Management of Project coursework

Project Cost Management Lecture 4 Management of Projects

Dr Paul Baguley 17th October

Contents

• Cost Engineering • Types of Cost • Cost Estimating • Crashing Projects • Critical Chain

The Cost of Everything Podcast

• Have a look: https://thecostofeverything.net/ • In this lecture we are considering the project cost of the film star wars • The Association of Cost Engineers AcostE is the UK trade association

for cost https://acoste.org.uk/node/1 • Association for Advancement of Cost Engineering (AACE) in the US,

here is a useful link to Cost Engineering terminology: https://library.aacei.org/terminology/welcome.shtml#D

Opener, cost of HS2

• https://www.youtube.com/watch?v=53fPt-n4WhI • PESTLE analysis and Value for Money

The perception of cost at the senior levels of a company and at political levels is critical

Star Wars Trailer (prototype?)

• https://www.youtube.com/watch?v=8Qn_spdM5Zg

Project Context

• We know there is a project life cycle where the more we know about a project increase as time goes on, i.e. we improve the project definition • We have selected the project in the first place (high level estimate) • We have developed a scope statement (high level estimate) • We have identified project objectives (high level estimate) • We have developed a PBS (product cost, can be high level and detailed

level) • We have developed a WBS (detailed) • We have developed a Schedule and Resource Loading to create a time

phased plan (detailed)

The cost of the cost estimate itself means that sometimes the initial estimates are under resourced setting up the project to fa

Organisation making the film

• There is an OEM who is the main supplier to the customer. • The OEM uses its own internal resources for its main competence and

utilises suppliers for other requirements • Our OEM is a Hollywood studio. It has some resources to produce

deliverables and conduct work packages by itself and also must utilise suppliers or contractors for other deliverables and work packages. • Typically an organisation has Business As Usual for its day to day

operations and also Projects to make changes to its BAU through increasing capability or making new products

Price negotiation is not just cost but also making sure your suppliers are reliable and will not go bankrupt

Project Context

• Project Life Cycle • Investment Appraisal • Scope Statement and or statement of work to suppliers • Product Breakdown Structure (See Galorath example) • Work Breakdown Structure (WBS) • Organisations being customer, OEM, Tier 1 suppler, Tier 2 supplier

A key part of cost is developing the estimating requirement and an estimating plan to deliver quality estimates

Typical Costs in Projects

• Labour • Material • Plant, equipment and facilities • Sub-contractors • Management, overheads, and administration • Fees and taxation • Inflation • Finance

Cost Accounting

• Financial Accounting (annual report) • Management Accounting (decision making in a company and used in

the ERP system) • Project Costs are costs attributed to a project cost account code • A cost account code is attributed at the work package level during the

project definition stage

Very often it is MISTAKEN that a cost engineer is an accountant with minimal understanding of the technical details of the project

Traditional Management Accounting Costs

• Material (raw materials, bought in parts, Commercial Off the Shelf) • Labour • Overhead (utilities, taxes, insurance, property, health and retirement,

depreciation of equipment, senior management, human resources, security)

Lack of detail in sharing out overhead costs has led to Activity Based Costing

Major Types of Cost

• Direct (dedicated costs to the project including labour, materials) • Indirect (Overhead including indirect labour, Selling and General

Administration)

• Fixed (one off costs for the project, e.g. buying a test facility) • Variable (costs based on volume, for example

• Non-recurring (one off cost, for example design costs) • Recurring (costs like machining the same part over and over to volume)

Example Project Cost Elements

• Direct Labour • Contractor • Project Management • Materials • Equipment • Nb. Project costs may not involve VAT from suppliers on the ERP

system • Supplier costs include their profit as part of a contractor quote

There are a range of cost element descriptions available to project engineers reporting cost in an ERP system

Form of a Contractor Quote for Utilities Pipe Repair • Survey • Access • Scaffolding (sub-contractor) • Painting • Supervision • Profit

Types of Cost

• Product cost (product cost elements: system, sub-system, bought in components, nuts and bolts and fasteners) is the aggregation of work package costs to make the product including wrapping or systems integration costs) • Cost per weight (example cost information or cost metric)

• Process cost (process cost elements: machining, assembly, test, transportation, inspection) • Cost per unit, cost per hour

• Service cost (providing a service in a hotel: laundry cost, cleaning room, reception cost, maintenance of hotel) • Cost per person

Types of Cost

• Full life cycle cost from cradle to grave

Systecon.com

Activity: Film Industry Costs, can you decide which type of cost it is and why in terms of direct and indirect cost? • Special effects • Editing • Extras • Filming • Distribution • Trailers • Advertising • Studio • Supplier Management • Directors • Main Actors • Film

