s. Recent Six Sigma success stories, primarily from the likes of

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4. Adapted from Forrest W. Breyfogle, III, Implementing Six Sigma (New York: Wiley, 1999), pp. 5–7.

PMBOK® Guide, 5th Edition Chapter 8 Introduction

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General Electric, Sony, AlliedSignal, and Motorola, have captured the attention of Wall

Street and have propagated the use of this business strategy. The Six Sigma strategy

involves the use of statistical tools within a structured methodology for gaining the knowl-

edge needed to create products and services better, faster, and less expensively than the

competition. The repeated, disciplined application of the master strategy on project after

project, where the projects are selected based on key business issues, is what drives dollars

to the bottom line, resulting in increased profit margins and impressive return on investment

from the Six Sigma training. The Six Sigma initiative has typically contributed an average

of six figures per project to the bottom line. The Six Sigma project executioners are some-

times called “black belts,” “top guns,” “change agents,” or “trailblazers,” depending on the

company deploying the strategy. These people are trained in the Six Sigma philosophy and

methodology and are expected to accomplish at least four projects annually, which should

deliver at least $500,000 annually to the bottom line. A Six Sigma initiative in a company

is designed to change the culture through breakthrough improvement by focusing on out-

of-the-box thinking in order to achieve aggressive, stretch goals. Ultimately, Six Sigma, if

deployed properly, will infuse intellectual capital into a company and produce unprece-

dented knowledge gains that translate directly into bottom line results.5

Former General Electric (GE) CEO Jack Welch described Six Sigma as “the most chal-

lenging and potentially rewarding initiative we have ever undertaken at General Electric.”

The GE 1997 annual report stated that Six Sigma delivered more than $300 million to its

operating income. In 1998, they expected to more than double this operating profit impact.

GE listed in its annual report the following to exemplify these Six Sigma benefits:

● Medical Systems described how Six Sigma designs have produced a 10-fold increase in the life of CT scanner X-ray tubes—increasing the “uptime” of these machines and the profitability and level of patient care given by hospi- tals and other health care providers.

● Superabrasives—our industrial diamond business—described how Six Sigma quadrupled its return on investment and, by improving yields, is giving it a full decade’s worth of capacity despite growing volume—without spending a nickel on plant and equipment capacity.

● Our railcar leasing business described 62% reduction in turnaround time at its repair shops: an enormous productivity gain for our railroad and shipper cus- tomers and for a business that’s now two or three times faster than its nearest rival because of Six Sigma improvements. In the next phase across the entire shop network, black belts and green belts, working with their teams, redesigned the overhaul process, resulting in a 50% further reduction in cycle time.

● The plastics business, through rigorous Six Sigma process work, added 300 million pounds of new capacity (equivalent to a “free plant”), saved $400 mil- lion in investment and will save another $400 by 2000.6

Implementing Six Sigma 1055

5. Information in this paragraph was contributed by J. Kiemele, Ph.D., of Air Academy Associates.

6. 1998 GE Annual Report.

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20.13 LEAN SIX SIGMA AND DMAIC7

Six Sigma is a quality initiative that was born at Motorola in the 1980s. The primary focus of the Six Sigma process improvement methodology, also known as DMAIC, is to reduce defects that are defined by the customer of the process. This customer can be internal or external. It is whoever is in receipt of the process output. Defects are removed by careful examination from a Six Sigma team made up of cross-functional positions having different lines of sight into the process. The team follows the rigor of the define, measure, analyze, improve, and control (DMAIC) methodology to determine the root cause(s) of the defects. The team uses data and appropriate numerical and graphical analysis tools to raise awareness of process variables gen- erating defects. Data collection and analysis is at the core of Six Sigma. “Extinction by instinct” is the phrase often used to describe intuitive decision-making and performance analysis. It has been known to generate rework, frustration, and ineffective solutions. Six Sigma prescribes dis- ciplined gathering and analysis of data to effectively identify solutions.

Lean manufacturing is another aspect of process improvement derived mostly from the Toyota Production System (TPS). The primary focus of lean is to remove waste and improve process efficiency. Lean is often linked with Six Sigma because both emphasize the importance of minimal process variation. Lean primarily consists of a set of tools designed to assist in the identification and steady elimination of waste (muda), allowing for the improvement of quality as well as cycle time and cost reduction. To solve the prob- lem of waste, lean manufacturing utilizes several tools. These include accelerated DMAIC projects known as kaizen events, cause-and-effect analysis using “five whys” and error proofing with a technique known as poka-yoke.

Kaizen Events. The source of the word kaizen is Japanese: Kai (take apart) and Zen (make good). This is an action-oriented approach to process improvement. Team members devote 3–5 consecutive days to quickly work through the DMAIC methodology in a work- shop fashion.

Five Whys. This technique is used to move past symptoms of problems and drill down to the root causes. With every answer comes a new question until you’ve gotten to the bottom of the problem. Five is a rule of thumb. Sometimes you’ll only need three questions, other times it might take seven. The goal is to identify the root cause of process defects and waste.

Poka-Yoke. The source of this technique is Japanese: Yokeru (to avoid) and Poka (inad- vertent errors). There are three main principles of poka-yoke. (1) Make wrong actions more difficult. (2) Make mistakes obvious to the person so that the mistake can be corrected. (3) Detect errors so that downstream consequences can be prevented by stopping the flow or other corrective action. The philosophy behind this technique is that it’s good to do things right the first time, but it is even better to make it impossible to do it wrong the first time.

When Six Sigma and lean manufacturing are integrated, the project team utilizes the project management methodology to lead them through the lean Six Sigma toolbox and make dramatic improvements to business processes. The overall goal is to reduce defects that impact the internal and external customer and eliminate waste that impact the cycle times and costs.

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7. The section was provided by Anne Foley, Director of Six Sigma for the International Institute for Learning.

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20.14 QUALITY LEADERSHIP8

Consider for a moment the following seven items:

● Teamwork ● Strategic integration

● Continuous improvement ● Respect for people ● Customer focus ● Management-by-fact

● Structured problem-solving

Some people contend that these seven items are the principles of project management

when, in fact, they are the seven principles of the total quality management program at

Sprint. Project management and TQM have close similarity in leadership and team-based

decision-making. According to Breyfogle,9 American managers have often conducted

much of their business through an approach that is sometimes called management by results. This type of management tends to focus only on the end result, that is, process yield, gross margin, sales dollars, return on investment, and so on. Emphasis is placed on

a chain of command with a hierarchy of standards, objectives, controls, and accountabil-

ity. Objectives are translated into work standards or quotas that guide the performance of

employees. Use of these numerical goals can cause short-term thinking, misdirected focus,

fear (e.g., of a poor job performance rating), fudging the numbers, internal conflict, and

blindness to customer concerns. This type of management is said to be like trying to keep

a dog happy by forcibly wagging its tail. Quality leadership is an alternative that emphasizes results by working on methods. In

this type of management, every work process is studied and constantly improved so that the final product or service not only meets but exceeds customer expectations. The princi- ples of quality leadership are customer focus, obsession with quality, effective work struc- ture, control yet freedom (e.g., management in control of employees yet freedom given to employees), unity of purpose, process defect identification, teamwork, and education and training. These principles are more conducive to long-term thinking, correctly directed efforts, and a keen regard for the customer’s interest.

Quality leadership does have a positive effect on the return on investment. In 1950, Deming described this chain reaction of getting a greater return on investment as follows: improve quality → decrease costs → improve productivity → decrease prices → increase market share in business → provide jobs → increase return on investment. Quality is not something that can be delegated to others. Management must lead the transformation process.

