Transcript Managing Cost Overruns on projects

Managing Cost Overruns on
projects
Managing
Cost
Overruns
and Project
Management
Rajiv Dua BSc.(Eng), PMP
Today's AGENDA
• Introduction’s
• Seminar Objective
• Seminar Content
Introduction to Project Management
The Triple Constraint and the nine knowledge areas
The processes of project Management
Cost Overruns
Some methods of overcoming Cost Overruns
Seminar Objective
• To provide a basic understanding of the
fundamental project management principles as
per the “Project Management Institute” (PMI) with
particular reference to the “Triple Constraint”. With
this knowledge attempt to discuss “Cost Overruns”
in projects and discuss some methods to
overcome these opportunities.
Cost Overrun definition
• Cost Overruns are the additional percentage or
dollar amount by which actual costs exceed
estimates
Questions?
• What kind of Cost Overruns do some of you think
you have in your respective organizations?
• Why do you think this is or has happened?
What is a Project?
• A project is a temporary endeavor undertaken to create a unique
product or service or result
Project Attributes
• A project has a unique purpose.
– Every project should have a well-defined objective.
• A project is temporary.
– A project has a definite beginning and a definite end.
• A project requires resources.
– Resources include people, hardware, software, or other assets.
Project Attributes
• A project should have a primary sponsor or customer.
• A project involves uncertainty
Project Manager
• A Project Manager is the key to a projects
success.
• Project Managers work with the Project Sponsors,
Project team and other stakeholders involved in a
project to ensure successful completion of the
project.
Definitions
Project Manager
Project Sponsor
Project Team Members
Functional Line Managers
Stakeholders – Internal and External
Steering Committee
Project Characteristics
• Four Key Characteristics
– It is an answer to a business opportunity or problem
• It has a specific objective...
– It must be approved to proceed
• It consumes resources...
– It is confined by definable boundaries
• It has defined scope, budget, schedule...
– It goes through distinct stages
• It has a beginning, a middle and an end...
Triggers of a project
• Projects can be created to answer to a business
opportunity or problem
– It has a specific, usually time-sensitive objective...
– A project objective can be internally or externally
triggered:
• Internal triggers e.g. a condition impacting the
operation of an organization
–
–
–
–
high costs
poor quality
new products or services
Efficiency of employees
• External triggers e.g. a condition imposed on the
organization
– regulations, codes
– competing products
– external decisions
WHAT IS A PROJECT ?
• It is confined by definable boundaries
– It has defined scope, budget, schedule...
– Boundaries defining a project include:
• Scope: What IS and IS NOT included as part of the
project
• Budget : How much can be expended for direct and
indirect costs
• Schedule : Start and end dates for each deliverable
• Quality : Qualitative terms, conditions and
expectations expressing each stakeholders’ interests
(ISO 9001,etc.)
WHAT IS A PROJECT ?
• It goes through distinct stages
– It has a beginning, a middle and an end...
– From a project management perspective there are
three main stages:
• Initiation
• Execution
• Wrap-up
PROJECTS vs. OPERATIONS
• Projects differ from ongoing operations in the
following ways:
–
–
–
–
projects start and end
projects are focused on one objective
projects have short term strategies
projects end!!
– ongoing operations are focused on continuing support
of an organization
– ongoing operations have long term strategies
– ongoing operations focus on multiple objectives
– ongoing operations don’t (normally) end!!
Project Constraints
• Every project is constrained in different ways by its
scope, time goals, and cost goals.
– Scope:
What is the project trying to accomplish?
– Time: How long should it take to complete the project?
– Cost: What should it cost to complete the project?
• These limitations are referred to as the Triple
Constraint of project management.
– Managing the triple constraint means making trade-offs
between project scope, time and cost goals for a project.
Project Constraints
Operations and Projects
• Operations are existing systems and functions
whereas Projects are one-time multi-disciplinary
resource configuration.
• Operations focus on “Maintaining”, whereas
Projects focus on “Change”.
What is Project Management?
• Project Management is “the application of knowledge,
skills, tools and techniques to project activities in
order to meet or exceed stakeholder needs and
expectations from a project.”
Project Management Framework
T
Stakeholders: The people involved in or affected by the projects
activities. These include the the project sponsor, project
team, support staff, customers, users, suppliers and even
opponents to the project.
Project Management Framework
T
Knowledge Areas: the NINE key competencies that project managers
must develop.
Project Management Framework
T
Scope Management: involves defining and managing all the work
required to successfully complete the project.
Project Management Framework
T
Time Management: includes estimating how long it will take to
complete the work, developing an acceptable
project schedule, and ensuring timely completion
of the project.
Project Management Framework
T
Cost Management: consists of preparing and managing the budget for
the project.
Project Management Framework
T
Quality Management: ensures the project will satisfy the stated or
implied needs for which it was undertaken.
Project Management Framework
T
HR Management: concerned with making effective use of the people
involved with the project.
Project Management Framework
T
Comm. Management: involves generating, collecting, disseminating and
storing project information.
Project Management Framework
T
Risk Management: includes identifying, analyzing and responding to
risks related to the project.
Project Management Framework
T
Procure. Management: involves acquiring or procuring goods and
services that are needed for a project from
outside the performing organization.
Project Management Framework
T
Project Mgmt. Integration: is an over-arching function that affects and
is affected by all of the other knowledge
areas. (This is where it is all brought
together.)
Project Management Framework
T
Tool and Techniques: these assist the project managers and their teams
in carrying out the management functions of the
9 Knowledge Areas. Examples of these include
WBS Diagrams and Gantt Charts.
A Systems View of Project Management
• Many IT professionals are to busy with their day-to-day activities
and often become frustrated by an organizations politics and
“red tape” and they often ignore key business issues.
• Using a holistic (systems management) approach, helps them
integrate business and organizational issues into their project
planning, and helps them look at projects as a series of phases.
– This ensures that project managers do a better job of planning and
developing the project, which leads to increased project success.
Project Phases and the
Project Life Cycle
• A project life cycle is a collection of project phases.
• Project phases vary by project or industry, but some
general phases include:
–
–
–
–
Concept
Development
Implementation
Close-Out
• The first two phases focus on planning and are often
referred to as project feasibility.
• The last two phases focus on deliverables and are often
referred to as project acquisition.
Project Phases and the
Project Life Cycle
• Concept Phase
– A high-level or summary project plan is developed
to briefly describe the project and why it is needed.
– A rough cost estimate is developed.
– A rough overview of the work involved is developed
in a work breakdown structure format.
• Work Breakdown Structure (WBS): an outcome
oriented document that defines the total scope
of the project.
– At the concept level the WBS document breaks the
work tasks out to no more than three levels (3 level
WBS).
Project Phases and the
Project Life Cycle
• Development Phase
– A more detailed project plan is developed.
– A more accurate cost estimate is developed.
– A more thorough WBS is developed.
• Implementation Phase
– Project team delivers the required work.
– A very accurate cost (or final cost) estimate is developed.
– This phase is where the bulk of the projects time and money should
be spent.
Project Phases and the
Project Life Cycle
• Close-out Phase
– All of the work is completed and all project activities are
wrapped up.