Proposed Answer Direct Indirect Special effects by sub-contractor Editing by direct labour Editing equipment by indirect Extra direct labour Filming (direct labour) Indirect support labour for maintenance

of equipment Studio hire is direct Advertising department labour Director is direct labour Facilities costs are indirect like dressing

rooms Main actors are direct labour Supplier management staff Film is direct materials

Roles

• Cost Engineer provides cost information and is an engineer • Finance are management accountants providing, managing,

structuring and reporting cost information to finance, management and projects • The cost engineer estimates cost and has to be: an engineer, a

statistician, a management accountant, a planner, a communicator, a software programmer, a data analyst, an estimator, risk manager and others

Interesting story: A cost engineer in Airbus also estimated the cost of a bike shed for the factory as well aircraft costs

Why do we need cost estimators?

• To provide cost information during the full project life cycle for use by several roles, • Design engineers using CAD systems for cost effective design

decisions • Cost accountants collating cost information across cost accounts • Procurement during contract negotiation, i.e. should cost estimate • Risk managers in estimating cost impact of risk and uncertainty • Strategy analysts making decisions on which projects to undertake • Finance accountants for cash flows and affordability calculations durin

the full life cycle The role of the cost engineer is central to decision making, yet is poorly recognised as a profession

Decision during the full project life cycle

The accuracy of a cost estimate improves with the amount and quality of information available

Pinto 2020

What decisions are being made in your film project?

Source: AACE (Association for the Advancement of Cost Engineering) based in the US

Activity: What cost information is required at the early phases of the project? • Cost per minute of high technology special effects • Costs of star actors •

Cost Estimating Process

• It is important to have a formal process for repeatability and auditing for quality

The estimating process has been hypothesised by researchers as a significant source of error if not properly defined

Eight Step IPA process

Source: IPA

NASA Cost Estimating Process

This is a little more technical from NASA CEH, note the inclusion of risk and uncertainty

What is a Cost Driver?

• A cost driver is a variable which when it changes, then cost changes • The bigger something is then the more it costs, a size driver is the

driver of size of a project, for example volume, weight, numbers of lines of software code, duration of a film • There are examples of cost drivers at different levels, for example

whole project duration, or at work package level. • A work package level cost driver could labour or materials • Quantitative and Qualitative Cost Drivers • A qualitative cost driver is complexity or difficulty

Activity: What are the high level cost drivers for star wars? • Menti

Basis of the Estimate is the Single Most Important Document in Cost Management • Purpose of the estimate • Stakeholders • Data sources • Ground Rules and Assumptions • Cost Drivers • Uncertainty and Risk • Estimating Method used (regression / analogy /detailed/ subjective) • Estimating Calculation • WBS / CBS / EBS and PBS regarding procurement • Level of accuracy

Source: Government Audit Office handbook is excellent source of best practice 29

Main Estimating Methods

• Subject Matter Expert • Analogy or Comparative • Parametric • Detailed • Artificial Intelligence • Three Point Estimate • Commercial estimating software Source: IPA

Estimating methods by life cycle

Source: NASA CEH

Case: Cost of New Technology

• When the aerospace industry was starting to use new lighter composite materials there was a lack of historical data on which to base cost estimates for the manufacture of new composite materials. • There was knowledge of process times at prototype level of new

manufacturing technology like double diaphragm forming. However this not a finished technology and cost behaviour at volume production was untried. • In this scenario the basis of the estimate has • A lot of Subject Matter Expertise content • And there is a lot of uncertainty

Activity: by Analogy

• Estimate Star Wars by choosing a more expensive and less expensive film to estimate the possible range of cost

Estimating by Analogy Project Excavati

on Excavati on depth

Excavato r used

Contract or

Schedule Location Reinstat ement

Pressure of Valve

Project cost

NW Complex 30 metres

Vacuum PMC, high quality

20 weeks Urban in road

High quality

30 bar 2M GBP

London Complex 50 metres

Conventi onal

Low quality

50 weeks Verge High quality

25 bar 4M GBP

This hypothetical example only shows some data. There would be a lot more data fields available about each project. There are only two projects. Cost estimating by analogy means selecting the most similar cost example and using that value AS IS, i.e. do not adjust it

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Parametric cost model development

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Activity: by Parametric

• Collect public domain data about previous films which are comparable to Star Wars • Identify a cost driver for films, brain storm with your colleagues • Build a simple data set with 2 cost drivers • Pick the most important cost driver and plot the data on a simple

excel graph • Use LINEST to do simple linear regression • How accurate is this Cost Estimating Relationship?

