Effective Project Cost & Scheduling

WELCOME....WELCOME....Effective Project Cost &

Scheduling7 – 9 October 20087 – 9 October 2008

Etisalat - Dubai, U.A.E.Etisalat - Dubai, U.A.E.

Dr. Jamal AlBahar, AVS, PMPPROMIS - Dubai, U.A.E.

PROMISDelegates

Project Cash Flow Analysis& Budget

Estimating Cash Flow Profiles

& Developing a Project

The Importance of Project Budget The importance of Project Cost Control was

recognized as early as the 60’s, when DOD and NASA have successfully developed and implemented a guide for incorporating the cost control into PERT/CPM.

The theme is the integration and interrelation of project time and cost functions for the purpose of the planning and control functions.

Cost control cannot be achieved without a baseline budget against which actual cost performance is measured and compared, deviations are detected, causes are investigated, and proper actions are implemented.

The Importance of Project Budget In addition, the integration of time and cost enables

us to: Analyze the cash flow and prepare financial plans for

ensuring proper funds throughout the project duration. Detect and estimate financial deficits, and estimate the

cost of financing. This presentation focuses on integrating time and

cost for cash flow analysis and project planning. Project cost control and time cost relationship will be

the subject of subsequent presentations.

Types of Budgets

There are three types of budget that are usually used:

Strategic.

Tactical.

Operational.

Strategic Budgets Strategic budget defines the long-term activity of an

organization.

It’s generally updated annually.

Once the projects are underway, actual cost data are collected and compared to the budget in order to monitor the project performance.

Budget review helps control both goal setting and resource allocation.

Tactical Budgets Tactical – midrange - budget details the strategic

budget and usually covers a period ranging from one to two years.

It details the monthly expenditures in labor, materials, and overhead costs of each activity.

Updates are typically carried on a quarterly basis.

Operational Budgets Operational budget deals with costs of specific

activities that are being performed.

It usually spans a period of at most one year, and

covers the costs of resources required for the completion of each activity.

Preparing the Budget Preparing a budget usually is performed in

one of three ways: a top-down approach, a bottom-up approach, or an iterative approach.

Preparing the BudgetThe Top-Down Approach How ?

The top-down approach starts with the strategic budget as this defines the organization goals developed by top management.

It is then passed down to the functional managers to develop both the midrange (tactical) and the short-range (operational) budgets.

Problems: The difficulty in translating the strategic budget into tactical

and operational budgets. The reason behind that is that usually top management is not aware of every aspect of these projects when preparing these budgets.

Lower-level managers will compete instead of cooperating to secure their share of the budget.

Preparing the BudgetThe Bottom-Up Approach How ?

Letting each project manager develop his/her own proposal.

These proposals are then handed to functional managers to prepare the budget for their units, and finally

These are handed over to top management to integrate these budgets into a strategic one.

Problems: Reduces the top management control over the whole

process of budgeting.

Preparing the BudgetThe Iterative Approach How ?

This approach tries to alleviate the problems of previous approaches in an iterative way.

It starts at the top management level that sets a budget framework serving as a guideline for project managers as they prepare their budgets.

This process can undergo several iterations in order to fine-tune the process.

It increases the cooperation between different levels of management.

Problems: its duration, since going through different iterations

may take a long time.

Cost Budgeting: Aggregate individual activity estimates. Establish a total cost baseline. Used to measure and control cost over the project

time.

The S-curve: A time phased budget that is used to measure cost

performance against.

Cu

mu

lati

ve v

alu

e (

$)

Time

Budgeting throughTime-Cost Integration

5A4

10B8

15C3

20D3

25E7

35G1

30F6

0 2019

1610

1912

107

74

124

4TF = 0FF = 0

TF = 0FF = 0

TF = 0FF = 0

TF = 5FF = 3

TF = 3FF = 3

TF = 2FF = 0

TF = 0FF = 0

2019

1912

1913

124

12940

129

Name T(Wk.)

Direct cost($)

Direct cost$/Week

A 4 36,000 9,000

B 8 48,000 6,000

C 3 30,000 10,000

D 2 24,000 12,000

E 7 56,000 8,000

F 6 60,000 10,000

G 1 6,000 6,000

Total 20 260,000

Consider The following project schedule network and the activities direct costs table below.