– There should be a formal customer acceptance of the
entire project and the products it produced.
– A “lessons learned” document is created for reference in
similar future projects. (This should be done if the project
is a failure as well or does not make it to the close-out
phase.)
• This phased approach minimizes the time and money
spent developing inappropriate projects. A project must
pass the concept phase before continuing into the
development phase and so on.
Project Phases and the
Project Life Cycle
Organizational Frames
• Project managers often do not spend enough time
understanding the political context of a project in an
organization.
– To improve the success rate of IT projects, project managers
must develop a better understanding of people and
organizations.
• Organizations can be viewed as having four different
frames:
– Structural Frame – Organizational chart
– Human Resources Frame – shortage of IT and Unrealistic
schedules
– Political Frame – Conflict and Power struggles for resources
– Symbolic Frame - Organizational Culture
Organizational Structures
• Most organizations focus on the structural frame.
– Most people know what an organizational chart is and can
follow them.
– New managers typically try to change the organizational
structure when other changes are needed, and to carve out
their piece of the pie.
• There are three general classifications of organization
structures:
– Functional
– Project
– Matrix
Organizational Structures
Project Manager’s Influence
Organization Type
Project
Characteristic
s
Functiona
l
Project manager’s authority
little or none
limited
low to
moderate
moderate to
high
high to almost
total
Percentage of performing
organization’s personnel
assigned full-time to project
work
virtually none
0-25%
15-60%
50-95%
85-100%
Project manager’s role
Part-time
Part-time
Full-time
Full-time
Full-time
Common title for project
manager’s role
Project
Coordinator/
Project Leader
Project
Coordinator/P
roject Leader
Project
Manager/
Project
Officer
Project
Manager/
Program
Manager
Project
Manager/
Program
Manager
Project management
administrative staff
Part-time
Part-time
Part-time
Full-time
Full-time
Matrix
Weak
Balance
d
Project
Strong
Top Management Is The Key
• Top management commitment is crucial to the projects
success for the following reasons:
– Project managers need adequate resources.
– Project managers often require approval for unique project
needs in a timely manner.
– Murphy’s Law is understood which relates to Management
Reserves
– Project managers require cooperation from stakeholders in
other parts of the organization.
Top Management Is The Key
– Project managers must have cooperation from people in
other parts of the organization.
– Project managers often need someone to coach and
mentor them on the finer points of leadership.
Project Management Process Groups
• Project management can be viewed as a number of interlinked
processes.
– A process is a series of actions directed toward a particular result.
• The five project management process groups are :
–
–
–
–
–
Initiating processes
Planning processes
Executing processes
Controlling processes
Closing processes
Process Groups
Project Management Process Groups
• Initiating processes:
– These processes are used to initiate every phase of the
project life cycle including the close-out phase.
– In the concept phase it is used to define the business
need for the project, the project sponsor, and the project
manager.
– To end a project the initiating processes are used to
ensure that all work is completed, the customers
acceptance of the work, the lessons learned document
is created and that resources are reassigned.
Project Management Process Groups
• Planning Processes:
– Used to devise and maintain a workable scheme to
accomplish the business need that the project was
to address.
– Project plans are created to define each knowledge
area as it relates to the project at that point in time.
(As the project travels through its life cycle.)
– The processes are also used to account for
changing conditions on a project and in an
organization, project plans are often revised during
each phase of the project life cycle.
Project Management Process Groups
• Executing processes:
– These process are used to ensure the coordination of people and
other resources follow the project plan and produce the
deliverables of either the project or the phase that the project is
currently in.
Executing processes include:
–
–
–
–
–
–
developing the project team
providing leadership
verifying project scope
assuring product quality
disseminating information
procuring resources and delivering the work.
Project Management Process Groups
• Controlling processes:
– These processes are used to ensure that the project objectives are
met.
– Projects must be continually monitored and their progress
measured against the project plan to ensure corrective actions are
taken when necessary.
– Controlling processes include performance and status reviews.
– Controlling processes are also used to follow project changes and
ensure that the changes are identified, analyzed and managed in
accordance with the project plan.
Project Management Process Groups
• Closing processes:
– These processes are used to formalize the acceptance of the
project or phase and bring it to an orderly end.
– This often involves archiving project files, documenting lessons
learned and receiving formal acceptance of work delivered.
• These phases are not discrete, one-time events, but occur at
varying levels throughout every phase of the projects life cycle,
and even vary in activities and time for each separate project.
Project Management Process Groups
(PMBOK 2000)
Knowledge Area
Integration
Initiating Planning
Scope
Initiation
Time
Cost
Quality
Human
resources
Communications
Risk
Procurement
Project Process Groups
Executing
Controlling
Project plan
development
Project plan
execution
Scope planning
Scope
verification
Activity
definition
Activity
sequencing
Activity
duration
estimating
Schedule
development
Resource
planning
Cost estimating
Cost budgeting
Quality planning
Organizational
planning
Staff acquisition
Communications
planning
Risk
identification
Risk
quantification
Risk response
development
Procurement
planning
solicitation
planning
Closing
Overall
change
control
Scope change
control
Schedule
control
Cost control
Quality
assurance
Team
development
Quality
control
Information
distribution
Performance
reporting
Risk response
control
Solicitation
Source
selection
Contract
administration
Administrative
closure
Contract closeout
Relationships Among Process Groups
and Knowledge Areas PMBOK 2004
PMBOK® Guide 2004, p. 69
Relationships Among Process Groups
and Knowledge Areas (cont’d)
Project Integration Management
• Project Integration Management - the processes involved in
coordinating all of the other project management knowledge
areas throughout a project’s life cycle.
• The main process involved in project integration management
include:
– Project Plan Development
– Project Plan Execution
– Integrated Change Control
Project Integration Management
This diagram shows how project integration management pulls
together and focuses the knowledge areas throughout the project’s
life cycle and guides these elements toward successful completion.
Project Integration Management
• Project integration management must occur within the
context of the whole organization, not just within a
particular project but on-going operations
– Project managers must always view their projects in the
context of the changing needs of their organizations and
respond to requests from senior managers.
– Project integration management involves integrating
knowledge areas within the project
– Integrating different areas outside the project.
Project Charters
• After deciding what project to work on, it is important
to let the rest of the organization know.
• A project charter is a document that formally
recognizes the existence of a project and provides
direction on the project’s objectives and management.
• Key project stakeholders should sign a project charter
to acknowledge agreement on the need and intent of
the project; a signed charter is a key output of project
integration management.
Sample Project Charter
Sample Project
Charter (cont’d)
Scope planning
• Involves creating documents that detail the basis
for future project decisions, including the criteria
for determining if a project or a phase is
completed successfully
• Output of the scope planning process
– Scope statement
– Scope statement’s supporting detail
– Scope management plan
Preliminary
Scope Statements (PMBOK 2004)
• A scope statement is a document used to
develop and confirm a common understanding of
the project scope.
• It is an important tool for preventing scope
creep:
– The tendency for project scope to keep getting bigger.
• A good practice is to develop a preliminary or
initial scope statement during project initiation
and a more detailed scope statement as the
project progresses.