Parametric

Cost Weight 1000 20 3000 45 5000 65

20000 150 30000 160 40000 200

215.9849 -6538.39 24.97319 3138.253 0.949238 4064.062 74.79952 4 1.24E+09 66066394

0 5000

10000 15000 20000 25000 30000 35000 40000 45000

0 50 100 150 200 250

Co st

/ £

Weight / Kg

WEIGHT

Shows drawn line of best fit, and the LINEST output from Excel

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Quality Statistics

• T-test to test the significance of the slope, is the slope variable in question much bigger than zero • F-test to test the significance of the equation as a whole, is the

equation much better than just the average cost • R squared, how much of the variation in the data is explained by the

equation • Residual analysis, are the errors randomly scattered

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R Squared

39ncl.ac.uk

Jig Saw Approach to Teaching and Learning

• Share your cost data with your colleagues around you • We are going to use duration of the film as a cost driver • This may or may not be a good cost driver • Hence build your data set

Film Cost Film Duration

Activity: Estimating the length of the River Nile • What strategy would you use to estimate the length of the River Nile?

Some data

• Length of the equator is 40,075 kilometres or 24,901 miles

Worldinmaps.com

Three point estimate

Shepperd, Martin. (2014). Cost Prediction and Software Project Management. Software Project Management in a Changing World. 51-71. 10.1007/978-3-642-55035-5_3.

PERT beta distribution

Source: “researchgate” 44

Activity: What is your three point estimate for star wars at concept design stage • Discuss

Sometimes people confuse probability jargon like most likely and average and also misunderstand optimistic and pessimistic

What is the minimum, most likely and maximum time it takes you to get to the university? • Menti

Example of Commercial Estimating Software

Example: Online COCOMO calculator Examples of High Level Parametric Cost Drivers • https://strs.grc.nasa.gov/repository/forms/cocomo-calculation/

Detailed estimate

• An aggregation of detailed cost information • Usually time multiplied by rates • Labour rates, overhead rates, personal time rate, amounts of

materials • Lots of small errors can be aggregated to produce larger overall error • Increased chance of user error • Takes more time to make the estimate • Generally most accurate estimate

Reasons for Cost Over Run

• Scope Creep • The conspiracy of optimism or optimism bias • High level of new technology and innovation • High level of complexity • VUCA environment (Volatility Uncertainty Complexity Ambiguity)

Crashing Projects

• Add resources from the company from elsewhere • Employ external temporary staff • Delete other work packages • Buy some specialist software • Use consultants • Sub-contract out part of the project • Innovate

The cost of lack of success in crashing the project could be losing the customer and future business

Crashing Projects can be simply

• Activity Crashing – adding more resources directly by increasing the number of resources • Or indirectly through the introduction of overtime • Fast tracking is overlapping of activities

Risk in throwing in more resource

• Substantial evidence to show: • Potential congestion in work area • More interruptions and disruptions • More absenteeism • Insufficient supervision • Lack of planning, particularly during the transition period

Asking workers to work longer

Benefits Cost Risk

Workers already recruited and familiar with the work

Workers rate of pay is enhanced for over time work

Substantial evidence to show that continuous overtime working is not effective and it actually reduces productivity in the “normal working week”

Critical Chain Examples

• A critical resource has to be available for a project work package to continue • For example in a special effects supplier the 3D graphics software

operator is highly skilled and experienced and required by concurrently running projects • In utilities the re-instatement machine and operator for restoring

road tarmac to final quality is expensive and is to be used by several concurrent projects • Critical chain is based on the Theory Of Constraints by Eliyahu

Goldratt

Critical Chain

• Theory of constraints focusses on the bottleneck in the system • In Project Management the bottleneck is the critical path • Activity time estimates are made using the PERT method assuming a

Beta distribution (see previously). Work Package managers usually add “safety” or “fat” onto the estimate which is a higher time than the average time • Student’s syndrome says that even though the work package has this

extra safety time then procrastination and leaving things mean the safety is lost • This means activities delay the project

Critical Chain Methodology

• Only allow the 50% time not to exceed estimate for activities • Activities not on the critical path start use the late start time • Put a project buffer on the end of the critical path • Put feeder buffers on parts of the network feeding into the critical path • No multi-tasking of the critical resource in the project • Where there is a critical resource needed on other projects have buffers to

protect against delays coming from other projects • The critical chain is the chain of activities across the concurrently running

projects or tasks within the same project where the critical resource is being used

Summary

• Cost engineering is critical to providing the right cost information at the right time on projects • There are different types of cost in projects and organisations. A cost

can be managed more effectively if it is specified in detail • A cost estimating process basis of estimate are critical to improve the

science and auditing of estimating and to facilitate learning • Cost estimating methods are dependent on the information available

and hence the state of the project life cycle