Direct cost of each activity is assumed to be uniformly distributed over activity duration.

Indirect cost is estimated at $ 2,000 per week.

Early Schedule Cash Flow Diagram

0

50

100

150

200

250

300

0 5 10 15 20

Time (weeks)

Co

st

($ 1

,00

0)

Σ Direct $

Σ Indirect $

Σ Total $

Time (Working Days)Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Sum

A 9 9 9 9 36

B 6 6 6 6 6 6 6 6 48

E 8 8 8 8 8 8 8 56

G 6 6

C 10 10 10 30

D 12 12 24

F 12 12 12 12 12 60

Direct $ 9 9 9 9 28 28 16 18 18 18 18 18 8 8 8 8 8 8 8 6 260Indirect 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 40Total $ 11 11 11 11 30 30 18 20 20 20 20 20 10 10 10 10 10 10 10 8 300Σ Direct $ 9 18 27 36 64 92 108 126 144 162 180 198 206 214 222 230 238 246 254 260Σ Indirect $ 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40Σ Total $ 11 22 33 44 74 104 122 142 162 182 202 222 232 242 252 262 272 282 292 300

0

50

100

150

200

250

300

0 5 10 15 20

Late Schedule Cash Flow Diagram

0

50

100

150

200

250

300

0 5 10 15 20

Time (weeks)

Co

st

($ 1

,00

0)

Σ Direct $

Σ Indirect $

Σ Total $


A 9 9 9 9 36

B 6 6 6 6 6 6 6 6 48

E 8 8 8 8 8 8 8 56

G 6 6

C 10 10 10 30

D 12 12 24

F 12 12 12 12 12 60


Baseline Schedule Cash Flow Diagram

0

50

100

150

200

250

300

0 5 10 15 20

Time (weeks)

Co

st

($ 1

,00

0)

Σ Direct $

Σ Indirect $

Σ Total $


A 9 9 9 9 36

B 6 6 6 6 6 6 6 6 48

E 8 8 8 8 8 8 8 56

G 6 6

C 10 10 10 30

D 8 8 8 24

F 6 6 12 12 12 12 60


Cash Flow Diagrams

Cumulative Cost Vs Time

0

50

100

150

200

250

300

0 5 10 15 20

Time (weeks)

Cu

mu

lati

ve t

ota

l co

st (

$ 1,

000) Baseline

Early Schedule

Late Schedule

Time/Cost Analysis

It is standard practice in any project to estimate resource demands and activity duration in the most economical way.

These estimates are usually determined from the past experience or historical data obtained from similar projects.

Crashing a Project

CPM includes a way of relating the project schedule to the level of physical resources allocated to the project.

This allows the project manager to trade time for cost, or vice versa.

Two activity times & two costs are specified, if appropriate, for each activity

Critical Path Method - Crashing a Project/Cont.

The first time/cost combination is called normal, and the second set is referred to as crash

Normal times are “normal” time required to accomplish activity within normal conditions.

Crash times result from an attempt to expedite the activity by the application of additional resources.

Critical Path Method - Crashing a Project/Cont.

Careful planning is critical when attempting to expedite (crash) a project.

Expediting tends to create problems; and the solution to one problem often creates several more problems that require solutions.

Some organizations have more than one level of crashing.

The Time/Cost curve

Describes the reduction effect in the duration of an activity has on the cost of the activity.

The method of reducing the duration of an activity (normal point) to a crashed point is known as crashing.

Normal Point –The cost & time when the activity is performed in the normal way without extra resources such as overtime, improved equipment or other materials that could expedite the activity.

Crash Point - The cost & time when the activity is expedited by the use of extra resources, manpower, etc. No cost is spared to reduce the duration of the activity as much as possible

Example

A manual painting operation requiring 4 days at $400 per day.

With a special compressed airflow system, however, two workers can complete the job in 2 days for $1,000 per day.

The Normal point: the activity can be performed in 4 days for $400 x 4 = $1,600

The Crash point: in 2 days for $1,000 x 2 = $2,000.

Normal duration is associated with the lowest-cost option for the activity.

It is this value that is used in the preparation of the initial budget.

Time/Cost Curve

Cost

Time

Normal Point

Crash Point

NTCT

NC

CC

Minimum cost

Minimum time

Cost Slope = CC – NC / NT - CT

What is Crashing and How?

