project management quiz
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class_vi.pptEM660 PROJECT MANAGEMENT
Class 6
Class 6 Agenda
- Finish Crashing
- Case Study 3
- Chapter 14 Pricing and Estimating
- Chapter 15 Cost Control
- Chapter 16 Trade-off Analysis
Chapter 14
Cost Estimating (p. 574)
Cost estimating is derived from prior experience.
Similar work
Professional reference material
Market surveys
Operations and process knowledge
Estimating software & databases
Interviews with subject experts.
Estimating tools can be formalized in manuals.
Types of Estimates
Cost estimates fall into two groups: conceptual
estimates and detailed estimates. Each can be broadly
defined as follows:
Conceptual Estimate
Conceptual estimating or parametric estimating is the process of establishing a project’s cost, often before a drawing of a facility has been developed.
Detailed Estimate
The detailed construction estimate is the product of a process whereby the cost of a proposed construction project is predicted. The estimate is prepared by breaking down the items of work in an orderly and logical basis, determining the cost of each item from experience, and summarizing the total.
Most Accurate
- Estimates based on quotations
Classes of Estimates (p. 575)
Inputs to Estimating
- Project Scope
- WBS
- Network Diagram
- Schedule
- Pricing Policy
- Culture & Systems
Once costs have been estimated, it’s time to have a kick-off meeting to further define them.
| Class | Types | Accuracy |
| I | Definitive | +/- 5% |
| II | Capital Cost | +/- 10 to 15% |
| III | Appropriation with some Capital Cost | +/- 15 to 20% |
| IV | Appropriation | +/- 20 to 25% |
| V | Feasibility | +/- 25 to 35% |
| VI | Order of Magnitude | > +/- 35% |
Types of Costs
- Costs can either be Variable or Fixed.
- Variable costs change with the amount of use or consumption (labor & materials).
- Fixed costs do not change (set-up costs).
- Costs can either be Direct or Indirect.
- Direct costs are directly attributable to the project work.
- Indirect costs benefit more than one project.
Direct Costs
Costs usually charged directly:
- Project staff
- Consultants
- Project supplies
- Publications
- Travel
- Training
Indirect Costs
Costs usually allocated indirectly:
- Utilities
- Rent
- Audit and legal
- Administrative staff
- Equipment rental
- Petrol
- Maintenance
- Generator
- Security
- Telephone
Labor and Overhead
Functional managers determine
the labor hours required for each
project task, then calculate the
dollars using the appropriate labor
rates.
Projecting labor rates over projects longer than one year are done with historical averages.
Overhead rates generally remain fairly constant, but management decides how to best distribute the cost.
- New projects may have lower overhead rates so more of their budget is available for R&D.
Materials/Support Costs
(p. 586)
Calculating material costs is time
consuming. A costed bill of
material is prepared for all
vendor purchased parts, including scrap factors and shelf life of perishable products.
A procurement plan is then developed to monitor spending, forecast inventory, and look for variances.
Support costs, such a travel, freight, computer hours and consulting are budgeted as a percentage into the cost of materials.
Pricing out the Work
(p. 589)
- Detailed WBS costs – pricing
out each task creates a cost
summary sheet
- Manpower curves – the project manager needs to smooth out peaks and valleys; this is preferred by the functional managers
Components of the Cost Budget
The rolling up process is called cost aggregation.
| Planning Steps | Examples |
| 8. Cost Budget | Compilation of individual cost estimates |
| 7. Management Reserve | Off-sets salary, price, material increases |
| 6. Cost Baseline | Baseline; only changes are approved ones |
| 5. Contingency Reserve | Used to off-set opportunities or threats |
| 4. Project | Projected project costs |
| 3. Control Account | Higher level oversight by function/dept. |
| 2. Work Packages | Detailed cost for each WBS element |
| 1. Activities | Lowest component possible for estimating |
Dangers of Low-Ball
Pricing (p. 599)
While being the lowest cost bidder
may attract business, customers
are increasingly concerned about
cost realism and the ability to
perform under contract.
A compliant, sound, technical and management proposal, based on past experience 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.
Cost vs. Quality
(p. 606)
When faced with inflexible
schedules or cost overruns,
executives are tempted to
sacrifice quality to keep costs
in line. While they assume cost and quality are linearly related, the following chart tells the tale:
If cost cutting is necessary, conduct an impact study or eliminate non-competitive projects.
| Project Costs | 85-90% | 10-15% |
| Tangible Quality | 10% | 90% |
| Time |
Time Value of Money (p. 614)
The time value of money says $1 now
(cash in hand) is worth more now than
at some future date.
Looking at it a different way, companies having a future cash target want to know how much they need to invest today to hit that target.
Three methods to evaluate project cash flows are:
1. Net Present Value (NPV)
2. Internal Rate of Return (IRR)
3. Payback Period
Which Project to Choose?