Contents of a Preliminary Scope
Statement (2004)
 Project objectives
 Product or service
requirements and
characteristics
 Project boundaries
 Deliverables
 Product acceptance
criteria
 Project assumptions and
constraints
 Organizational structure
for the project
 Initial list of defined risks
 Summary of schedule
milestones
 Rough order of
magnitude cost estimate
 Configuration
management
requirements
 Description of approval
requirements
Further Defining Project Scope
Project Management Plans
• A project management plan is a document
used to coordinate all project planning
documents and help guide a project’s
execution and control.
• Plans created in the other knowledge areas
are subsidiary parts of the overall project
management plan.
Attributes of Project Plans
• Just as projects are unique, so are project plans.
• Plans should be:
– Dynamic
– Flexible
– Updated as changes occur
• Plans should first and foremost guide project
execution by helping the project manager lead the
project team and assess project status.
Project Execution
• Project execution involves managing and
performing the work described in the project
management plan.
• The majority of time and money is usually
spent on execution.
What Went Wrong?
• Many people have a poor view of plans based on their experiences.
Top managers often require a project management plan, but then
no one follows up on whether the plan was followed. For example,
one project manager said he would meet with each project team
leader within two months to review their project plans. The project
manager created a detailed schedule for these reviews. He
cancelled the first meeting due to another business commitment.
He rescheduled the next meeting for unexplained personal reasons.
Two months later, the project manager had still not met with over
half of the project team leaders. Why should project members feel
obligated to follow their own plans when the project manager
obviously did not follow his?
• Could this cause cost overruns?
Integrated change control
process
Change Control on Information
Technology Projects
• Former view: The project team should strive to
do exactly what was planned on time and within
budget.
• Problem: Stakeholders rarely agreed
beforehand on the project scope, and time and
cost estimates were inaccurate.
• Modern view: Project management is a process
of constant communication and negotiation.
• Solution: Changes are often beneficial, and the
project team should plan for them.
Change Control Boards (CCBs)
• A formal group of people responsible for approving
or rejecting changes on a project.
• CCBs provide guidelines for preparing change
requests, evaluate change requests, and manage
the implementation of approved changes.
• CCBs include stakeholders from the entire
organization.
Making Timely Changes
• Some CCBs only meet occasionally, so it may
take too long for changes to occur.
• Some organizations have policies in place for
time-sensitive changes.
– A “48-hour policy” allows project team members to
make a decision and have 48 hours to seek approval
from top management. If the team decision cannot be
implemented, management has 48 hours to reverse a
decision; otherwise, the team’s decision is approved.
– Another policy is to delegate changes to the lowest
level possible, but keep everyone informed of changes.
What is Project Scope Management?
• Scope refers to all the work involved in creating
the products of the project and the processes
used to create them.
• A deliverable is a product produced as part of a
project, such as hardware or software, planning
documents, or meeting minutes.
• What’s in and what’s out
Creating the Work Breakdown
Structure (WBS)
• A WBS is a deliverable-oriented grouping of the
work involved in a project that defines the total
scope of the project.
• A WBS is a foundation document that provides
the basis for planning and managing project
schedules, costs, resources, and changes.
• Decomposition is subdividing project
deliverables into smaller pieces.
Sample Intranet WBS
Organized by Phase
Intranet WBS in Tabular Form
1.0 Concept
1.1 Evaluate current systems
1.2 Define requirements
1.2.1 Define user requirements
1.2.2 Define content requirements
1.2.3 Define system requirements
1.2.4 Define server owner requirements
1.3 Define specific functionality
1.4 Define risks and risk management approach
1.5 Develop project plan
1.6 Brief Web development team
2.0 Web Site Design
3.0 Web Site Development
4.0 Roll Out
5.0 Support
Figure 5-4. Intranet Gantt Chart Organized by Project
Management Process Groups
Approaches to Developing
WBSs
• Guidelines: Some organizations, such as the
DOD, provide guidelines for preparing WBSs.
• Analogy approach: Review WBSs of similar
projects and tailor to your project.
• Top-down approach: Start with the largest items
of the project and break them down.
• Bottom-up approach: Start with the specific
tasks and roll them up.
• Mind-mapping approach: Write tasks in a nonlinear, branching format and then create the
WBS structure.
Sample Mind-Mapping Approach
Resulting WBS in Chart Form
Scope Verification and Change
Control
• Many IT projects suffer from “scope creep” caused by
scope changes. As a result it is very important to verify
the project scope and minimize scope changes.
• Scope Creep – The tendency for a projects scope to
keep getting bigger and bigger, thereby dragging out
the completion date of the project.
• To minimize or prevent scope creep, the project’s
scope should go through a scope verification process.
Scope Verification
– Scope Verification – This involves formal
acceptance of project’s scope by the stakeholders.
– To receive this acceptance the project team
members must develop clear documentation of the
project’s products and procedures for evaluating
those products.
Scope Verification & Scope
Change Control
• Inevitably there will still be changes made to the
projects scope which will have to be managed
through a “scope change control” process.
• Scope Change Control – involves controlling changes
to the project scope.
– To minimize scope change control, it is crucial to do a good
job during scope verification. However, as a project manager
you should still expect and prepare for requested changes
that come from the customer.
• The following table shows the Top 10 factors that
cause problems for IT projects.
Scope Verification cause for Cost
Overruns
Factor
Rank
Lack of user input
1
Incomplete requirements and specifications
2
Changing requirements and specifications
3
Lack of executive support
4
Technology incompetence
5
Lack of resources
6
Unrealistic expectations
7
Unclear objectives
8
Unrealistic time frames
9
New technology
10
Project Management
Project Time Management
The importance of
project time management
• Many projects can be determined failures in terms of
meeting scope, time and cost projections.
– In one study the average time for unsuccessful overruns
of IT projects ran at 222%. A follow up study showed that
this overrun period had been reduced to nearly 65%.
• Most project managers state that scheduling issues are
the main reasons for conflicts during a projects life
cycle.
Importance of Project Schedules
• Managers often cite delivering projects on time as one of
their biggest challenges.
• Fifty percent of IT projects were challenged in the 2003
CHAOS study, and their average time overrun increased to
82 percent from a low of 63 percent in 2000.*
• Schedule issues are the main reason for conflicts on
projects, especially during the second half of projects.
• Time has the least amount of flexibility; it passes no matter
what happens on a project.
*The Standish Group, “Latest Standish Group CHAOS Report Shows Project Success
Rates Have Improved by 50%,” (www.standishgroup.com) (March 25, 2003).
Conflict Intensity Over the Life
of a Project
0.40
Conflict Intensity
0.35
0.30
Schedules
0.25
Average
Total Conflict
0.20
Priorities
Manpower
Technical opinions
Procedures
0.15
Cost
Personality conflicts
0.10
0.05
0.00
Project
Formation
Early Phases
Middle Phases
End Phases
Project Time Management
• One of the reasons that schedule problems are so
frequent is due to the time it takes to perform
respected tasks that are underestimated.
– Once the project schedule is in place schedule performance
can be calculated by subtracting the estimated time for
completing a task, from the actual time it really took to
complete.