The process of reducing the project duration either to comply with contractual requirements, external constraints, and/or to reduce the project cost.

Accomplished by reducing the duration of one or more critical activities by assigning more resources to the activities or by adopting more productive technique/method for accomplishing the work.

What is Crashing and How?/Cont.

Crashing a critical activity means moving from the activity normal point towards the crash point. I.e., additional direct cost.

Among all the activities that can be crashed, the activity or combination of activities having minimum crashing cost are selected for crashing.

As critical activities are crashed, the critical path may change. None critical activities may become critical. If this takes place, then activities on the new critical path have also to be crashed.

Effect of Crashing a Project on the Project Cost Project cost consists of Direct & Indirect costs. Indirect costs are usually periodic costs which

is directly related to project duration. Delay in project completion time will increase the indirect costs.

When project is delayed, liquidated damages may be applied.

Some contracts call for incentives for early completion time.

Effect of Crashing a Project on the Project Cost/Cont.

Crashing or reducing the project duration increases the direct costs as we move from the normal time towards the crash time of the crashed activities.

The total project cost is thus sensitive to the project completion time.

There exists a project completion time at which the total project cost is minimum.

Project Time-Cost Relation

Point b is the project time at which the total project cost is minimum

Cost

Time

Indirect CostsDirect Costs

b

Total Costs

Crashing a Project Case Study (20)

Consider the following network of a project consisting of nine activities with a scheduled project duration of 32 weeks.

and the following table of time-cost data.

A7

70

1 8

101 0

B8

80

0 8

200 0

D11

187

8 19

401 0

E8

168

11 19

503 2

F10

188

6 18

600 0

H13

3118

19 32

801 1

I14

3218

18 32

900 0

Fin0

3232

32 32

1000 0St.

0

00

0 0

00 0

400

0

0

0

0

0 0

0

2

0

1

C9

167

11 20

304 0 G

12

2816

20 32

704 4

Name

Duration

EFES

LS LF

Number

TF FF None drivingRelationship

DrivingRelationship

Critical Path

Activity

Legend

ActivityActivity ttnn ttcc CnCn CcCc Allowable Allowable CrashCrash

Cc/weekCc/week

A 7 6 600 750 1 150

B 8 6 750 900 2 75

C 9 7 900 1100 2 100

D 11 8 1100 1400 3 100

E 8 5 850 1200 3 116.67

F 10 7 1000 1300 3 100

G 12 10 1300 1500 2 100

H 13 11 1400 1500 2 50

I 14 10 1500 2000 4 125

week/100$710

000,1300,1 day per cost Crashing

thatmeans Factivity for which,

tt

CC per week cost Crashing

cn

nc

Crashing a Project Crashing by 1 Wk Critical Path = B-F-I Project time = 32 weeks. Direct Cost = $ 9,400 Crashing options =

B @ $75/wk F @ $100/wk I @ $125/wk

A7

70

1 8

101 0

B8

80

0 8

200 0

D11

187

8 19

401 0

E8

168

11 19

503 2

F10

188

6 18

600 0

H13

3118

19 32

801 1

I14

3218

18 32

900 0

Fin0

3232

32 32

1000 0St.

0

00

0 0

00 0

400

0

0

0

0

0 0

0

2

0

1

C9

167

11 20

304 0 G

12

2816

20 32

704 4

Name

Duration

EFES

LS LF

Number


DrivingRelationship

Critical Path

Activity

Legend

Activity t Allowable Crash

Cc/week

A 7 1 150

B 8 2 75

C 9 2 100

D 11 3 100

E 8 3 116.67

F 10 3 100

G 12 2 100

H 13 2 50

I 14 4 125

Decision: Crash B by 1 week @ $75/wkDecision: Crash B by 1 week @ $75/wk

Crashing a Project Crashing by Another 1 Wk. Critical Path(s) = B-F-I, A-D-H Project time = 31 weeks. Direct Cost = $ 9,475 Crashing should be of activities on

both critical paths. On each critical path, select the

activity of minimum crashing cost.