To give quality leadership, the historical hierarchical management structure needs to be changed to a structure that has a more unified purpose using project teams. A single

Quality Leadership 1057

PMBOK® Guide, 5th Edition Chapter 9 Human Resources

Management

8. Adapted from Forrest W. Breyfogle, III, Implementing Six Sigma (New York: Wiley, 1999), pp. 28–29.

9. Adapted from Forrest W. Breyfogle, III, Implementing Six Sigma (New York: Wiley, 1999), pp. 28–29.

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person can make a big difference in an organization. However, one person rarely has enough knowledge or experience to understand everything within a process. Major gains in both quality and productivity can often result when a team of people pool their skills, talents, and knowledge.

Teams need to have a systematic plan to improve the process that creates mistakes/ defects, breakdowns/delays, inefficiencies, and variation. For a given work environment, management needs to create an atmosphere that supports team effort in all aspects of busi- ness. In some organizations, management may need to create a process that describes hier- archical relationships between teams, the flow of directives, how directives are transformed into action and improvements, and the degree of autonomy and responsibility of the teams. The change to quality leadership can be very difficult. It requires dedication and patience to transform an entire organization.

20.15 RESPONSIBILITY FOR QUALITY

Everyone in an organization plays an important role in quality management. In order for an organization to become a quality organization, all levels must actively participate, and, according to Dr. Edwards Deming, the key to successful implementation of quality starts at the top.

Top management must drive fear from the workplace and create an environment where cross-functional cooperation can flourish. The ultimate responsibility for quality in the orga- nization lies in the hands of upper management. It is only with their enthusiastic and unwa- vering support that quality can thrive in an organization.

The project manager is ultimately responsible for the quality of the project. This is true for the same reason the president of the company is ultimately responsible for quality in a corporation. The project manager selects the procedures and policies for the project and therefore controls the quality. The project manager must create an environment that fosters trust and cooperation among the team members. The project manager must also support the identification and reporting of problems by team members and avoid at all costs a “shoot the messenger” mentality.

The project team members must be trained to identify problems, recommend solu- tions, and implement the solutions. They must also have the authority to limit further pro- cessing when a process is outside of specified limits. In other words, they must be able to halt any activity that is outside of the quality limits set for the project and work toward a resolution of the problem at any point in the project.

20.16 QUALITY CIRCLES

Quality circles are small groups of employees who meet frequently to help resolve company quality problems and provide recommendations to management. Quality circles were ini- tially developed in Japan and have achieved some degree of success in the United States.

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The employees involved in quality circles meet frequently either at someone’s home or at the plant before the shift begins. The group identifies problems, analyzes data, recom- mends solutions, and carries out management-approved changes. The success of quality cir- cles is heavily based upon management’s willingness to listen to employee recommendations.

The key elements of quality circles include:

● They give a team effort. ● They are completely voluntary. ● Employees are trained in group dynamics, motivation, communications, and prob-

lem solving.

● Members rely upon each other for help. ● Management support is active but as needed. ● Creativity is encouraged. ● Management listens to recommendations.

The benefits of quality circles include:

● Improved quality of products and services ● Better organizational communications ● Improved worker performance ● Improved morale

20.17 JUST-IN-TIME MANUFACTURING (JIT)

Just-in-time manufacturing is a process that continuously stresses waste reduction by opti- mizing the processes and procedures necessary to maintain a manufacturing operation. Part of this process is JIT purchasing or inventory where the materials needed appear just in time for use, thus eliminating costs associated with material handling, storage, paperwork, and even inspection. In order to eliminate inspection, the customer must be convinced that the contractor has adhered to all quality requirements. In other words, JIT inventory pushes quality assurance and quality control for that product down to the contractor’s level.

The customer benefits from JIT purchasing by developing long-term relationships with fewer suppliers, thus lowering subcontractor management costs. The contractor ben- efits by having long-term contracts. However, the contractor must agree to special condi- tions such as on-site inspections by the customer’s executives, project manager, or quality team, or even allowing an on-site customer representative at the contractor’s location.

JIT purchasing has been widely adopted in Japan, but only marginal success has occurred here in the United States. Table 20–6 shows the relative comparison of American versus Japanese quality practices.

Another part of JIT manufacturing is the identification and continuous reduction of waste. Shigeo Shingo of Toyota Motor Company has identified seven wastes that should be the targets of a continuous improvement process. These appear in Table 20–7.

Just-in-Time Manufacturing (JIT) 1059

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Two new topics are now being discussed as part of JIT manufacturing: value-added manufacturing and stockless production. Value-added manufacturing advocates the elimi- nation of any step in the manufacturing process that does not add value to the product for the customer. Examples include process delays, transporting materials, work-in-process inventories, and excessive paperwork. Stockless production promotes little inventories for

1060 QUALITY MANAGEMENT

TABLE 20–6. COMPARATIVE ANALYSIS OF PURCHASING PRACTICE: TRADITIONAL U.S. AND JAPANESE JIT

Purchasing Activity JIT Purchasing Traditional Purchasing

Purchase lot size Purchase in small lots with frequent Purchase in large batch size with less deliveries frequent deliveries

Selecting supplier Single source of supply for a given Rely on multiple sources of supply part in nearby geographical area for a given part and short-term with a long-term contract contracts

Evaluating supplier Emphasis is placed on product Emphasis is placed on product quality, delivery performance, quality, delivery performance, and price, but no percentage of and price but about two percent reject from supplier is acceptable reject from supplier is acceptable

Receiving inspection Counting and receiving inspection Buyer is responsible for receiving, of incoming parts is reduced and counting, and inspecting all eventually eliminated incoming parts

Negotiating and bidding Primary objective is to achieve Primary objective is to get the lowest process product quality through a possible price

long-term contract and fair price

Determing mode Concern for both inbound and Concern for outbound freight and of transportation outbound freight, and on-time lower outbound costs. Delivery

delivery. Delivery schedule left schedule left to the supplier to the buyer

Product specification “Loose” specifications. The buyer “Rigid” specifications. The buyer relies more on performance relies more on design specifications than on product specifications than on product design and the supplier is performance and suppliers have encouraged to be more innovative less freedom in design

specifications

Paperwork Less formal paperwork. Delivery Requires great deal of time and time and quantity level can be formal paperwork. Changes in changed by telephone calls delivery date and quantity require

purchase orders

Packaging Small standard containers used to Regular packaging for every part hold exact quantity and to specify type and part number with no the precise specifications clear specifications on product

content

Source: Sang M. Lee and A. Ansari, “Comparative Analysis of Japanese Just-in-Time Purchasing and Traditional Purchasing Systems,” International Journal of Operations and Product Management, 5, no. 4 (1985), pp. 5–14.

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raw materials, work in process, and finished goods. Everything ends up being made to order and then delivered as needed. Waste becomes nonexistent. The practicality and risks of this approach may not be feasible for either the company or the project manager.

20.18 TOTAL QUALITY MANAGEMENT (TQM)10

There is no explicit definition of total quality management. Some people define it as providing the customer with quality products at the right time and at the right place. Others define it as meeting or exceeding customer

requirements. Internally, TQM can be defined as less variability in the quality of the prod- uct and less waste.

Figure 20–32 shows the basic objectives and focus areas of a TQM process. Almost all companies have a primary strategy to obtain TQM, and the selected strategy is usually in place over the long term. The most common primary strategies are listed below. A sum- mary of the seven primary improvement strategies mapped onto 17 corporations is shown in Table 20–8.

Primary strategies:

● Solicit ideas for improvement from employees. ● Encourage and develop teams to identify and solve problems.

Total Quality Management (TQM) 1061

TABLE 20–7. THE SEVEN WASTES

1. Waste of overproduction. Eliminate by reducing setup times, synchronizing quantities and timing between processess, compacting layout, visibility, and so forth. Make only what is needed now.