– However, one of the things to keep in mind when doing this,
is to include the approved changes or (changes to the
baseline) to the calculation. This usually reduces the gap
between the estimated and the actual times.
Project Time Management
• Project Time Management – The process required to ensure
timely completion of a project
• For project managers, time is the least forgiving, and least
flexible variable in the project.
– Time cannot be stopped, no matter what changes have been
requested, what resource conflicts are occurring, or what
problems have been encountered.
• As a result, project time management is:
– Considered one of the most difficult tasks to both improve
and successfully achieve.
– Considered critically important in determining the overall
success of a project.
Project Time Management
The Basic Processes
• The main processes involved in project time
management include:
– Activity definition.
• This involves identifying the specific activities that the
project team members and stakeholders must perform
to produce the project deliverables.
• In some projects identifying all of the tasks is a feat
unto itself. Therefore it is very important to ensure that
as many as possible are identified, because those that
are missed will ultimately throw the project of schedule.
Project Time Management
The Basic Processes
– Activity sequencing.
• This involves identifying and documenting the relationships
between project activities.
• It is important to know which tasks can be performed at the same
time and which ones are dependant on a previous task being
completed first.
– Activity duration estimating.
• This involves estimating the number of work periods that are
needed to complete individual activities. (Remember an unwritten
rule is a work package can represent about 80 hours of work.)
remember this comes from the WBS.
• Here the project manager must work closely with his team leaders to
take a best guess at how long it will take to complete a task. They
must be careful not to estimate to much or to little.
Project Time Management
The Basic Processes
– Schedule development.
• This involves analyzing the activity sequences, activity duration
estimates, and resource requirements to create the project
schedule.
• Here the activity sequences and activity duration estimates are
double checked and matched to available resources. Once it is
verified the projects schedule is committed to documentation for
sign-off. (At this point the project schedule is almost law.)
– Schedule control.
• This involves controlling and managing the changes to the projects
schedule.
• This is where the law gets broken, and most often this is where the
proverbial back of the project gets broken.
Project Time Management
The Tools and Techniques
– The completion date that the project manager and team
members come up with may not reflect the completion date in
the project charter.
• If this is the case the project manager must go back to the
project sponsor or customer and renegotiate changes to the
triple constraint.
Activity Sequencing
• There are three basic reasons for creating
dependencies, often called the types of
dependencies, among project activities.
They are:
– Mandatory dependencies.
– Discretionary dependencies
– External dependencies
PDM Network Diagram
Gantt Chart for Software Launch Project
Sample Tracking Gantt Chart
The Importance Of Network Diagrams
• The construction of a network diagram is
fundamental to determining the overall project
completion date.
• Gantt charts display planned and project
schedule information but don’t display
relationships between tasks and
dependencies.
• A network diagram displays dependencies and
is required to perform critical path analysis.
Importance of Critical Path
• Critical Path Method predicts total project duration
and allows project managers to make trade-offs where
necessary.
– If the project manager knows that one of the projects tasks is
behind schedule then they can decide what to do about it. For
example:
• Should they try to renegotiate the schedule?
• Should they allocate more resources to make for lost time?
Slack
• One of the techniques that allow project managers to make these
trade-offs is by determining the free slack and total slack for the
project.
– Free slack is the amount of time an activity can be delayed without
delaying the early start of any immediately following activity.
– Total slack is the amount of time an activity may be delayed from its
early start without delaying the planned finish date.
Critical Path Method (CPM)
• Critical path method is a tool which will help combat
schedule overruns.
• What does the critical path really mean?
– The critical path is the earliest time by which a project can be
completed.
– It is the longest path through a project network diagram, and
has the least amount of slack or float.
Performing Critical Path
Analysis
Critical Path Approach
Build A
Dur = 15
Analysis
Design
Dur = 10
Dur = 25
Build B
Implement
Dur = 20
Dur = 15
Build C
Dur = 30
Critical Path = 10 + 25 + 30 + 15 = 70 days
Clearly, Design is on the Critical path since future activities
Cannot proceed unless the design is completed
The Critical path is the longest path through the project and also
when the schedule is least flexible
Time Management Scenario
Create a wireless “Triple Play” system i.e.. One that
can handle VOIP, Data and Broadband (Video)
services. Your company has 1000 employees all
of whom have computers with Intranet access
requiring “Triple Play” services
The executive team has given you a budget of
$100,000 and completion date of 6 months.
Dates are from January 1st 2006 – June 30th 2006
Time management process to follow.
Time Management Assignment
During the planning phase you will:
 Brainstorm a high level Activity/WBS list of 20 high level
activities/WBS (Work Packages) and display them on the wall.
 Create a form of Activity Sequencing relationship
 Estimate your Activity Duration’s
 Evaluate and show your Critical Path
 Hire a Project Manager
 Delegate activities/Tasks
 To show the above create a Network diagram (PDM) Create your
own Assumptions and Constraints
 Use 8.5”x11” sheets for activities
 Put outputs on the wall
Shortening Project Schedules
• It is common for stakeholders (mainly the project
sponsor and/or customer) to want the projected
schedule shortened.
• There are several techniques which the project manager
can use to perform this task once the project’s critical
path has been determined including:
– The critical path duration can be shortened by allocating
more resources to the tasks or by changing the project’s
scope.
Shortening Project Schedules
– Crashing – (Expert or Full Time) is another technique used,
and it involves making cost and schedule trade-offs to obtain
the greatest amount of schedule compression at the least
incremental cost.
• For example a task that was supposed to take two weeks by a
part-time resource could be performed in a week by a full-time
resource. This would shorten the project schedule by a week
at no extra cost.
• If a full-time resource was unavailable to perform this task
then a temporary resource could be hired to perform the job in
one week.
The schedule would be shortened by one week and the cost hiring
a temp resource should only increase the project costs slightly.
– The main advantage of crashing is that the projects schedule is shortened,
however the disadvantage is that it often raises the overall project costs.
Shortening Project Schedules
– Fast Tracking – Parallel is another technique used to
shorten a project schedule, and involves performing
project tasks in parallel.
• Most project tasks are setup to be performed in sequence
or with a slightly overlapping time frame.
• With this technique it is important to be aware of how the
tasks in the schedule affect one another, and to be able to
determine which tasks can be fast tracked due to a low risk
of potential problems further down the schedule.
– The main advantage of fast tracking is a shortened project
schedule. The main disadvantage is that unforeseen
problems with performing some tasks to soon can greatly
lengthen a project schedule. (E.g.. Overlapping or being to
anxious)
Assignment
From your WBS/Activity list in PDM format the
Sponsor has asked you because of financial
constraints to bring back the date of your current
end date by 2 weeks thus saving the company
resource costs.
Is this possible?
Alter your PDM to reflect this.
Critical Chain Schedules
• Critical chain scheduling is a fairly
complicated yet powerful tool that involves
critical path analysis, resource constraints,
and using buffers to make changes in tasks
estimates.
• Example of resource constraints:
– One person assigned to two tasks which are to be
completed at the same time by the same person,
critical chain scheduling (and common sense)
acknowledges that one of these tasks needs to be
delayed or another resource needs to be brought in
to do it.
