MBP1133 Project Management Framework Prepared by Dr Khairul Anuar

Transcription

1 MBP1133 Project Management Framework Prepared by Dr Khairul Anuar L3 Project Cost Management

2 Content 1. Introduction 2. Management cost and control system 3. Planning and control system 4. Understanding Control 5. Justifying the Costs 6. The Cost Overrun Dilemma 7. Earned value management system (EVMS) 8. Life-Cycle Costing 2

3 1. Introduction 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 3

4 2. Management cost and control system 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 twocycle 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. 4

5 2. Management cost and control system FIGURE Phases of a management cost and control system 5

6 2. Management cost and control system 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 completion. Its purpose is to establish policies, procedures, and techniques that can be used in the day-to-day management and control of projects and programs. 6

7 4. 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 established during the planning cycle. 7

8 4. Understanding Control 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%. Likewise, having a production line turn out exactly 200 items, as planned, loses its significance if a 50% cost overrun is incurred. All three resource parameters (time, cost, and performance) must be analyzed as a group, or else we might win the battle but lose the war. 8

9 4. Understanding Control 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. 9

10 4. Understanding Control FIGURE Cost reduction analysis. 10

11 4. Understanding Control FIGURE People with the ability to influence cost. 11

12 5. Justifying the Costs 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 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. 12

13 5. Justifying the Costs 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 possible 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. 13

14 5. Justifying the Costs Risks: Risk analysis may be based upon the quality of the estimates and experience 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, (eg. cost of capital, shipping/transportation) can erode all of the profitability expected on a project. Another potentially hidden cost is the yearly or monthly workload availability. Vacation, sick leave, paid holidays will substantially reduce the hour available for work of an employee. 14

15 6. The Cost Overrun Dilemma When overruns occur, the project manager looks for ways of reducing costs. The simplest 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 estimating process and were therefore underestimated. 15

16 6. The Cost Overrun Dilemma 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 16

17 6. The Cost Overrun Dilemma 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 Qualitative reasons 17

18 Quantitative reasons 6. The Cost Overrun Dilemma 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 18

19 6. The Cost Overrun Dilemma 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 19

20 7. Earned value management system (EVMS) The critical question in US Government projects (US Air Force,1966) was whether project managers were managing costs or just monitoring 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. 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. 20

21 7. Earned value management system (EVMS) 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% of the budget, does that imply that you are 20% complete? If you are 30% complete, then have you spent 30% of the budget? 21

22 7. Earned value management system (EVMS) 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 22

23 7. Earned value management system (EVMS) 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 usually 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. 23

24 8. Life-Cycle Costing In some R&D organizations, technical 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. 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 manufacturing. 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 unanticipated expenses may result at a point where no alternatives exist. 24

25 8. Life-Cycle Costing Life-cycle costs are the total cost to the organization for the ownership and acquisition 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 development, spare/repair parts provisioning, technical data development, training, and entry of items into inventory. 25

26 8. Life-Cycle Costing 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 phasing the product out of inventory due to obsolescence or wearout, and subsequent equipment item recycling and reclamation as appropriate. 26

27 8. Life-Cycle Costing Figure shows the various life-cycle phases for US Department of Defense projects. At the end of the demonstration and validation phase (which is the completion of R&D) 85% 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% (excluding the effects of learning curve experiences). 27

28 8. Life-Cycle Costing FIGURE Department of Defense life-cycle phases. 28

29 8. Life-Cycle Costing Figure shows that, at the end of the R&D phase, 95 percent of the cumulative life-cycle cost is committed by the government. 29