Name

Duration

EFES

LS LF

Number


DrivingRelationship

Critical Path

Activity

Legend


Cc/week

A 7 1 150

B 8 1 75

C 9 2 100

D 11 3 100

E 8 3 116.67

F 10 3 100

G 12 2 100

H 13 2 50

I 14 4 125

Decision: Crash B & H by 1 week @ $125/wkDecision: Crash B & H by 1 week @ $125/wk

A7

70

0 7

100 0

B7

70

0 7

200 0

D11

187

7 18

400 0

E8

157

10 18

503 3

F10

177

6 18

600 0

H13

3118

18 31

801 1

I14

3117

18 32

900 0

Fin0

3131

31 31

1000 0St.

0

00

0 0

00 0

300

0

0

0

0

0 0

0

3

0

0

C9

167

10 19

303 0 G

12

2816

19 31

703 3

Crashing a Project Crashing B & H by 1 Wk. Critical Path(s) = B-F-I, A-D-H Project time = 30 weeks. Direct Cost = $ 9,600 Crashing should be of activities

on both critical paths. B cannot be further crashed.

Name

Duration

EFES

LS LF

Number


DrivingRelationship

Critical Path

Activity

Legend


Cc/week

A 7 1 150

B 8 0 75

C 9 2 100

D 11 3 100

E 8 3 116.67

F 10 3 100

G 12 2 100

H 13 1 50

I 14 4 125

Decision: Crash F & H by 1 week @ $150/wkDecision: Crash F & H by 1 week @ $150/wk

A7

70

0 7

100 0

B6

60

0 6

200 0

D11

187

7 18

400 0

E8

146

10 18

504 4

F10

166

6 16

600 0

H12

3018

18 30

800 0

I14

3016

16 30

900 0

Fin0

3030

30 30

1000 0St.

0

00

0 0

00 0

200

0

0

0

0

0 0

0

4

0

0

C9

167

9 18

302 0 G

12

2816

18 30

702 2

Crashing a Project Crashing F & H by 1 Wk. Critical Path(s) = B-F-I, A-D-H Project time = 29 weeks. Direct Cost = $ 9,750 Crashing should be of activities

on both critical paths. H & B cannot be further crashed

Name

Duration

EFES

LS LF

Number


DrivingRelationship

Critical Path

Activity

Legend


Cc/week

A 7 1 150

B 8 0 75

C 9 2 100

D 11 3 100

E 8 3 116.67

F 10 2 100

G 12 2 100

H 13 0 50

I 14 4 125

Decision: Crash D & F by 1 week @ $200/wkDecision: Crash D & F by 1 week @ $200/wk

A7

70

0 7

100 0

B6

60

0 6

200 0

D11

187

7 18

400 0

E8

146

10 18

504 4

F9

156

6 15

600 0

H11

2918

18 29

800 0

I14

2915

15 29

900 0

Fin0

2929

29 29

1000 0St.

0

00

0 0

00 0

100

0

0

0

0

0 0

0

4

0

0

C9

167

8 17

301 0 G

12

2816

17 29

701 1

Crashing a Project Crashing D & F by 1 Wk.

Critical Path(s) = B-F-I, A-D-H, and A-C-G

Project time = 28 weeks. Direct Cost = $ 9,950 Crashing should be of activities

on the three critical paths. A is located on 2 critical paths.

Name

Duration

EFES

LS LF

Number


DrivingRelationship

Critical Path

Activity

Legend


Cc/week

A 7 1 150

B 8 0 75

C 9 2 100

D 11 2 100

E 8 3 116.67

F 10 1 100

G 12 2 100

H 13 0 50

I 14 4 125

Decision: Crash A & F by 1 week @ $250/wkDecision: Crash A & F by 1 week @ $250/wk

A7

70

0 7

100 0

B6

60

0 6

200 0

D10

177

7 17

400 0

E8

146

9 17

503 3

F8

146

6 14

600 0

H11

2817

17 28

800 0

I14

2814

14 28

900 0

Fin0

2828

28 28

1000 0St.

0

00

0 0

00 0

000

0

0

0

0

0 0

0

3

0

0

C9

167

7 16

300 0 G

12

2816

16 28

700 0

Crashing a Project Crashing A & F by 1 Wk.