Multitasking Example
Critical Chain SchedulesBuffers
• Project Buffers: This is additional time added to the entire
project before the project’s due date.
– In most cases individual tasks have additional time added to them
to ensure adequate time to completion.
– In critical chain scheduling this additional time is removed from the
tasks themselves and added to the project time overall.
– Also, the critical path is padded with “feeding buffers” to prevent
delay as well.
– Feeding buffers are addition time added to critical path tasks that
are preceded by non-critical-path tasks.
Critical Chain Schedules –
Parkinson's Law
• Typically task estimates in critical chain scheduling are shorter
than with traditional scheduling techniques because individual
tasks do not contain their own buffers.
• This means less occurrence of “Parkinson’s Law”.
– Parkinson’s Law states that work(task) expands to fill the time
allowed to perform the task.
– The feeding buffers and project buffers protect the date that really
needs to be met by the project completion date.
Example of Critical Chain
Scheduling
Program Evaluation and Review
Technique (PERT)
• A technique used to estimate project duration when
there is a high degree of uncertainty about individual
activity duration estimates.
– PERT uses probabilistic time estimates, which are duration
estimates using optimistic, most likely, and pessimistic task
duration estimates instead of specific or defined estimates
PERT Analysis
– The PERT analysis method is based on a project network diagram,
normally the PDM method, and a weighted average for each project
task is calculated using the following formula:
PERT weighted average
=
optimistic time + (4 x most likely time) + pessimistic time
6
• PERT applies the critical path method to a weighted
average duration estimate.
• It involves more work because it requires several
duration estimates.
PERT Formula and Example
• PERT weighted average =
optimistic time + 4X most likely time + pessimistic time
6
• Example:
PERT weighted average =
8 workdays + 4 X 10 workdays + 24 workdays
= 12 days
6
where:
optimistic time= 8 days
most likely time = 10 days
pessimistic time = 24 days
Therefore, you’d use 12 days on the network diagram instead of
10 when using PERT for the above example.
Controlling changes to the
project schedule
•
Reality checks on scheduling: Review the draft schedule,
progress meetings with stakeholders.
•
Working with people issues:
 Empowerment – To give someone authority or even
accountability
 Incentives
 Discipline
 Negotiation
The Importance of Project Cost
Management
• IT projects have a poor track record for meeting
budget goals.
• The 2003 CHAOS studies showed the average cost
overrun (the additional percentage or dollar amount
by which actual costs exceed estimates) was 43
percent.
• U.S. lost $55 billion in IT projects in 2002 from
cancelled projects and overruns compared to $140
billion in 1994.*
*The Standish Group, “Latest Standish Group CHAOS Report Shows Project
What Went Wrong?
According to the San Francisco Chronicle’s front-page story, “Computer Bumbling
Costs the State $1 Billion,” the state of California had a series of expensive IT
project failures in the late 1990s, costing taxpayers nearly $1 billion…It was ironic
that the state that was leading in the creation of computers was also the state most
behind in using computer technology to improve its services.*
The Internal Revenue Service (IRS) managed a series of project failures that cost
taxpayers over $50 billion a year—roughly as much money as the annual net profit
of the entire computer industry.**
Connecticut General Life Insurance Co. sued PeopleSoft over an aborted
installation of a finance system.***
*Lucas, Greg, “Computer Bumbling Costs the State $1 Billion,” San Francisco Chronicle (2/21/99).
**James, Geoffrey, “IT Fiascoes . . . and How to Avoid Them,” Datamation (November 1997).
***Songini, Marc L., “PeopleSoft project ends in court,” ComputerWorld (September 2001).
Cost of Software Defects*
It is important to spend money up-front on IT projects
to avoid spending a lot more later.
*Collard, Ross, Software Testing and Quality Assurance, working paper (1997).
Cost Management Principles
–
–
–
–
–
–
–
–
–
Profits
Life cycle costing
Cash flow analysis
Tangible and intangible cost/benefits
Direct and indirect costs
Sunk costs
Learning curve theory
Reserves
Earned value analysis
Types of Cost Estimates
Cost Estimation Tools and
Techniques
• Basic tools and techniques for cost estimates:
– Analogous or top-down estimates:.
– Bottom-up estimates
– Parametric modeling
PROJECT PLANNING : ESTIMATING
PROJECT :
$900.00
$500.00
$500.00
$500.00
RESOURCE PLAN
JB
Pr o ject
ACTIVITY/TASK
Project Charter
M anag er
RR
RT
TY
$400.00
$350.00
$650.00
$500.00
EFFORT
WE
BN
JJ
KG
B usiness B usiness B usiness B usiness
A nalyst
A nalyst
A nalyst
A nalyst
Junio r
JB
T echnical Pr o g r ammer T OT A L
A nalyst Sp ecialist
A nalyst
DAY S
5.00
RR
RT
TY
WE
COST
BN
JJ
Pr o ject
B usiness
B usiness
B usiness
B usiness
Junio r
T echnical
M anag er
A nalyst
A nalyst
A nalyst
A nalyst
A nalyst
Sp ecialist
5.00
4,500.00
12.00
18.00
25.00
26.00
18.00
26.00
$1,800.00
$1,800.00
$1,800.00
$1,800.00
$1,800.00
1,800.00
125.00
10,800.00
17,000.00 22,000.00
$4,000.00
$2,500.00
$500.00
1,000.00
800.00
$3,250.00
$6,500.00
$3,250.00
6,500.00
8,000.00
800.00
19,500.00
Requirements Defintion
Review Documentation
Interview Stakeholders
Document Inital Findings
Conduct Focus Groups
Prepare Requirements Document
Finalize Deliverables
Phase Total
2.00
2.00
2.00
2.00
2.00
2.00
12.00
10.00
12.00
10.00
13.00
13.00
2.00
4.00
2.00
12.00
34.00
44.00
3.00
10.00
10.00
2.00
10.00
20.00
15.00
$5,000.00
$6,500.00
$1,050.00
$6,500.00
$3,500.00
$6,000.00 $1,000.00 $4,000.00
$5,000.00 $2,000.00
$700.00
6,000.00 1,000.00 4,000.00
8,000.00
5,250.00
Systems Design
Logical Design
Physical Design
Design Review Meetings
Finalize Design Criteria
Phase Total
3.00
2.00
2.00
2.00
1.00
8.00
5.00
1.00
2.00
16.00
2.00
5.00
10.00
5.00
10.00
2.00
20.00
15.00
10.00
18.00
37.00
24.00
26.00
$2,700.00
$1,800.00
$1,800.00
1,800.00
2.00
30.00
47.00
105
8,100.00
9.00
1.00
5.00
3.00
2.00
1.00
9.00
8.00
6.00
5.00
5.00
10.00
5.00
25.00
21.00
13.00
$4,500.00
$2,700.00
1,800.00
Phase Total
10.00
1.00
23.00
5.00
20.00
59
9,000.00
TOTAL RESOURCES/COSTS
36.00
2.00
57.00
65.00
294.00
32,400.00
$500.00
500.00
Quality M anagement Process
Review QM Processes
Track to ISO 9002 Standards
Prepare QM Review Report
22.00
35.00
30.00
47.00
PROJECT MANAGEMENT
$500.00 $4,500.00 $2,500.00
$4,000.00
3,000.00
500.00 11,500.00
2,500.00
1,000.00 28,500.00 32,500.00
$1,750.00
$3,500.00
1,750.00
7,000.00
8,800.00 12,250.00 19,500.00
Surveyor Pro Project Cost Estimate
Surveyor Pro Software Development Estimate
PROJECT PLANNING : ESTIMATING
• Guidelines
– Where possible, use multiple techniques for verification
• Analogous estimating – top down estimating (using actual costs of
similar projects)
• Parametric modeling – using project characteristics in a
mathematical model projecting costs ($10/sqft)
• Bottom – up
• Computerized tools
• Procurement estimating – Vendor bids
– Use a systematic approach
– Use multiple estimators
– Document assumptions and techniques used
PROJECT ESTIMATING GUIDELINE
Guidelines for estimation effort
• Opportunity evaluation and project initiation represent 510% of project effort
• Analysis and design represent 50 - 60 % of the total effort
• Construction represents 30 - 40% of the total effort
• Implementation and evaluation represent 5 - 15% of the
total effort
These numbers are guidelines only.