2. Waste of waiting. Eliminate through synchronizing work flow as much as possible, and balance uneven loads by flexible workers and equipment.

3. Waste of transportation. Establish layouts and locations to make transport and handling unnecessary if pos- sible. Then rationalize transport and material handling that cannot be eliminated.

4. Waste of processing itself. First question why this part or product should be made at all, then why each process is necessary. Extend thinking beyond economy of scale or speed.

5. Waste of stocks. Reduce by shortening setup times and reducing lead times, by synchronizing work flows and improving work skills, and even by smoothing fluctuations in demand for the product. Reducing all the other wastes reduces the waste of stocks.

6. Waste of motion. Study motion for economy and consistency. Economy improves productivity, and consistency improves quality. First improve the motions, then mechanize or automate. Otherwise there is danger of automating waste.

7. Waste of making defective products. Develop the production process to prevent defects from being made so as to eliminate inspection. At each process, accept no defects and make no defects. Make processes failsafe to do this. From a quality process comes a quality product—automatically.

Source: R. Hall, Attaining Manufacturing Excellence. (Homewood, IL: Dow-Jones-Irwin, 1987), p. 26.

10. This section has been adapted from C. Carl Pegels, Total Quality Management (Danvers, MA: Boyd & Fraser, 1995), pp. 4–27.

PMBOK® Guide, 5th Edition 8.1 Quality Planning

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● Encourage team development for performing operations and service activities resulting in participative leadership.

● Benchmark every major activity in the organization to ensure that it is done in the most efficient and effective way.

● Utilize process management techniques to improve customer service and reduce cycle time.

1062 QUALITY MANAGEMENT

CUSTOMER FOCUS (M)

BENCHMARKING (M)

REENGINEERING (M)

CYCLE TIME REDUCTION (M)

TIME-BASED COMPETITION (M)

JUST-IN-TIME OPERATIONS (M)

ADAPTABILITY (M)

CONCURRENT ENGINEERING (M)

FUNCTIONAL AREA INTEGRATION (M)

ACTIVITY-BASED COSTING (M)

SUPPLIER COOPERATION AND DEVELOPMENT (M)

PRODUCT INNOVATION (M)

BRAINSTORMING (T)

PARETO ANALYSIS (T)

CAUSE AND EFFECT DIAGRAMS (T)

STATISTICAL CONTROL CHARTING (T)

QUALITY FUNCTION DEPLOYMENT (T)

PROCESS QUALITY (T)

ISO 9000 (T)

GROUP DYNAMICS (E)

EMPLOYEE MOTIVATION (E)

TEAM PROBLEM SOLVING (E)

TEAMWORK (E)

EMPLOYEE EDUCATION AND TRAINING (E)

NOTES: M 5 MANAGEMENT FOCUS T 5 TOOL FOCUS E 5 EMPLOYEE FOCUS

QUALITY

PRODUCTIVITY

FLEXIBILITY

TIMELINESS

CUSTOMER RESPONSIVENESS

FIGURE 20–32. TQM objectives and focus areas. Source: C. Carl Pegels, Total Quality Management (Danvers, MA: Boyd & Fraser, 1995), p. 6.

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Total Quality Management (TQM) 1063

TABLE 20–8. PRIMARY IMPROVEMENT STRATEGIES EMPLOYED BY LISTED CORPORATIONS

Strategy

P1 P2 P3 P4 P5 P6 P7

Asea, Brown, Boveri X AT&T X Cigna X DuPont X Eastman Kodak X Eaton Corp. X X X Ford Motor Company X General Motors X Goodyear Tire X X IBM Rochester X ICL Plc X Johnson Controls X Motorola X New England Corp. X New York Life X X Pratt and Whitney X Xerox Corp. X

Source: C. Carl Pegels, Total Quality Management (Danvers, MA: Boyd & Fraser, 1995), p. 21.

TABLE 20–9. SECONDARY IMPROVEMENT STRATEGIES EMPLOYED BY LISTED CORPORATIONS

Strategy

S1 S2 S3 S4 S5 S6 S7 S8 S9 S10

AMP Corp. X X X X Asea, Brown, Boveri X X British Telecom X X Chrysler Corp. X X X Coca-Cola X Corning X Eastman Kodak X Eaton Corp. X Fidelity Investment X X X Ford Motor Company X Fujitsu Systems X X X General Motors X X X Holiday Inns X IBM Rochester X X X X ICL Plc X Johnson Controls X X X Motorola X New England Corp. X New York Life X X Pratt and Whitney X Procter & Gamble X X The Forum Corp. X X VF Corp. X X Xerox Corp. X

Source: C. Carl Pegels, Total Quality Management (Danvers, MA: Boyd & Fraser, 1995).

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● Develop and train customer staff to be entrepreneurial and innovative in order to find ways to improve customer service.

● Implement improvements so that the organization can qualify as an ISO 9000 supplier.

There also exist secondary strategies that, over the long run, focus on operations and profitability. Typical secondary strategies are shown below, and Table 20–10 identifies the secondary improvement strategies by listed companies.

Secondary strategies:

● Maintain continuous contact with customers; understand and anticipate their needs.

● Develop loyal customers by not only pleasing them but by exceeding their expectations.

● Work closely with suppliers to improve their product/service quality and productivity.

● Utilize information and communication technology to improve customer service.

● Develop the organization into manageable and focused units in order to improve

performance.

● Utilize concurrent or simultaneous engineering.

TABLE 20–10. SUMMARY ILLUSTRATIONS OF QUANTIFIED IMPROVEMENTS ACHIEVED

AMP. On-time shipments improved from 65% to 95%, and AMP products have nationwide availability within three days or less on 50% of AMP sales.

Asea, Brown, Boveri. Every improvement goal customers asked for—better delivery, quality responsiveness, and so on—was met.

Chrysler. New vehicles are now being developed in 33 months versus as long as 60 months 10 years ago.

Eaton. Increased sales per employee from $65,000 in 1983 to about $100,000 in 1992.

Fidelity. Handles 200,000 information calls in 4 telephone centers; 1,200 representatives handle 75,000 calls, and the balance is automated.

Ford. Use of 7.25 man-hours of labor per vehicle versus 15 man-hours in 1980; Ford Taurus bumper uses 10 parts compared to 100 parts on similar GM cars.

General Motors. New vehicles are now being developed in 34 months versus 48 months in the 1980s.

IBM Rochester. Defect rates per million are 32 times lower than four years ago and on some products exceed six sigma (3.4 defects per million).

Pratt & Whitney. Defect rate per million was cut in half; a tooling process was shortened from two months to two days; part lead times were reduced by 43%.

VF Corp. Market response system enables 97% in-stock rate for retail stores compared to 70% industry average.

NCR. Checkout terminal was designed in 22 months versus 44 months and contained 85% fewer parts than its predecessor.

AT&T. Redesign of telephone switch computer completed in 18 months versus 36 months; manufacturing defects reduced by 87%.

Deere & Co. Reduced cycle time of some of its products by 60%, saving 30% of usual development costs.

Source: C. Carl Pegels, Total Quality Management (Danvers, MA: Boyd & Fraser, 1995), p. 27.

1064 QUALITY MANAGEMENT

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● Encourage, support, and develop employee training and education programs.

● Improve timeliness of all operation cycles (minimize all cycle times).

● Focus on quality, productivity, and profitability.

● Focus on quality, timeliness, and flexibility.

Information about quality improvements is difficult to obtain from corporations. Most

firms consider this information confidential and do not like to publish for fear of provid-

ing an advantage to their competitors. As a result, the information in Table 20–11 is

sketchy. It is simply a snapshot of a limited number of quantitative performance improve-

ments that were achieved by firms as part of their total quality management programs.