Critical Path(s) = B-F-I, A-D-H, and A-C-G

Project time = 27 weeks. Direct Cost = $ 10,200 Crashing should be of activities

on the three critical paths. A & F cannot be further crashed

Name

Duration

EFES

LS LF

Number


DrivingRelationship

Critical Path

Activity

Legend


Cc/week

A 7 0 150

B 8 0 75

C 9 2 100

D 11 2 100

E 8 3 116.67

F 10 0 100

G 12 2 100

H 13 0 50

I 14 4 125

Decision: Crash I, D, & (C or G)Decision: Crash I, D, & (C or G) by 1 week @ $325/wkby 1 week @ $325/wk

A6

60

0 6

100 0

B6

60

0 6

200 0

D10

166

6 16

400 0

E8

146

8 16

502 26

F7

136

6 13

600 0

H11

2716

16 27

800 0

I14

2713

13 27

900 0

Fin0

2727

27 27

1000 0St.

0

00

0 0

00 0

000

0

0

0

0

0 0

0

2

0

0

C9

156

6 15

300 0 G

12

2715

15 27

700 0

Example Project Time-Cost Trade-offs

Consider: Indirect Cost of $200

per week, Liquidated damages

of $500 per week for project duration beyond 30 weeks, and

No incentive plan

Project Duration (wk) 26 27 28 29 30 31 32

Direct Cost ($) 10,525 10,200 9,950 9,750 9,600 9,475 9,400

Indirect Cost ($) 5,200 5,400 5,600 5,800 6,000 6,200 6,400

Liquidated Damages ($) 0 0 0 0 0 500 1,000

Incentives ($) 0 0 0 0 0 0 0

Total Cost ($) 15,725 15,600 15,550 15,550 15,600 16,175 16,800

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

25 26 27 28 29 30 31 32

Project Duration (w eeks)

Pro

ject C

ost ($

)

Direct Cost ($)Indirect Cost ($)Liquidated Damages ($)Total Cost ($)

Earned Value Management (EVM)

EVM is a project performance measurement technique that integrates scope, time, and cost data.

Given a baseline (original plan plus approved changes), you can determine how well the project is meeting its goals.

You must enter actual information periodically to use EVM.

More and more organizations around the world are using EVM to help control project costs.

The EV System

To set up the EV system

1. Establish the WBS to divide the project into manageable portions.

2. Identify the activities to be scheduled that represent the entire project.

3. Allocate the costs to be expended on each activity.

4. Schedule the activities over time.

5. Tabulate, plot & analyze the data to confirm that the plan is acceptable.

To use the information generated by the EV calculations:

1. Update the schedule by reporting activity progress.

2. Enter the actual costs on the activities.

3. Execute the Earned Value calculations, print and plot the reports and charts.

4. Analyze the data & write the performance narrative.

Earned Value Technique:

Compares reality to what was planned originally (baseline).

Used for cost and schedule control. Given project status today, report actual

progress variances. Forecast future outcomes

(expectations). Used for ETC and EAC.

Output is performance measurements values.

Earned Value Management Terms

The planned value (PV), formerly called the budgeted cost of work scheduled (BCWS), also called the budget, is that portion of the approved total cost estimate planned to be spent on an activity during a given period.

Actual cost (AC), formerly called actual cost of work performed (ACWP), is the total of direct and indirect costs incurred in accomplishing work on an activity during a given period.

The earned value (EV), formerly called the budgeted cost of work performed (BCWP), is an estimate of the value of the physical work actually completed.

EV is based on the original planned costs for the project or activity and the rate at which the team is completing work on the project or activity to date.

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.

TRADITIONAL COST ANALYSIS

Back to our S-curveC

um

ula

tive v

alu

e (

$)

Time

Actual cost (AC)

Earned Value (EV)

Planned Value (PV)

Budget At Completion (BAC)

Earned Value Performance Measurement

EV measurement should enable a: Clearer measure of the project work

accomplished, Better forecasts of the likely task &

project completion dates & associated costs.

Earned Value Principles

EV also known as the Budgeted Cost of Work Performed (BCWP).

EV is based on assigning a value to the achievement of project work. Ideally, achievement is in terms of milestones &

deliverables. The value is usually monetary but can be expressed

in any appropriate units such as man-hours.