PROJECT PLANNING : ESTIMATING
• Guidelines
– Retain estimates and assumptions for future use
– Use comparison techniques for explaining variances
and arriving at consensus
– Top down approaches = underestimates
– Bottom up approaches = overestimates
– Always express estimates in terms of effort then dollars
Problems With Cost Estimates
• Despite the use of sophisticated tools and techniques many
IT project cost estimates are still very inaccurate.
• This inaccuracy is even more prevalent in IT projects
involving new technology and software as there are no
previous historical examples to compare with.
• There are typically four reasons attributed to inaccurate
cost estimates.
Problems With Cost Estimates
1. Developing an estimate for a large software project is
a complex task requiring a significant amount of
effort.
– This is because many estimates must be prepared quickly,
before system requirements are clearly defined and before
proper analysis can be performed.
– A process to be followed can be as follows:
• Before the project begins a rough order of magnitude
(ROM) budget estimate should be prepared.
• This estimate is followed by a more accurate (typically
higher cost) budget estimate.
Problem With Cost Estimates
• This in turn is followed by the definitive estimate which,
again, typically shows that it will cost more to do the project
than previously estimated.
– Something to consider…
• As with schedule management the project manager must
insist and ensure that proper cost estimates and analysis be
performed before the project begins and that the definitive
estimate needs to be revised and updated as necessary
throughout the project
Problems With Cost Estimates
2. The people who develop software and hardware
cost estimates often do not have enough
experience with cost estimation, especially for
large projects.
– Not enough accurate project data available on which
to base estimates because organizations do not
properly archive and manage historical information.
– To overcome these issues IT people should receive
training and mentoring on cost estimating.
– A proper archival and management system needs to
be developed and used for important historical
project information.
Problems With Cost Estimates
3. Human beings have a bias towards underestimation.
– One of the reasons projects are underestimated is that
senior IT employees often make estimates based on their
own abilities and forget about junior team members
working on the project.
– Another issue is that estimators typically forget about are
integration and testing costs. This occurs often in areas
where the team is only producing a small component or
module within the whole project.
– To overcome these problems project managers and
senior managers must review the cost estimates given to
them by team members and ask questions to make sure
the estimates are not biased. (I.e.. Get stakeholders or
team members involved).
Problems With Cost Estimates
4. Management might ask for an estimate, but are really
requesting a number to help them create a bid to win a
major contract or get internal funding.
Surveyor Pro Project
Cost Baseline
Cost Budgeting
Project budget estimates for business replacement and explanations
Cost Overruns Globally
• Australia: Problems with the installation of an ERP system at Crane
Group Ltd. led to an estimated cost overrun of $11.5 million.*
• India: As many as 274 projects currently under implementation in the
Central sector are suffering serious cost and time overruns.**
• Pakistan: Pakistan has sustained a cost overrun of Rs 1.798 billion (over
$30 million U.S. dollars) in the execution of the 66.5 megawatt Jagran
Hydropower Project in the Neelum Valley.***
• United States: Northern California lawmakers were outraged over
Governor Arnold Schwarzenegger's announcement that commuters should
have to pay construction costs on Bay Area bridges. Maybe it takes the
Terminator to help control costs!****
*Songini, Marc L., “Australian Firm Wrestles With ERP Delays,” ComputerWorld (July 12, 2004).
**Srinivasan, G., “274 Central sector projects suffer cost, time overruns,” The Hindu Business Line (May 4, 2004).
***Mustafa, Khalid, “Rs 1.8 billion cost overrun in Jagran hydropower project,” Daily Times (November 19, 2002).
****Gannett Company, “Governor Refuses to Pay for Bay Bridge Cost Overruns,” News10 (August 17, 2004).
Cost Control and measurement to
help avoid Cost Overruns
• There are many different accounting approaches to measuring
cost performance, however, project managers most often use
the earned value analysis (EV) approach.
– EV is a project performance measurement technique that integrates
scope, time and cost data.
– Given a cost performance baseline the project manager and their
team can determine how well the project is meeting scope, time and
cost goals by entering in actual information and comparing it to the
baseline.
Cost Control – Actual
Information
– The actual information includes whether or not a
WBS item or work package or activity was
completed or approximately how much of the work
was completed
Earned Value Analysis or Earned
Value Management
• An important part of the budget cost control process in
any project is performing an earned value
analysis(EVA).
• Earned value management (EVM) analysis involves
calculating three values for each activity or summary
activity in the WBS. These values include:
– The Planned Value (PV or BCWS).
• This is also called the budgeted cost of work scheduled
(BCWS).
• This is the portion of the approved total cost estimate
planned to be spent on an activity during a given period.
– The Actual Cost of Work Performed (ACWP or AC).
• This is also called the actual cost.
• This is the total direct and indirect costs incurred in
accomplishing work on an activity during a given period.
Earned Value Analysis
– The Earned Value (EV), formerly called the budgeted cost of
work performed (BCWP).
– This is the percentage of the work completed multiplied by the
planned value.
• Earned Value (EV) = PV (to date) X percent complete
– Cost variance (CV): this is the budgeted cost of work performed
(EV) minus the actual cost of work(AC) performed.
– Cost Variance (CV) = EV – AC
– Schedule variance (SV): this is the budgeted cost of work
performed (EV) minus the budgeted cost of work scheduled (PV).
– Schedule Variance (SV) = EV – PV
Earned Value Analysis
– Cost performance index (CPI): this is the ratio of budgeted cost of
work performed (EV) to actual cost of work scheduled (AC) and can
be used to estimate the projected cost of completing the project.
– Cost Performance Index (CPI) = EV / AC
– Schedule performance index (SPI): this is the ratio of budgeted cost
of work performed (EV) to budgeted cost of work scheduled (PV),
and can be used to estimate the projected time to complete the
project.
Schedule Performance Index (SPI) = EV / PV
Note that when the analysis is performed negative numbers for cost
and schedule variance indicate problems in those areas.
– In this event, the project is costing more then planned or taking
longer then planned.