One noteworthy achievement is Ford’s reduction in man-hours to build a vehicle from

15 to 7.25. Although this took 10 years to achieve, it is still a sterling example of produc-

tivity improvement. IBM Rochester, Minnesota’s reduction in defects per million by a fac-

tor of 32 over a 4-year period is also noteworthy. And the ability of Chrysler and General

Motors to reduce their design development times for new vehicles from 60 and 48 months

to the current 33 and 34 months, respectively, is an achievement that indicates the return

of competitiveness to the U.S. automobile industry.

20.19 STUDYING TIPS FOR THE PMI® PROJECT MANAGEMENT CERTIFICATION EXAM

This section is applicable as a review of the principles to support the knowledge areas and

domain groups in the PMBOK® Guide. This chapter addresses:

● Quality Management

Understanding the following principles is beneficial if the reader is using this text to

study for the PMP® Certification Exam:

● Contributions by the quality pioneers

● Concept of total quality management (TQM)

● Ddifferences between quality planning, quality assurance, and quality control

● Importance of a quality audit

● Quality control tools

● Concept of cost of quality

The following multiple-choice questions will be helpful in reviewing the principles of

this chapter:

1. Which of the following is not part of the generally accepted view of quality today? A. Defects should be highlighted and brought to the surface. B. We can inspect quality.

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C. Improved quality saves money and increases business. D. Quality is customer-focused.

2. In today’s view of quality, who defines quality? A. Contractors’ senior management B. Project management C. Workers D. Customers

3. Which of the following are tools of quality control? A. Sampling tables B. Process charts C. Statistical and mathematical techniques D. All of the above

4. Which of the following is true of modern quality management? A. Quality is defined by the customer. B. Quality has become a competitive weapon. C. Quality is now an integral part of strategic planning. D. All are true.

5. A company dedicated to quality usually provides training for: A. Senior management and project managers B. Hourly workers C. Salaried workers D. All employees

6. Which of the following quality gurus believe “zero-defects” is achievable? A. Deming B. Juran C. Crosby D. All of the above

7. What are the components of Juran’s Trilogy? A. Quality Improvement, Quality Planning, and Quality Control B. Quality Improvement, Zero-Defects, and Quality Control C. Quality Improvement, Quality Planning, and Pert Charting D. Quality Improvement, Quality Inspections and Quality Control

8. Which of the following is not one of Crosby’s Four Absolutes of Quality? A. Quality means conformance to requirements. B. Quality comes from prevention. C. Quality is measured by the cost of conformance. D. Quality means that the performance standard is “zero-defects.”

9. According to Deming, what percentage of the costs of quality is generally attributable to management? A. 100% B. 85% C. 55% D 15%

10. Inspection: A. Is an appropriate way to ensure quality B. Is expensive and time-consuming

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C. Reduces rework and overall costs D. Is always effective in stopping defective products from reaching the customer

11. The Taguchi Method philosophies concentrate on improving quality during the: A. Conceptual Phase B. Design Phase C. Implementation Phase D. Closure Phase

12. A well-written policy statement on quality will: A. Be a statement of how, not what or why B. Promote consistency throughout the organization and across projects C. Provide an explanation of how customers view quality in their own organizations D. Provide provisions for changing the policy only on a yearly basis

13. Quality assurance includes: A. Identifying objectives and standards B. Conducting quality audits C. Planning for continuous collection of data D. All of the above

14. What is the order of the four steps in Deming’s Cycle for Continuous Improvement? A. Plan, do, check, and act B. Do, plan, act, and check C. Check, do, act, and plan D. Act, check, do, and plan

15. Quality audits: A. Are unnecessary if you do it right the first time B. Must be performed daily for each process C. Are expensive and therefore not worth doing D. Are necessary for validation that the quality policy is being followed and adhered to

16. Which of the following are typical tools of statistical process control? A. Pareto analysis B. Cause-and-effect analysis C. Process control charts D. All of the above

17. Which of the following methods is best suited to identifying the “vital few?” A. Pareto analysis B. Cause-and-effect analysis C. Trend analysis D. Process control charts

18. When a process is set up optimally, the upper and lower specification limits typically are: A. Set equal to the upper and lower control limits B. Set outside the upper and lower control limits C. Set inside the upper and lower control limits D. Set an equal distance from the mean value

19. The upper and lower control limits are typically set: A. One standard deviation from the mean in each direction B. 3 (three sigma) from the mean in each direction C. Outside the upper and lower specification limits D. To detect and flag when a process may be out of control

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20. Which of the following is not indicative of today’s views of the quality management process applied to a given project? A. Defects should be highlighted and brought to the surface. B. The ultimate responsibility for quality lies primarily with senior management or spon- sor but everyone should be involved. C. Quality saves money. D. Problem identification leads to cooperative solutions.

21. If the values generated from a process are normally distributed around the mean value, what percentage of the data points generated by the process will not fall within plus or minus three standard deviations of the mean? A. 99.7% B. 95.4% C. 68.3% D. 0.3%

ANSWERS

1. B

2. D

3. D

4. D

5. D

6. C

7. A

8. C

9. B

10. B

11. B

12. B

13. D

14. A

15. D

16. D

17. A

18. B

19. B

20. B

21. D

1068 QUALITY MANAGEMENT

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Modern Developments in Project Management

1069

4th Edition) Study Guide, 11th Edition) Certification Exam

• Lakes Automotive • Project Management None • Ferris HealthCare, Inc. Maturity Questionnaire • Clark Faucet Company • Multiple Choice Exam • Honicker Corporation*

21.0 INTRODUCTION

As more industries accept project management as a way of life, the change in project management practices has taken place at an astounding rate. But what is even more important is the fact that these companies are sharing their accomplishments with other companies during benchmark- ing activities.

Eight recent interest areas are included in this chapter:

● The project management maturity model (PMMM) ● Developing effective procedural documentation

PMBOK® Guide, 5th Edition PMBOK Chapters 1, 2, and 3

(inclusive)

*Case Study also appears at end of chapter.

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● Project management methodologies ● Continuous improvement ● Capacity planning ● Competency models ● Managing multiple projects ● End-of-phase review meetings

21.1 THE PROJECT MANAGEMENT MATURITY MODEL (PMMM)

All companies desire excellence in project management. Unfortunately, not all companies recognize that the time frame can be shortened by performing strategic planning for proj- ect management. The simple use of project management, even for an extended period of time, does not lead to excellence. Instead, it can result in repetitive mistakes and, what’s worse, learning from your own mistakes rather than from the mistakes of others.

Strategic planning for project management is unlike other forms of strategic planning in that it is most often performed at the middle-management level, rather than by execu- tive management. Executive management is still involved, mostly in a supporting role, and provides funding together with employee release time for the effort. Executive involvement will be necessary to make sure that whatever is recommended by middle management will not result in unwanted changes to the corporate culture.

Organizations tend to perform strategic planning for new products and services by lay- ing out a well-thought-out plan and then executing the plan with the precision of a surgeon. Unfortunately, strategic planning for project management, if performed at all, is done on a trial-by-fire basis. However, there are models that can be used to assist corporations in per- forming strategic planning for project management and achieving maturity and excellence in a reasonable period of time.

The foundation for achieving excellence in project management can best be described as the project management maturity model (PMMM), which is comprised of five levels, as shown in Figure 21–1. Each of the five levels represents a different degree of maturity in project management.

● Level 1—Common Language: In this level, the organization recognizes the impor- tance of project management and the need for a good understanding of the basic knowledge on project management, along with the accompanying language/ terminology.