Available Funds = $3,000,000
Project Cost Payback Period
Upgrade Production Line $2 M 2 yr
Emissions Reduction $1.5M ---
Reduce Safety Risks $1M ---
Upgrade packaging sys. $2M 1 yr
Net Present Value
$10,000 target,
with 10% interest
Where: FV = Future Value
PV = Present Value
k = Interest Rate
n = Number of yrs
The decision criteria for using NPV is:
- If the NPV is > 0, accept the project.
- If the NPV is negative, reject the project.
| Year | Cash Inflow | 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 inflows | $8,722 | |
| Less initial investment | $10,000 | |
| NET PRESENT VALUE | - $1,278 |
Internal Rate of Return
- Companies that use IRR to
compare projects, purchases or
investments typically have a
calculation template to make decisions.
- The general rule is that you choose the project with the highest IRR, especially if it is more than your target or desired interest rate.
Example: You have 2 projects to choose from; Project A with an IRR of 21% or Project B with an IRR of 15%. Which do you prefer?
Payback Period
Payback period in capital budgeting
refers to the period of time required for
the return on an investment to "repay" the sum of the original investment. Uncertainties in future cash flows (which are typically estimates or extrapolations) make companies shy away from long-term payback periods.
Another reason to prefer short-term paybacks is the rapid obsolescence rate of technologies.
Example: You have 2 projects to choose from; Project A has a payback period of 6 months or Project B with payback period of 18 months. Which do you prefer?
Graphical Analysis of Discounted Cash Flows
Low Bid Dilemma
- The low cost may be perceived by the customer as unrealistic
- May be unnecessarily low thus eroding profits
- Price may be irrelevent to the bid objective, such as entering new markets
- Low pricing without market information is meaningless, price level is relative to competitive prices, customer’s budget, and the bidder’s cost estimate
- The customer may have budgeted for a higher price
Chapter 15 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.
Additionally, cost control should be practiced by all personnel involved in the project, not just the project manager.
Cost Controls (p.634)
The WBS is where all costs and
controls emanate. If you want
to know where the money is
going, go to the lowest denominator. Cost controls provide:
Verification – compare the actual to plans.
Decision making – reports provide feedback, identify deviations and variances, and highlight opportunities to take corrective action sooner.
Generating cost codes
(p. 637)
A cost account (or control account)
is an established level where the
work breakdown structure costs get assigned to functional departments. This is where the actual direct labor, material and overhead costs are compiled for management control purposes.
As the work is completed, the costs are assigned to a specific cost account (see figures 15-4 thru 15-6 – page 638). The result is reported (p. 643).
Budgets (p. 644)
A budget is a compilation of
individual cost estimates. Meeting
the cost baseline is a measure of
project success.
The project budget must be SMART and based on contractually negotiated costs, historical data, best estimates, or industrial engineering standards. The budget must identify planned manpower requirements, contract allocated changes, and dips into the management reserve.
Variance and Earned
Value (p. 647)
Cost account reports (pages &
pages of rows & rows of figures)
make it difficult to determine project status, except in a “bottom line” respect.
- Looking only at cost variances ignores work scheduled vs. work accomplished.
- Looking only at work performance and you miss the cost impact.
The Earned Value calculations join work & cost.
Variance and Earned Value
The PMP certification test stresses
knowing the following terms and
formulas (next slide).
| Acronym | Term | Interpretation |
| PV | Planned Value | Estimated value of planned work. |
| EV | Earned Value | Estimated value of actual work. |
| AC | Actual Cost | What is the actual cost of the work? |
| BAC | Budget @ Completion | How much did we budget for the project? |
| EAC | Estimate @ Completion | What is our current expectation of budget? |
| ETC | Estimate to Complete | How much more do we expect to spend? |
| VAC | Variance @ Completion | How much over or under did we end up? |
| Acronym | Term | Interpretation |
| Cost Variance (CV) | EV - AC | NEGATIVE is over budget, POSITIVE is under budget. |
| Schedule Variance (SV) | EV – PV | NEGATIVE is behind schedule, POSITIVE is ahead of schedule. |
| Cost Performance Index (CPI) | EV/PC | We are getting $ ______worth of work for every $1 spent. Over 1 is good, under 1 is under performing. |
| Schedule Performance Index (SPI) | EV/PV | We are (only) progressing at _________% of the original rate planned. Over 100% is good, less is under performing. |
| Estimate at Completion (EAC) | BAC/CPI | As of now, how much do we expect the total project to cost? ________________What is our current expectation of budget? |
| Estimate to Complete (ETC) | EAC – AC | How much more will the project cost? |
| Variance at Completion (VAC) | BAC - EAC | How much over or under did we end up? |
Cost Justification (p. 668)
Project pricing is often based upon
best guesses rather than concrete
estimates.
- If cost is not your primary driver, then hitting your budget may be enough.
- If you are in a competitive bid process, costing is generally scrutinized & justified for approval.
Forward pricing, weighted averages, margins and allowances can help cover hidden costs.
Reporting Variances
& Controls
The earned value system creates
reports:
- Performance Reports
- Status Reports
- Projection Reports
- Exception Reports
Once reviewed, management may:
1) Approve
2) Authorize
3) Take Action
Cost Overrun Dilemma
- Alternatives:
- Cut costs-reduce scope, reduce quality
- Pull the plug and cancel Project
- Accept Overrun
Chapter 16 Trade Off Analysis
The project manager constantly works to keep the “triple constraints” in line. Situations arise that make this difficult, requiring trade-offs.