– Likewise, CPI and SPI of less then 100% indicate problems in the
projects cost and schedule.
Earned Value Analysis
Earned Value (EV) = PV(to date) X (RP) percent complete
Cost Variance (CV) = EV – AC
Schedule Variance (SV) = EV – PV
Cost Performance Index (CPI) = EV / AC
Schedule Performance Index (SPI) = EV / PV
Estimate At Completion (EAC) = BAC / CPI
Estimate Time to Complete (ETC) = Original Time Estimate/ SPI
Rate of Performance
• Rate of performance (RP) is the ratio of actual
work completed to the percentage of work
planned to have been completed at any given
time during the life of the project or activity.
• Brenda Taylor, Senior Project Manager in South
Africa, suggests using this approach for
estimating earned value.
• For example, suppose the server installation was
halfway completed by the end of week 1. The rate
of performance would be 50 percent (50/100)
because by the end of week 1, the planned
schedule reflects that the task should be 100
percent complete and only 50 percent of that work
has been completed.
Earned Value Calculations for a OneYear Project After Five Months
Earned Value Analysis
This example shows a project summary activity for purchasing a
Web Server over a one week period for $10,000.
Earned Value Analysis
The Planned Value (PV) is $10,000 and the Actual Cost (AC) is
$15,000 in the first week.
Earned Value Analysis
After 1 week the activity is only 75% complete and the Earned
Value (EV) is calculated as follows:
EV = $10,000 X 75% = $7,500 (PV*%complete)
Earned Value Analysis
The Cost Variance for the project activity is calculated as follows:
CV = $7,500 - $15,000 = ($7,500) (EV-AC)
Earned Value Analysis
The Schedule Variance for the activity is calculated as follows:
SV = $7,500 - $10,000 = ($2,500) (EV-PV)
Earned Value Analysis
The Cost Performance Index for the activity is calculated as follows:
CPI = $7,500 / $15,000 = 50% (EV/AC)
Earned Value Analysis
The Schedule Performance Index for the activity is calculated
as follows:
SPI = $7,500 / $10,000 = 75% (EV/PV)
Benefits of Earned Value Analysis
• It is important to remember that the earned value calculations
must be performed for all project activities in order to estimate
the earned value for the entire project.
– This is because some activities will be behind schedule or over
budget while others are ahead of schedule and under budget.
– To determine how the project as a whole is performing these earned
values for all of the activities must be added together.
• Once the overall earned value is determined the CPI for the
project can be used to determine the estimate at completion
(EAC).
Benefits of Earned Value Analysis
• Estimate at Completion (EAC)
– This is an estimate of what it will cost to complete the project based
on the projects performance (CPI) to date.
– The EAC is calculated as follows:
EAC = Original Budgeted Cost / CPI
• If in the previous example the original budgeted cost for the
project was $250,000 then the EAC for the project (after the first
week only) would be:
EAC = $250,000 / 50% = $500,000
Conclusion on EVA Benefits
• Earned value management analysis is the
primary method available for integrating
performance, cost and schedule data.
– This makes it a powerful tool for project managers
and senior management to use as in evaluating
project performance.
– To help alleviate the problems with performing an
EVM the organization can make it simpler by
requiring that the EVM be calculated for only the
summary tasks.
What Went Wrong?
• In 1981, a small timing difference caused by a computer
program caused a launch abort.*
• In 1986, two hospital patients died after receiving fatal
doses of radiation from a Therac 25 machine after a
software problem caused the machine to ignore
calibration data.**
• Britain’s Coast Guard was unable to use its computers
for several hours in May 2004 after being hit by the
Sasser virus, which knocked out the electronic mapping
systems, e-mail, and other computer functions, forcing
workers to revert to pen, paper, and radios.***
*Design News (February 1988).
**Datamation (May 1987).
***Fleming, Nic, “Virus sends coastguard computers off course” (http://news.telegraph.co.uk/news/
main.jhtml?xml=/news/2004/05/05/ncoast05.xml) (May 15, 2004).
What Is Quality?
• Quality: The conformance to requirements
and fitness for use.
– Conformance to requirements – meeting
project processes and products to specification
– Fitness for use – computer missing parts
• Quality (Another Definition): The
characteristics of work performed or items
produced that exceeds the explicit, and
implicit, requirements expected by the
customer.
Quality Control
•
•
Quality Control involves monitoring specific project results to ensure
that they comply with the relevant quality standards as outlined in the
quality management plan.
The main goal is to improve quality. There are three main outputs:
– Acceptance or reject decisions
– Rework
• bring rejected items into compliance with the projects product
requirements, specifications – expensive
– Process adjustment
– This might include such actions such as purchasing and
implementing a new server to improve response time
– shutting down an assembly line more often to perform
preventative maintenance and retooling on the
equipment. (Shutdown Syncrude)
Examples of Six Sigma
Organizations
• Motorola, Inc. pioneered the adoption of Six
Sigma in the 1980s and saved about $14 billion.*
• Allied Signal/Honeywell saved more than $600
million a year by reducing the costs of reworking
defects and improving aircraft engine design
processes.**
• General Electric uses Six Sigma to focus on
achieving customer satisfaction.
*Pande, Peter S., Robert P. Neuman, and Roland R. Cavanagh, The Six Sigma Way. New York:
McGraw-Hill, 2000, p. 7.
**Ibid. p. 9.
Six Sigma
The above table illustrates:
The relationship between sigma, the
percentage of the population within that sigma
range, and the number of defective units per
billion.
The Seven Run Rule
This
seven
data
points
appear
below the
mean.
{
}
This seven
data points
are all
descending.
Testing can reduce cost Overruns
In this diagram the ovalshaped phases represent
areas where you should
do testing to help ensure
quality on software
development projects.
By quality auditing and
testing the customer
should meet his/her
acceptance criteria
Testing (An Example)
This diagram also shows
several phases which include
work related testing, including:
Unit Tests:
These are done to test each
individual component (often a
program or module) to ensure
it is as defect free as possible.
Integration Tests:
These occur between unit and
system testing to test
functionally grouped
components.
Testing (An Example)
This diagram also shows
several phases which
include work related testing,
including:
System Tests:
These test the entire
system as one complete
entity.
User Acceptance Tests:
This is an independent test
performed by the end user
prior to accepting the
delivered system.
Improving Quality
Improving Quality
• There are five major cost categories related to
quality, including:
– Prevention Cost:
• Preventative actions such as training, detailed studies, and
quality surveys all fall under this cost category.
– Appraisal Cost:
• Inspection, product testing, equipment maintenance, and
reporting inspection data all contribute to this cost category.
Improving Quality
– Internal Failure Cost:
• Scrap, rework, late payment charges, and inventory
costs that are a direct result of defects are all included
in this category.
– External Failure Cost: Customer
• Warranty cost, field service personnel training costs,
product liability suits, complaint handling, and future
lost business are all part of this cost category.