● Level 2—Common Processes: In this level, the organization recognizes that com- mon processes need to be defined and developed such that successes on one proj- ect can be repeated on other projects. Also included in this level is the recognition that project management principles can be applied to and support other method- ologies employed by the company.

● Level 3—Singular Methodology: In this level, the organization recognizes the syner- gistic effect of combining all corporate methodologies into a singular methodology,

1070 MODERN DEVELOPMENTS IN PROJECT MANAGEMENT

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the center of which is project management. The synergistic effects also make process control easier with a single methodology than with multiple methodologies.

● Level 4—Benchmarking: This level contains the recognition that process improve- ment is necessary to maintain a competitive advantage. Benchmarking must be

performed on a continuous basis. The company must decide whom to benchmark

and what to benchmark. ● Level 5—Continuous Improvement: In this level, the organization evaluates the

information obtained through benchmarking and must then decide whether or not this information will enhance the singular methodology.

When we talk about levels of maturity (and even life-cycle phases), there exists a com- mon misbelief that all work must be accomplished sequentially (i.e., in series). This is not necessarily true. Certain levels can and do overlap. The magnitude of the overlap is based upon the amount of risk the organization is willing to tolerate. For example, a company can begin the development of project management checklists to support the methodology while it is still providing project management training for the workforce. A company can create a center for excellence in project management before benchmarking is undertaken.

Although overlapping does occur, the order in which the phases are completed cannot change. For example, even though Level 1 and Level 2 can overlap, Level 1 must still be completed before Level 2 can be completed. Overlapping of several of the levels can take place, as shown in Figure 21–2.

The Project Management Maturity Model (PMMM) 1071

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Level 1

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Level 3

Level 4

Level 5

Common Language

Common Processes

Singular Methodology

Benchmarking

Continuous Improvement

FIGURE 21–1. The five levels of maturity.

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● Overlap of Level 1 and Level 2: This overlap will occur because the organization can begin the development of project management processes either while refine- ments are being made to the common language or during training.

● Overlap of Level 3 and Level 4: This overlap occurs because, while the organiza- tion is developing a singular methodology, plans are being made as to the process

for improving the methodology.

● Overlap of Level 4 and Level 5: As the organization becomes more and more com- mitted to benchmarking and continuous improvement, the speed by which the

organization wants changes to be made can cause these two levels to have signif-

icant overlap. The feedback from Level 5 back to Level 4 and Level 3, as shown

in Figure 21–3, implies that these three levels form a continuous improvement

cycle, and it may even be possible for all three of these levels to overlap.

Level 2 and Level 3 generally do not overlap. It may be possible to begin some of the

Level 3 work before Level 2 is completed, but this is highly unlikely. Once a company is

committed to a singular methodology, work on other methodologies generally terminates.

Also, companies can create a Center for Excellence in project management early in the

life-cycle process, but will not receive the full benefits until later on.

Risks can be assigned to each level of the PMMM. For simplicity’s sake, the risks can

be labeled as low, medium, and high. The level of risk is most frequently associated with

1072 MODERN DEVELOPMENTS IN PROJECT MANAGEMENT

Level 1 Common Language

Level 2 Common Processes

Level 5 Continuous

Improvement

Level 4 Benchmarking

Level 3 Singular

Methodology

FIGURE 21–2. Overlapping levels.

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the impact on the corporate culture. The following definitions can be assigned to these

three risks:

● Low Risk: Virtually no impact upon the corporate culture, or the corporate culture is dynamic and readily accepts change.

● Medium Risk: The organization recognizes that change is necessary but may be unaware of the impact of the change. Multiple-boss reporting would be an exam-

ple of a medium risk.

● High Risk: High risks occur when the organization recognizes that the changes resulting from the implementation of project management will cause a change in

the corporate culture. Examples include the creation of project management

methodologies, policies, and procedures, as well as decentralization of authority

and decision-making.

Level 3 has the highest risk and degree of difficulty for the organization. This is shown

in Figure 21–4. Once an organization is committed to Level 3, the time and effort needed

to achieve the higher levels of maturity have a low degree of difficulty. Achieving Level 3,

however, may require a major shift in the corporate culture.

These types of maturity models will become more common in the future, with generic

models being customized for individual companies. These models will assist management

in performing strategic planning for excellence in project management.

The Project Management Maturity Model (PMMM) 1073

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Level 1

Level 2

Level 3

Level 4

Level 5

Common Language

Common Processes

Singular Methodology

Benchmarking

Continuous Improvement

Feedback

FIGURE 21–3. Feedback between the five levels of maturity.

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21.2 DEVELOPING EFFECTIVE PROCEDURAL DOCUMENTATION

Good procedural documentation will accelerate the project management maturity process, foster support at all levels of management, and greatly improve project communications. The type of procedural documentation selected is heavily biased on whether we wish to manage formally or informally, but it should show how to conduct project-oriented activ- ities and how to communicate in such a multidimensional environment. The project man- agement policies, procedures, forms, and guidelines can provide some of these tools for delineating the process, as well as a format for collecting, processing, and communicating project-related data in an orderly, standardized format. Project planning and tracking, how- ever, involve more than just the generation of paperwork. They require the participation of the entire project team, including support departments, subcontractors, and top manage- ment, and this involvement fosters unity. Procedural documents help to:

● Provide guidelines and uniformity ● Encourage useful, but minimum, documentation ● Communicate information clearly and effectively ● Standardize data formats ● Unify project teams ● Provide a basis for analysis ● Ensure document agreements for future reference ● Refuel commitments ● Minimize paperwork ● Minimize conflict and confusion ● Delineate work packages ● Bring new team members on board ● Build an experience track and method for future projects

1074 MODERN DEVELOPMENTS IN PROJECT MANAGEMENT

Common Language

Common Processes

Singular Methodology

Benchmarking

Continuous Improvement

Medium

High

Low

Level Description Degree of Difficulty

FIGURE 21–4. Degrees of difficulty of the five levels of maturity.

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Done properly, the process of project planning must involve both the performing and the customer organizations. This leads to visibility of the project at various organizational levels, and stimulates interest in the project and the desire for success.

Even though procedural documents can provide all these benefits, management is often reluctant to implement or fully support a formal

project management system. Management concerns often center around four issues: over- head burden, start-up delays, stifled creativity, and reduced self-forcing control. First, the introduction of more organizational formality via policies, procedures, and forms might cost money, and additional funding may be needed to support and maintain the system. Second, the system is seen as causing start-up delays by requiring additional project defi- nition before implementation can start. Third and fourth, the system is often perceived as stifling creativity and shifting project control from the responsible individual to an imper- sonal process. The comment of one project manager may be typical: “My support person- nel feel that we spend too much time planning a project up front; it creates a very rigid environment that stifles innovation. The only purpose seems to be establishing a basis for controls against outdated measures and for punishment rather than help in case of a con- tingency.” This comment illustrates the potential misuse of formal project management systems to establish unrealistic controls and penalties for deviations from the program plan rather than to help to find solutions.

Few companies have introduced project management procedures with ease. Most have experienced problems ranging from skepticism to sab-

otage of the procedural system. Many use incremental approaches to develop and imple- ment their project management methodology. Doing this, however, is a multifaceted challenge to management. The problem is seldom one of understanding the techniques involved, such as budgeting and scheduling, but rather is a problem of involving the proj- ect team in the process, getting their input, support, and commitment, and establishing a supportive environment.

The procedural guidelines and forms of an established project management methodology can be especially useful during the project planning/definition phase. Not only does project management methodology help to delineate and communicate the four major sets of vari- ables for organizing and managing the project—(1) tasks, (2) timing, (3) resources, and (4) responsibilities—it also helps to define measurable milestones, as well as report and review requirements. This provides project personnel the ability to measure project status and perfor- mance and supplies the crucial inputs for controlling the project toward the desired results.