Cost Performance Analysis

Cost Variance (CV) = EV - AC

Cost Performance Index (CPI) =

Where: AC is the actual cost of work performed; and EV = Planned Value to Date * RP

AC

EV

Schedule Performance analysis

Schedule Variance (cost-based) = EV - PV Schedule Variance (time-based) = OD - ATE Schedule Performance Index (SPI)

Cost based SPI =

Time based SPI =

Where: PV is the budgeted (planned) cost of work scheduled. OD is the Original Duration planed for the work to

date; ATE is the Actual Time Expended for the work to

date.

PV

EV

ATE

OD

Forecasting CostBased on Earned Value Statistics

EAC = AC +

Where: EAC is the estimated cost at completion BAC is the budget at completion

(total planned cost of work).

CPI

EV-BAC

Forecasting TimeBased on Earned Value Statistics

Planned Total Project Time = PTPT Schedule Variance (time) = OD - ATE Planned Time to Complete (PTC) = PTPT - OD

Estimated Actual Time to Complete =

Estimated Total Project Time = ATE +

SPI

PTC

SPI

PTC

Time & Cost Forecasting

ECTC = Estimated Cost To Complete

BAC = Budget At Completion

BCWP = Budget Cost of Work Performed

ACWP = Actual Cost of Work Performed

BCWS = Budget Cost of Work Scheduled

OD = Original Duration planned for work to date

ATE = Actual Time Expended for work to date

PTPT = Planned Total Project Time

Project Portfolio Management

Many organizations collect and control an entire suite of projects or investments as one set of interrelated activities in a portfolio.

Project portfolio management has five levels:1. Put all your projects in one database.

2. Prioritize the projects in your database.

3. Divide your projects into two or three budgets based on type of investment.

4. Automate the repository.

5. Apply modern portfolio theory, including risk-return tools that map project risk on a curve.

Benefits of Portfolio Management

Schlumberger saved $3 million in one year by organizing 120 information technology projects into a portfolio.

Using Software to Assist in Cost Management

Spreadsheets are a common tool for resource planning, cost estimating, cost budgeting, and cost control.

Many companies use more sophisticated and centralized financial applications software for cost information.

EV Analysis - ExampleTarget Schedule:

Activity Start Duration % CompleteA 0 2 100B 2 8 60C 6 4 50D Total =EFG

Total =

Activity BT BC % BCWP BTWP ATWP ACWP ST BCWS Time Cost Schedule TV CV SVA 2 1,000 100 1,000 2 2 900 2 1,000 100% 111% 100% 0 -100 0B 17 3,400 60 2,040 10 8 2,000 8 1,600 128% 102% 128% -2.2 -40 -440C 3 9,000 0 0 0 0 0 2 6,000 0% 6000D 5 5,000 50 2,500 3 4 3,200 5 5,000 63% 78% 50% 1.5 700 2500E 6 12,000 0 0 0 0 0 0 0F 2 1,000 0 0 0 0 0 0 0G 1 1,000 0 0 0 0 0 0 0

Totals: 32,400 5,540 6,100 13,600 91% 41% 560 8060

Actual at end of day 10

Activity C is expected to start after 3 days from

Cost

12,0001,000

6,100

1,00032,400

Efficiency Variance

now and is expected to last for 5 days at a costof 2,000 $ per day .

Table of Efficiencies and Variances of Activities and of the Project.

Budget

1,0003,4009,0005,000

Cost900

2,0003,200

E5

13 19

TF=FF=0

G1

19 20

TF=FF=0

C3

118

TF=FF=2

0 2

D5

94

TF=4, FF=2

F2

1311

TF=FF= 6

B17

2 19

TF=FF= 0

TF=FF=0

A2

EV Forecast - Example

0

G1

C5

DD0

E5

130 83* 8 13 14

TF=FF=0 TF=FF=0

64 40

TF=4, FF=0 TF=FF=7

TF=FF=0

B5

0 5

TF=FF=8

Time to complete the project = 14Cost to complete the project =

= 1,333+10,000+2,000+12,000+1,000+1,000 = 27,333

D4

F2

Performance Analysis Plot

A useful way of using earned value data is to plot CPI as a function of SPI (cost based) through time, to:

• reveal the direction of the task and of the whole project.

• demonstrate the effect of recovery action.

Projects Selection

Remember: PM are not accountants! But…

Need to do some cost related duties.

Selection between alternatives techniques are very useful to know.

Uncertainty makes risk management an essential and important task from onset of project to finishing date.