– Measurement and Test Equipment Cost:
PROJECT ORGANIZATION:
ROLES & RESPONSIBILITIES
• Define Roles and Responsibilities
Group
Roles
Steering Committee
•Provide overall direction
and decision making to
the project
Project Manager
•Manage the day to day operations
of the project
Design Team
Leader
•Manage and deliver the project design
Responsibilities
•Meet monthly
•Review status reports
•Consider and resolve decision requests
•Represent peer groups
•Accept deliverables
•Acquire project resources
•Prepare monthly status reports
•Identify and resolve project issues
•Manage project activities
•Develop project plans
•Coordinate all team activities
•Develop design concepts
•Manage design team activities
•Deliver project design documents
•Ensure design compliance with regulations and codes
Risk management
• Involves identifying and measuring the risks
associated with a project
• The major components of risk management
–
–
–
–
Risk management planning
Risk identification
Qualitative risk analysis - Probability and Impact
Quantitative risk analysis – Assessing risks on
objectives
– Risk response planning
– Risk monitoring and control
Risk Management
•
Questions that might be asked when addressing the Risk
Management Plan.
1. Why is it important to take or not to take this risk wrt
project objectives?
2. What is the specific risk?
3. How will the risk be mitigated?
4. Who is responsible for the Risk Management Plan
5. When will the milestones associated with the mitigation
approach occur?
6. What are resources that are required to mitigate the risk?
Benefits from Software Risk
Management Practices*
100%
80%
80%
60%
60%
47%
47%
43%
35%
40%
20%
6%
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*Kulik, Peter and Catherine Weber, “Software Risk Management Practices – 2001,”
KLCI Research Group (August 2001).
Risk Identification
Risks can also be identified based on the project
knowledge areas.
Sample Probability/Impact
Matrix
Probability high and Impact High is DANGER – Cost Overrun
Sample Probability/Impact Matrix for
Qualitative Risk Assessment
Example of Top Ten Risk Item
Tracking causing Cost Overruns
Monthly Ranking
Risk Item
This
Last
Number
Risk Resolution
of Months Progress
Month
Month
Inadequate
planning
1
2
4
Working on revising the
entire project plan
Poor definition
of scope
2
3
3
Holding meetings with
project customer and
sponsor to clarify scope
Absence of
leadership
3
1
2
Just assigned a new
project manager to lead
the project after old one
quit
Poor cost
estimates
4
4
3
Revising cost estimates
Poor time
estimates
5
5
3
Revising schedule
estimates
Procurement Management
• Many organizations are turning to outsourcing to:
– Reduce both fixed and recurrent costs and hence cost overruns.
• Outsourcing vendors are often able to use economies of scale to
their advantage.
– Allow the client organization to focus on its core business.
Procurement Management
– Access skill and technologies.
• Organizations can often gain access to special skills and
technologies when they are required by using outsourced
vendors.
– Provide flexibility.
• Outsourcing can provide extra staff during peak workloads which
is more efficient and more economical then trying to find
resources internally within the company.
– Increase accountability.
• A well-written contract can clarify responsibilities and sharpen
focus on key project deliverables.
Contract Types
–
–
–
–
–
Fixed price or lump sum contracts
Time and Materials
cost plus incentive fee
cost plus fixed fee
cost plus percentage of costs
Mega Cost Overrun examples
•
•
•
•
•
•
•
•
Canadian Firearms Program:
Planned cost: $119 m Final cost: $1bn
International Space Station :
Planned cost: $8bn Final cost: $26bn
Channel Tunnel:
Planned cost: £4.9bn Final cost: £10bn
Concorde:
Planned cost: £90m Final cost:1.1bn
Estimates and cost overruns
• A large number of studies show the fact that cost overrun
affects projects in all industries, in all countries either in
the public or in the private sector
• Cost Overrun = Actual Cost – Estimated Cost
• The problem is that several cost estimates are usually
produced during the project life cycle, but there is no
standard rule to determine which one must be considered
for computing the cost overrun
Statistics on Cost Overruns
– A survey based on 258 infrastructure projects in 20
different countries indicates that
•
•
9 times of 10, the actual costs are on average 28% higher
than the estimated costs at the time of decision to build
Underestimated today are in the same order of magnitude
as it was 10, 30, and 70 years ago
– • In India of 617 infrastructure projects, only 149
were faced with cost overruns amounting to 22.2%
with respect to the latest approved estimates
•
The cost overrun has come down from 62% in March,
1991 to 20.7% in September, 2004
Statistics on Cost Overruns
• The Standish Group has surveyed over 50,000 completed
IT projects in its biennial CHAOS research since 1994.
The results are summarized below
• Years 1994 1996 1998 2000 2002 2004
• overrun 189% 142% 69% 45% 43% 43%
One of today’s major reason for the reduction in cost
overruns is that projects are now small enough to manage
Reserves
• Reserves are funds included in a cost estimate to
mitigate cost risk by allowing for future situations that
are difficult to predict. There are typically two types of
reserves:
– Contingency reserves: this reserve allows for future
situations that are partially planned for.
• Known - Unknowns
– Management reserves: this reserve allows for future
situations which are unpredictable.
• Unknown - Unknowns
Suggestions for labour cost
overruns
• sharing the estimated time or labour costs for
each phase or deliverable (WBS) with a seller of
the project before work begins
• Empower team leads or team to ensure
responsibility or ownership of their deliverable by
tracking, monitoring and being aware of cost
savings on using or acquiring resources
• Asking experienced colleagues for advice on your
estimates
Suggestions for labour cost
overruns
• By having the field keep daily time cards
separating the job into phases or deliverables so
that overruns can be tracked and analyzed to the
finest detail. These phases should be
standardized in a company so that you estimate
by phase or deliverable and are able to track job
costs.
• Instituting an incentive program which shares job
cost savings
Subcontractor overruns
• Ensure a bidder for a RFP understands the
context of the business of the buyer (customer)
before they bid on the contract to ensure that they
are aware of the what they are getting themselves
into which may provide a better estimate to the
buyer thus removing the escalation of cost
overruns
• As a buyer try and obtain a “Fixed Price” contract
as much as possible. This will ensure that the risks
are taken on the bearer for that deliverable
Subcontractor overruns (Cont.)
• By referencing your plans in your “sellers” /
subcontractors' contracts. Ask the seller to let you
know in writing (as part of their contract), if they
are not including any labour or materials shown on
the plans that would normally be in their area of
specialty
• Insisting that subcontractors let you know if there
is a change to the scope of their work and what
that extra cost will add to their contract before they
actually perform the work.
Material Overruns
• Try and order ahead for delivery by suppliers. This
will ensure that your product or service will be in
stock. Discourage pickup of material by your
personnel. It bleeds profit and uses up labor
hours.
• By allotting some time on a regular basis cross
check supplier prices. Choose some frequently
ordered materials and get prices to see where you
should be buying from
Material overruns
• get multiple prices on large material orders
• ask for discounts on materials you buy frequently
and in large quantities. Often just asking will
reduce your costs. – “Learning Curve theory”
References
• A Guide to the Project Management Body of
Knowledge PMBOK 2004 (Body Of Knowledge) –
Project Management Institute
• Information Technology Project Management – 4th
Edition –Kathy Schwalbe
• Project Management: A Managerial Approach, 5th
Edition- Jack R. Meredith, Samuel J. Mantel, Jr