Developing an effective project management methodology takes more than just a set of policies and procedures. It requires the integration of these guidelines and standards into the culture and value system of the organization. Management must lead the overall efforts and foster an environment conducive to teamwork. The greater the team spirit, trust, com- mitment, and quality of information exchange among team members, the more likely the team will be to develop effective decision-making processes, make individual and group

Developing Effective Procedural Documentation 1075

The Challenges

How to Make It Work

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commitments, focus on problem-solving, and operate in a self-forcing, self-correcting control mode.

Although project managers may have the right to establish their own policies and procedures, many companies design project control forms

that can be used uniformly on all projects. Project control forms serve two vital purposes by establishing a common framework from which:

● The project manager will communicate with executives, functional managers, functional employees, and clients.

● Executives and the project manager can make meaningful decisions concerning the allocation of resources.

Some large companies with mature project management structures maintain a sepa- rate functional unit for forms control. This is quite common in aerospace and defense, but is also becoming common practice in other industries and in some smaller companies.

Large companies with a multitude of different projects do not have the luxury of con- trolling projects with three or four forms. There are different forms for planning, schedul- ing, controlling, authorizing work, and so on. It is not uncommon for companies to have 20 to 30 different forms, each dependent upon the type of project, length of project, dollar value, type of customer reporting, and other such arguments. Project managers are often allowed to set up their own administration for the project, which can lead to long-term damage if they each design their own forms for project control.

The best method for limiting the number of forms appears to be the task force con- cept, where both managers and doers have the opportunity to provide input. This may appear to be a waste of time and money, but in the long run provides large benefits.

To be effective, the following ground rules can be used:

● Task forces should include managers as well as doers. ● Task force members must be willing to accept criticism from other peers, superi-

ors, and especially subordinates who must “live” with these forms. ● Upper-level management should maintain a rather passive (or monitoring)

involvement. ● A minimum of signature approvals should be required for each form. ● Forms should be designed so that they can be updated periodically. ● Functional managers and project managers must be dedicated and committed to

the use of the forms.

The dynamic nature of project management and its multifunctional involvement create a need for a multitude of procedural documents to guide a project through the various phases and stages of integration.

1076 MODERN DEVELOPMENTS IN PROJECT MANAGEMENT

Established Practices

Categorizing the Broad Spectrum of Documents

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Especially for larger organizations, the challenge is not only to provide management guidelines for each project activity, but also to provide a coherent procedural framework within which project leaders from all disciplines can work and communicate with each other. Specifically, each policy or procedure must be consistent with and accommodating to the various other functions that interface with the project over its life cycle. This com- plexity of intricate relations is illustrated in Figure 21–5.

One simple and effective way of categorizing the broad spectrum of procedural doc- uments is by utilizing the work breakdown concept, as shown in Figure 21–6. Accordingly, the principal procedural categories are defined along the principal project life-cycle phases. Each category is then subdivided into (1) general management guidelines, (2) poli- cies, (3) procedures, (4) forms, and (5) checklists. If necessary, the same concept can be carried forward one additional step to develop policies, procedures, forms, and checklists for the various project and functional sublevels of operation. Although this might be needed for very large programs, an effort should be made to minimize “layering” of poli- cies and procedures to avoid new problems and costs. For most projects, a single document covers all levels of project operations.

As companies become more mature in executing the project management methodology, project management policies and

Developing Effective Procedural Documentation 1077

As We Mature . . .

PROJECT

PROJECT ACTIVITIES

P R

O JE

C T

M A

N A

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M E

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GENERAL MANAGEMENT

PROGRAM OFFICE

PROJECT SUBSYSTEM LEVEL I

PROJECT SUBSYSTEM LEVEL II

CUSTOMER/SPONSOR ORGANIZATION

SUBCONTRACTORS

FU NC

TI ON

OR GA

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AN AG

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RE VI

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AN D

RE PO

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PR OJ

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E- OU

FIGURE 21–5. Interrelationship of project activities with various functional/organizational levels and project management levels.

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procedures are disregarded and replaced with guidelines, forms, and checklists. More flex- ibility is provided the project manager. Unfortunately, this takes time because executives must have faith in the ability of the project management methodology to work without the rigid controls provided by policies and procedures. Yet all companies seem to go through the evolutionary stages of policies and procedures before they get to guidelines, forms, and checklists.

21.3 PROJECT MANAGEMENT METHODOLOGIES

The ultimate purpose of any project management system is to increase the likelihood that your organization will have a continuous stream of successfully managed projects. The best way to achieve this goal is with good project management methodologies that are based upon guidelines and forms rather than policies and procedures. Methodologies must have enough flexibility that they can be adapted easily to each and every project.

Methodologies should be designed to support the corporate culture, not vice versa. It is a fatal mistake to purchase a canned methodology package that mandates that you change your corporate culture to support it. If the methodology does not support the cul- ture, it will not be accepted. What converts any methodology into a world-class method- ology is its adaptability to the corporate culture. There is no reason why companies cannot develop their own methodology. Companies such as Hewlett-Packard, Johnson Controls, and Motorola are regarded as having world-class methodologies for project

1078 MODERN DEVELOPMENTS IN PROJECT MANAGEMENT

PROJECT MANAGEMENT POLICIES, PROCEDURES, FORMS, AND GUIDELINES

GENERAL POLICIES

PROJECT INITIATION

BID PROPOSALS

PROJECT PLANNING

PROJECT KICK-OFF

05 06 07 08 09

.02

.03

.04

.02

.03

.04

.05

Policies

Charters

Job Descriptions

Policies

Procedures

Forms

Checklists

.02

.03

.04

.05

Policies

Procedures

Forms

Checklists

.02

.03

.04

.05

Policies

Procedures

Forms

Checklists

Policies

Procedures

Forms

Checklists

Policies

Procedures

Forms

Checklists

Policies

Procedures

Forms

Checklists

Policies

Procedures

Forms

Checklists

Policies

Procedures

Forms

Checklists

10 11 12 13

COST CONTROL

CHANGE MANAGEMENT

REVIEWS AND REPORTS

CLOSE-OUT AND TRANSFERS

FIGURE 21–6. Categorizing procedural documents within a work breakdown structure.

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management and, in each case, the methodology was developed internally. Developing your own methodology internally to guarantee a fit with the corporate culture usually pro- vides a much greater return on investment than purchasing canned packages that require massive changes.

21.4 CONTINUOUS IMPROVEMENT

All too often complacency dictates the decision-making process. This is particularly true of organizations that have reached some degree of excellence in project management, become complacent, and then realize too late that they have lost their competitive advan- tage. This occurs when organizations fail to recognize the importance of continuous improvement.

Figure 21–7 illustrates why there is a need for continuous improvement. As compa- nies begin to mature in project management and reach some degree of excellence, they achieve a sustained competitive advantage. The sustained competitive advantage might very well be the single most important strategic objective of the firm. The firm will then begin the exploitation of its sustained competitive advantage.

Unfortunately, the competition is not sitting by idly watching you exploit your sus- tained competitive advantage. As the competition begins to counterattack, you may lose a large portion, if not all, of your sustained competitive advantage. To remain effective and competitive, the organization must recognize the need for continuous improvement, as shown in Figure 21–8. Continuous improvement allows a firm to maintain its competitive advantage even when the competitors counterattack.

Continuous Improvement 1079

Time

Exploitation

Sustained Competitive

Position

Pr oj

ec t

M an

ag em

en t

M at

ur ity Com

petitors

C ounterattack

FIGURE 21–7. Why there is a need for continuous improvement.