Many factors go into trade-off decisions; sometimes it is not possible to sacrifice one item without
affecting the others.
Methodology
Project managers need to identify the problem, determine what needs to change, and then find a win-win situation if possible.
Situation 1: Performance
Must Hold
Customer is demanding or quality reputation must be maintained.
- Add extra resources.
- Change scope to delete work.
- Shift labor from slack to critical path.
- Try concurrent engineering; parallel paths.
It may be possible that additional resources and overtime may be used to meet the time target; costs will likely go up as a result.
Situation 2: Costs Remain
Fixed
When costs are fixed, performance
will vary as a function of time.
Performance requirements must be clearly written to determine what may be excluded or included.
- Cut down on unnecessary paperwork.
- Cross train; become more cross-functional.
- Farm work out or delegate.
To maintain costs & not let performance suffer, system improvements need to be sought.
Situation 3: Time
Remains Fixed
When time is fixed, performance
will vary as a function of cost. The
question will become: can we pass off the cost/quality problem to the customer, and do we want any repeat business?
Work with the customer to see if they can help.
- See if the customer is really ready for product.
- Give early warning & coordinate w/customer.
- They may be flexible to certain suggestions.
Situation 4: No Constraints
Fixed
This is where your project is
suffering (or is trending that way)
one or more triple constraint issues.
Generally, brainstorming will create a list of potential corrective actions, which will be compared to the project and/or company objectives.
Trade-offs are determined and approved, then the entire project team commits to the revision.
Project Planning: A Roadmap
- Develop project charter
- Establish work breakdown structure
- Analyze sequencing relationships
- Estimate “normal” activity durations
- Perform network calculations and validate/revise initial
- schedule
- Perform time-cost tradeoff analysis
- Load resources to activities and resolve any resource/workload imbalances
- Develop budget and cash flow plan based on analysis of direct and indirect costs
- Analyze schedule risk
- Monitor and control project
Crashing the Network to
Shorten the Project Duration
- It always makes sense to focus on activities that are on the critical path
- That being said, there are numerous heuristics for choosing activities to crash
- In this class, we will focus what is called the lowest acceleration cost heuristic
- Think of this as “where can I get the most bang for my buck” i.e., what is most cost effective
Other Heuristics for Considering
What to Crash
- Crashing so-called bottleneck activities (i.e., activities that are on multiple critical paths)
- Crashing activities that occur relatively early in the project and are labor intensive
- Crashing activities with relatively long durations
- Crashing activities that are not likely to cause quality problems if crashed
Time/Cost Trade-off Analysis
- You might think that total project costs will increase when we begin to crash activities
- But, total project costs consist of both indirect (project-based) costs (PBC) and activity-based costs (ABC)
- – ABC goes up when we crash activities in an effort to finish the project early
- – But, PBC (the indirect costs) goes down if we finish the project early
Steps for Performing
Time/Cost Trade-off Analysis
- Estimate project-based (indirect) cost per unit time
- Select critical activity (or activities, if there are multiple critical paths) that are good candidates for crashing (use lowest acceleration cost heuristic)
- Incrementally crash (i.e., shave a day off of) the selected activity where that is possible (or activities, if there are multiple critical paths and no bottleneck activities that are economical to crash)
Steps for Performing Time/Cost
Trade-off Analysis
- Keep track of the activity-based (direct) cost of crashing the selected activity (or activities) and indirect cost savings associated with reducing overall project duration
- Recalculate the forward pass and check for changes in critical path
- Continue until acceptable duration is reached or it becomes uneconomical to continue crashing the project
Using the Lowest Acceleration
Cost Heuristic to Figure out What
to Crash
- Considers both the normal cost and the crash cost
- Normal cost is defined as the cost associated with the most economical way of doing something and results in what we call the normal activity duration
- Crash cost is defined as the cost associated with the fastest way of doing something and results in what we call the crash duration
- Acceleration cost = (Crash Cost – Normal Cost)
- ($/day) (Normal Duration – Crash Duration)
The Project Trade-Off
Twinkie
- Think of projects as cream
filled Twinkies. When we squeeze one corner of the Twinkie the filling oozes out the others. That’s an elegant example of a project trade-off
Project Trade-Off
Twinkie
- Take away resources and duration will increase
- Increase the delivered business value, the cost and duration will both rise.
- Increase the certainty of the finishing date, the cost will increase as we “buy” risk insurance.
Other Possible Actions to Utilize
- Overtime
- Double shifts
- Expediting
- Additional Manpower
- More Money
- Change vendors
- Change specifications
- Shift of project resources
- Waiving equipment inspections
- Change in statement of work
- Change in work breakdown structure
Next week
- Chapter 17 Risk Management
- Case Study 4 Presentation
- Project Proposals are Due March 26th
- Quiz 2 Next Week on March 5th