Some Project Selection Methods

1. Net Present Value (NPV)

2. Internal Rate of Return (IROR)

3. Payback Period (PBP)

4. Benefit Cost Ratio (BCR)

Selection Methods

Net Present Value (NPV)

Considers the time value of money.

NPV= PV (income)- PV (cost).

Always chose the one with higher NPV.

Formula

P P ==FF

(1 +(1 + r r))nn

wherewhere

F = future value of the investment at the end of n periods

P = amount invested at the beginning, called the principal

r = periodic interest rate (discount rate)n = number of time periods for which the

interest compounds

Selection Methods Cont….

Internal Rate of Return Maths is complex. i at which

PV of inflows = PV of outflows. Always chose the one with highest IRR

975.57 20

-745.03 18NPV = 77.82

-360.47 151815.77 32005

77.82 12762.62 12004

404.61 101067.67 15003

763.008717.679002

1368.55714.298001

26000-5000 - 50000

NPVIR (i)PV ( i = 12% )

CASHFLOW

EOY


Payback Period (PBP) Simple method. When do I get my money back? Ignores the time value of money.

Chose the one with shortest PBP.

Inflows above $2m/month to break even

Benefit to Cost Ratio (BCR) Usually used for public projects.

Calculate all benefits and costs and work out the ratio between them.

BCR could be =, > or <1

Would like a BCR = 1.3


The Exit Strategy

Steps in completing the project Controlling costs & schedule late in the

project Scope verification Schedule Control Cost Control Contract closeout Administrative closure

Contract Closure

Completing & settling each contract Resolution of any open items Closing each project or project phase

contract

Contract Closure

Involves both product verification & administrative closeout.

During contract closeout, the PM must perform: Product verification: insuring that all of the

work was completed. Administrative closure: documenting &

archiving final results.

Procurement Audits (tools & Techniques)

Can provide valuable lessons learned by identifying successes & failures that warrant transfer to other procurements within the project & other projects.

Contract Administration

Managing the contract & relationships between the buyer & seller

Reviewing & documenting how a seller is performing or has performed

Managing contract-related changes

Managing contractual relationship with the project outside buyers

Contract Change Control System (tools & Techniques)

Includes: Supporting paperwork Tracking systems (such as the change control

log) Dispute resolution procedures (such as when

to escalate) Approval levels required (based on cost of the

change, impact, etc.)

Buyer-Conducted Performance Review (tools & Techniques)

This is a meeting where all the available data is brought together to see if the seller is performing.

Often the seller is present to review the data and most importantly talk about what the buyer can do differently to help the work along.

The purpose of this review is to determine & recommend needed corrective & preventive actions and to request formal changes.

Claims Administration (tools & Techniques)

A claim is an assertion that the buyer did something that has hurt the seller and the seller asking for compensation.

Another way of looking at claims is that they are a form of seller’s change requests. Claims can get nasty.

Many claims are not resolved until the work is completed.

Record Management System (tools & Techniques)

On many projects, every e-mail, every payment, every written and oral communication must be recorded, kept and stored.

On other projects the weather each day & the number of people on the buyer’s property each day may also be required.

Whatever is appropriate for the particular industry and project is kept.

Helpful to unresolved claims, legal actions, or even to satisfy insurance needs.

Administrative Closure

Must be done any time a project or phase ends.

For example, if a project is canceled prior to completion, the project needs to enter administrative closure.

This is often a good test as to how committed an organization is to the disciplines of project management.

Administrative Closure

Several key things must happen in this process, including: Documenting performance Assembling all project documentation, memos,

communications, etc. Finalizing all payments Collecting and documenting lessons learned Releasing resources

Administrative Closure Includes:

Project Archives

Creating a complete set of indexed project records for the project.

Project Closure

Verifying that the project has met all or the customer's requirements.

Lessons Learned

Lessons Learned Include:

Documenting what variances occurred on the project, and what the underlying causes were.

Documentation should also include what was done to correct the project, and

what was learned by the performing organization to avoid the problems that were encountered.

Results from Lessons Learned Include:

Update of the lessons learned knowledge base

Input to knowledge management system

Updated corporate policies, procedures, & processes

Improved product & service improvements

Update to the risk management plan

Over time, lessons learned are often incorporated into

best practices.

THANK YOU ALL …

Effective Project Cost & Scheduling

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