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Time

Sustained Competitive

Position

Continuous Improvement

FIGURE 21–8. The need for continuous improvement.

21.5 CAPACITY PLANNING

As companies become excellent in project management, the benefits of performing more work in less time and with fewer resources becomes readily apparent. The question, of course, is how much more work can the organization take on? Companies are now strug- gling to develop capacity planning models to see how much new work can be undertaken within the existing human and nonhuman constraints.

Figure 21–9 illustrates the classical way that companies perform capacity planning. The approach outlined in this figure holds true for both project- and non–project-driven

Manpower

Time

Planning Horizon

Anti cipa

ted Gro

wth

Current Staff

Prop osal

Man pow

er R equi

rem ents

FIGURE 21–9. Classical capacity planning.

1080 MODERN DEVELOPMENTS IN PROJECT MANAGEMENT

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Capacity Planning 1081

Capacity Planning Models

• Manpower • Facilities • Capital • Technology

• Strategic Fit • Profitability • Customer • Benefits

Selection of

Projects

Project Objectives

• Technical • Business

Planning Objectives

• Least Cost • Least Time • Least Risk

Feedback

FIGURE 21–10. Improved capacity planning.

organizations. The “planning horizon” line indicates the point in time for capacity plan- ning. The “proposals” line indicates the manpower needed for approved internal projects or a percentage (perhaps as much as 100 percent) for all work expected through competi- tive bidding. The combination of this line and the “manpower requirements” line, when compared against the current staffing, provides us with an indication of capacity. This tech- nique can be effective if performed early enough such that training time is allowed for future manpower shortages.

The limitation to this process for capacity planning is that only human resources are considered. A more realistic method would be to use the method shown in Figure 21–10, which can also be applied to both project-driven and non–project-driven organizations. From Figure 21–10, projects are selected based upon such factors as strategic fit, prof- itability, who the customer is, and corporate benefits. The objectives for the projects selected are then defined in both business and technical terms, because there can be both business and technical capacity constraints.

The next step is a critical difference between average companies and excellent com- panies. Capacity constraints are identified from the summation of the schedules and plans. In excellent companies, project managers meet with sponsors to determine the objective of the plan, which is different than the objective of the project. Is the objective of the plan to achieve the project’s objective with the least cost, least time, or least risk? Typically, only one of these applies, whereas immature organizations believe that all three can be achieved on every project. This, of course, is unrealistic.

The final box in Figure 21–10 is now the determination of the capacity limitations. Previously, we considered only human resource capacity constraints. Now we realize that the critical path of a project can be constrained not only by time but also by available man- power, facilities, cash flow, and even existing technology. It is possible to have multiple critical paths on a project other than those identified by time. Each of these critical paths

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provides a different dimension to the capacity planning models, and each of these con- straints can lead us to a different capacity limitation. As an example, manpower might limit us to taking on only four additional projects. Based upon available facilities, however, we might only be able to undertake two more projects, and based upon available technology, we might be able to undertake only one new project.

21.6 COMPETENCY MODELS

In the twenty-first century, companies will replace job descriptions with competency models. Job descriptions for project management tend to emphasize the deliverables and expectations from the project manager, whereas competency models emphasize the specific skills needed to achieve the deliverables.

Figure 21–11 shows the competency model for Eli Lilly. Project managers are expected to have competencies in three broad areas1:

● Scientific/technical skills ● Leadership skills ● Process skills

For each of the three broad areas, there are subdivisions or grade levels. A primary advantage of a competency model is that it allows the training department to develop cus- tomized project management training programs to satisfy the skill requirements. Without competency models, most training programs are generic rather than customized.

1082 MODERN DEVELOPMENTS IN PROJECT MANAGEMENT

SCIENTIFIC/TECHNICAL SKILLS

LEADERSHIP SKILLS

PR OC

ES S S

KIL LS

FIGURE 21–11. Competency model.

1. A detailed description of the Eli Lilly competency model and the Ericsson competency model can be found in Harold Kerzner, Applied Project Management (New York: Wiley, 1999), pp. 266–283.

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Competency models focus on specialized skills in order to assist the project manager in making more efficient use of his or her time. Figure 21–12, although argumentative, shows that with specialized competency training, project managers can increase their time effec- tiveness by reducing time robbers and rework.

Competency models make it easier for companies to develop a complete project management curriculum, rather than a singular course. This is shown in Figure 21–13.

Competency Models 1083

Time Robbers Rework

Effective Use of Time

4 3

Productive

Hours per

Day

Without Project Management Competency

With Project Management Competency

Time Robbers

Rework

Effective Use of Time

FIGURE 21–12. Core competency analysis.

Job Descriptions

with Authority

Job Descriptions

without Authority

Competency Models

Charter Charter

Generic External Training

Generic In-House Training

Customized In-House Training

Immaturity Maturity Excellence

FIGURE 21–13. Competency models and training.

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As companies mature in project management and develop a company-wide core compe- tency model, an internal, custom-designed curriculum will be developed. Companies, especially large ones, will find it necessary to maintain a course architecture specialist on their staff.

21.7 MANAGING MULTIPLE PROJECTS

As organizations mature in project management, there is a tendency toward having one person manage multiple projects. The initial impetus may come either from the company sponsoring the projects or from project managers themselves. There are several factors supporting the managing of multiple projects. First, the cost of maintaining a full-time project manager on all projects may be prohibitive. The magnitude and risks of each indi- vidual project dictate whether a full-time or part-time assignment is necessary. Assigning a project manager full-time on an activity that does not require it is an overmanagement cost. Overmanagement of projects was considered an acceptable practice in the early days of project management because we had little knowledge on how to handle risk manage- ment. Today, methods for risk management exist.

Second, line managers are now sharing accountability with project managers for the successful completion of the project. Project managers are now managing at the template levels of the WBS with the line managers accepting accountability for the work packages at the detailed WBS levels. Project managers now spend more of their time integrating work rather than planning and scheduling functional activities. With the line manager accepting more accountability, time may be available for the project manager to manage multiple projects.

Third, senior management has come to the realization that they must provide high- quality training for their project managers if they are to reap the benefits of managing mul- tiple projects. Senior managers must also change the way that they function as sponsors. There are six major areas where the corporation as a whole may have to change in order for the managing of multiple projects to succeed.

● Prioritization: If a project prioritization system is in effect, it must be used cor- rectly such that employee credibility in the system is realized. One risk is that the project manager, having multiple projects to manage, may favor those projects having the highest priorities. It is possible that no prioritization system may be the best solution. Not every project needs to be prioritized, and prioritization can be a time-consuming effort.

● Scope Changes: Managing multiple projects is almost impossible if the spon- sors/ customers are allowed to make continuous scope changes. When using multiple projects management, it must be understood that the majority of the scope changes may have to be performed through enhancement projects rather than through a continuous scope change effort. A major scope change on

1084 MODERN DEVELOPMENTS IN PROJECT MANAGEMENT

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one project could limit the project manager’s available time to service other projects. Also, continuous scope changes will almost always be accompanied by reprioritization of projects, a further detriment to the management of multi- ple projects.

● Capacity Planning: Organizations that support the management of multiple proj- ects generally have a tight control on resource scheduling. As a result, the organi- zation must have knowledge of capacity planning, theory of constraints, resource leveling, and resource limited planning.

● Project Methodology: Methodologies for project management range from rigid poli- cies and procedures to more informal guidelines and checklists. When managing multiple projects, the project manager must be granted some degree of freedom. This necessitates guidelines, checklists, and forms. Formal project management practices create excessive paperwork requirements, thus minimizing the opportunities to man- age multiple projects. The project size is also critical.

● Project Initiation: Managing multiple projects has been going on for almost 40 years. One thing that we have learned is that it can work well as long as the projects are in relatively different life-cycle phases because the demands on the project man- ager’s time are different for each life-cycle phase.

● Organizational Structures: If the project manager is to manage multiple pro- jects, then it is highly unlikely that the project manager will be a technical expert in all areas of all projects. Assuming that the accountability is shared with the line managers, the organization will most likely adopt a weak matrix structure.

21.8 END-OF-PHASE REVIEW MEETINGS

For more than 20 years, end-of-phase review meetings were simply an opportunity for executives to “rubber stamp” the project to continue. As only good news was presented the meetings were used to give the executives some degree of comfort concerning project status.

Today, end-of-phase review meetings take on a different dimension. First and foremost, executives are no longer afraid to cancel projects, especially if the objectives have changed, if the objectives are unreachable, or if the resources can be used on other activities that have a greater likelihood of success. Executives now spend more time assessing the risks in the future rather than focusing on accomplishments in the past.

Since project managers are now becoming more business-oriented rather than techni- cally oriented, the project managers are expected to present information on business risks, reassessment of the benefit-to-cost ratio, and any business decisions that could affect the ultimate objectives. Simply stated, the end-of-phase review meetings now focus more on business decisions, rather than on technical decisions.

End-of-Phase Review Meetings 1085

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HONICKER CORPORATION1

Honicker Corporation was well-recognized as a high-quality manufacturer of dashboards for automobiles and trucks. Although it serviced mainly

U.S. automotive and truck manufacturers, the opportunity to expand to a worldwide supplier was quite apparent. Its reputation was well-known worldwide but it was plagued for years with ultraconservative senior management leadership that prevented growth into the international marketplace.

When the new management team came on board in 2009, the conservatism disappeared. Honicker was cash rich, had large borrowing power and lines of credit with financial institu- tions, and received an AA-quality rating on its small amount of corporate debt. Rather than expand by building manufacturing facilities in various countries, Honicker decided to go the fast route by acquiring four companies around the world: Alpha, Beta, Gamma, and Delta Companies.

Each of the four acquired companies serviced mainly its own geographical areas. The senior management team in each of the four companies knew the culture in their geographic areas and had a good reputation with their clients and local stakeholders. The decision was made by Honicker to leave each company’s senior management teams intact provided that the necessary changes, as established by corporate, could be implemented.

Honicker wanted each company to have the manufacturing capability to supply parts to any Honicker client worldwide. But doing this was easier said than done. Honicker had an enterprise project management methodology (EPM) that worked well. Honicker understood project management and so did the majority of Honicker’s clients and stakeholders in the United States. Honicker recognized that the biggest challenge would be to get all of the divi- sions at the same level of project management maturity and using the same corporatewide EPM system or a modified version of it. It was expected that each of the four acquired companies may want some changes to be made.

The four acquired divisions were all at different levels of project management maturity. Alpha did have an EPM system and believed that its approach to project management was supe- rior to the one that Honicker was using. Beta Company was just beginning to learn project man- agement but did not have any formal EPM system although it did have a few project management templates that were being used for status reporting to its customers. Gamma and Delta Companies were clueless about project management.

To make matters worse, laws in each of the countries where the acquired companies were located created other stakeholders that had to be serviced, and all of these stakeholders were at different levels of project management maturity. In some countries government stakeholders were actively involved because of employment procurement laws whereas in other countries government stakeholders were passive participants unless health, safety, or environmental laws were broken.

It would certainly be a formidable task developing an EPM system that would satisfy all of the newly acquired companies, their clients, and their stakeholders.

1086 MODERN DEVELOPMENTS IN PROJECT MANAGEMENT

CASE STUDY

Background

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Honicker knew that there would be significant challenges in getting a pro- ject management agreement in a short amount of time. Honicker also

knew that there is never an acquisition of equals; there is always a “landlord” and “tenants,” and Honicker is the landlord. But acting as a landlord and exerting influence in the process could alienate some of the acquired companies and do more harm than good. Honicker’s approach was to treat this as a project, and each company, along with its clients and local stakeholders, would be treated as project stakeholders. Using stakeholder relations management practices would be essential to getting an agreement on the project management approach.

Honicker requested that each company assign three people to the project management implementation team that would be headed up by Honicker personnel. The ideal team member, as suggested by Honicker, would have some knowledge and/or experience in project manage- ment and be authorized by their senior levels of management to make decisions for their com- pany. The representatives should also understand the stakeholder needs from their clients and local stakeholders. Honicker wanted an understanding to be reached as early as possible that each company would agree to use the methodology that was finally decided upon by the team.

Senior management in each of the four companies sent a letter of understanding to Honicker promising to assign the most qualified personnel and agreeing to use the methodology that was agreed upon. Each stated that their company understood the importance of this project.

The first part of the project would be to come to an agreement on the methodology. The second part of the project would be to invite clients and stakeholders to see the methodology and provide feedback. This was essential since the clients and stakeholders would eventually be interfacing with the methodology.

Honicker had hoped that the team could come to an agreement on a compa- nywide EPM system within six months. But after the kickoff meeting was

over, Honicker realized that it would probably be two years before an agreement would be reached on the EPM system. There were several issues that became apparent at the first meeting:

● Each company had different time requirements for the project. ● Each company saw the importance of the project differently. ● Each company had its own culture and wanted to be sure that the final design was good

fit with that culture. ● Each company saw the status and power of the project manager differently. ● Despite the letters of understanding, two of the companies, Gamma and Delta, did not

understand their role and relationship with Honicker on this project. ● Alpha wanted to micromanage the project, believing that everyone should use its

methodology.

Senior management at Honicker asked the Honicker representatives at the kickoff meeting to prepare a confidential memo on their opinion of the first meeting with the team. The Honicker personnel prepared a memo including the following comments:

● Not all of the representatives at the meeting openly expressed their true feelings about the project.

● It was quite apparent that some of the companies would like to see the project fail. ● Some of the companies were afraid that the implementation of the new EPM system

would result in a shift in power and authority.

Case Study 1087

Establishing the Team

Kickoff Meeting

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● Some people were afraid that the new EPM system would show that fewer resources were needed in the functional organization, thus causing a downsizing of personnel and a reduction in bonuses that were currently based upon headcount in functional groups.

● Some seemed apprehensive that the implementation of the new system would cause a change in the company’s culture and working relationships with their clients.

● Some seemed afraid of learning a new system and being pressured into using it.

It was obvious that this would be no easy task. Honicker had to get to know all companies better and understand their needs and expectations. Honicker management had to show them that their opinion was of value and find ways to win their support.

QUESTIONS

1. What are Honicker’s options now? 2. What would you recommend that Honicker do first? 3. What if, after all attempts, Gamma and Delta companies refuse to come on board? 4. What if Alpha Company is adamant that its approach is best and refuses to budge? 5. What if Gamma and Delta Companies argue that their clients and stakeholders have

not readily accepted the project management approach and they wish to be left alone with regard to dealing with their clients?

6. Under what conditions would Honicker decide to back away and let each company do its own thing?

7. How easy or difficult is it to get several companies geographically dispersed to agree to the same culture and methodology?

8. If all four companies were willing to cooperate with one another, how long do you think it would take for an agreement on and acceptance to use the new EPM system?

9. Which stakeholders may be powerful and which are not? 10. Which stakeholder(s) may have the power to kill this project? 11. What can Honicker do to win their support? 12. If Honicker cannot win their support, then how should Honicker manage the opposi-

tion? 13. What if all four companies agree to the project management methodology and then

some of the client stakeholders show a lack of support for use of the methodology?

1088 MODERN DEVELOPMENTS IN PROJECT MANAGEMENT

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