Project Management - Kerzner - Chapter 15 - Cost Control

A project can be defined as a collection of value scheduled for realization [Page 808]

"Meeting time and cost constraints has very little to do with project success. Project success is measured in terms of business value expected compared to business value delivered. Both the PM and business analyst (BA) should be making every effort to maximize business value for the time and cost invested. This puts the goals of the PM and the BA in alignment."

Calculating percent complete techniques/rules: [Page 763-765]

- 50/50 rule (most common): Half of the budget for each element is recorded at the time that the work is scheduled to begin, and the other half at the time that the work is scheduled to be completed. For a project with a large number of elements, the amount of distortion from such procedure is minimal. Advantage = it eliminates the necessity for the continuous determination of the percent complete. - 0/100 rule: Usually limited to work packages (activities) of small duration (i.e., less than one month). No value is earned until the activity is complete - Milestone: This is used for long work packages with associated interim milestones, or a functional group of activities with a milestone established at identified control point. Value is earned when the milestone is completed. In these cases, a budget is assigned to the milestone rather than the work packages - Percent complete: Usually invoked for long-duration work packages (i.e., three months or more) where milestones cannot be identified. The value earned would be the reported percent of the budget - Equivalent units: Used for multiple similar-unit work packages, where earning are on completed units, rather than labor - Cost formula (80/20): A variation of percent complete for long-duration work packages - Level of effort: This method is based on the passage time, often used for supervision and management work packages. The value earned is based on time expended over total scheduled time. It is measured in terms of resources consumed over a given period of time and does not result in a final product - Apportioned effort: A rarely used technique, for special related work packages. Used for effort that is not readily divisible into short-span work packages but that is in proportion to some other measured effort

Key performance indicators (KPIs) - What they are and the need for them [Page 800-801, 804-805]

- A KPI is a metric measuring how well the organization or an individual performs an operational, tactical or strategic activity that is critical for the current and future success of the organization - KPIs serve as early-warning signs that, if an unfavorable condition exists and is not addressed, the results could be poor - KPIs give us information for making informed decisions by reducing uncertainty - When applied to projects, KPIs answer the question, "What is really important for different stakeholders to monitor on the project?" - KPIs are the items that appear in the dashboards and reports that are elements that both customers and project managers track - KPIs are critical components of all earned value measurement systems - Most important attribute of a KPI may be that is is actionable - Lagging KPIs measure past performance - Leading KPIs measure drivers for future performance Typical KPIs that project managers may use include: - % of work packages adhering to the schedule &/or budget - # of assigned resources versus planned resources - % of actual vs. planned baselines completed to date - % of actual vs. planned best practices used - Project complexity factor - Time to achieve value - Customer satisfaction ratings - # of critical assumptions made - % of critical assumptions that have changed - # of cost revisions, schedule revisions, critical constraints, &/or scope change review meetings - % of work packages with a critical risk designation - Net operating margins - Grade levels of assigned resources vs. planned resources

Project planning and control systems identifiable design requirements [Page 739]

- A common framework from which to integrate time, cost, and technical performance - Ability to track progress of significant parameters - Quick response - Capability for end-value prediction - Accurate and appropriate data for decision-making by each level of management - Full exception reporting with problem analysis capability - Immediate quantitative evaluation of alternative solutions

Cost Account Codes [Page 745]

- A cost account is an identified level at a natural intersection point of the WBS and the organizational breakdown structure (OBS) at which functional responsibility for the work is assigned, and actual direct labor, material, and other direct costs are compared with actual work performed for management control purposes - If a cost center needs additional time or additional man-hours, then a cost account change notice form must be initiated - Large companies have computerized cost control and reporting systems - Small companies have manual or partially computerized systems

Strategic intelligence (SI) [Page 815]

- A formalized process of research, collection, information processing and distribution of knowledge useful to strategic management - Main goals are to anticipate environmental threats and opportunities (anticipatory function), help in strategic decision making and improve competitiveness and performance of the organization - Requires an organizational network structure, and human technical and financial resources

Earned value [Page 752, 762]

- A management technique that relates resource planning to schedules and technical performance requirement - A forecasting variable used to predict whether the project will finish over or under the budget - A key parameter used in variance analysis - The concept of earned value, although a crude estimate, identifies trends concerning the status of specific WBS elements - Used to determine whether costs are being incurred faster or slower than planned

At a minimum, the contractor's material accounting system must provide the following: [Page 782]

- Accurate cost accumulation and assignment of costs to cost accounts in a manner consistent with budgets using recognized, acceptable costing techniques - Determination of material price variances by comparing planned versus actual commitments - Cost performance measurement at the point in time most suitable for the category of material involved, but no earlier than the time of actual receipt of material - Determination of material cost variances attributable to the excess usage of material - Determination of unit or lot cots when applicable - Full accountability for all material purchased for the project, including residual inventory In order to satisfy these six system requirements, the following accounting practices should be adhered to: - The material costs actuals (ACWP) must equate to its material plans (BCWS), and be carried down to the cost account level of the WBS - The material price variances must be determinable by comparing planned commitments (estimated material value) to actual commitments (actual cost of the material) - Physical work progress or earned value (BCWP) must be determinable, but not before the materials have been received - Usage cost variances must be determinable from excess material usage - Material unit costs and/or lot cots must be determinable, as applicable - There must be full accountability of all materials purchases, including any residual material inventory

Variance [Page 754]

- Any schedule, technical performance, or cost deviation from a specific plan - Must be tracked and reported - Should be mitigated through corrective actions and not eliminated through a baseline change unless there is a good reason

Whenever companies operate on a matrix structure, information must be carefully prepared and distributed to all key individuals in the organization. To avoid dual standards and red tape, management must establish the decision-making policies associated with cost and control systems. The following is a policy guide: [Page 789]

- Approving all estimates, and negotiating all estimates and the definition of work requirements with the respective organizations - Approving the budget, and directing distribution and budgeting of available funds to all organizational levels by program element - Defining the work required and the schedule - Authorizing work release, the manager may not, however, authorize work beyond the scope of the contract - Approving the program BOM, detailed plans, and program schedules fro need and compliance with program requirements - Approving the procuring work statement, the schedules, the source selection, the negotiated price, and the type of contract on major procurement - Monitoring the functional organization's performance against released budgets, schedules, and program requirements - When cost performance is unacceptable, taking appropriate action with the affected organization to modify the work requirements or to stimulate corrective action within the functional organization so as to reduce costs without changing the contracted scope of work - Being responsible for all communications and policy matters on contracted programs so that no communicative directives shall be issued without the signature or concurrence of the program manager

Government subcontractors are required to have a government-approved cost/schedule control system. The information requirement that must be demonstrated by such a system include: [Page 760-761]

- Budgeted cost for work scheduled (BCWS) - Budgeted cost for work performed (BCWP) - Actual cost for work performed (ACWP) - Estimated cost at completion - Budgeted cost at completion - Cost and schedule variances/explanations - Traceability

Importance of SPI and CPI in trend analysis [Page 758]

- Can be used to show performance for a specified time period or trends over a long time horizon without disclosing actual company sensitive numbers - Very valuable tools for customer status reporting without disclosing hard numbers - Trend analysis provides an early warning system and allows managers to take corrective action - May be restricted to long-term projects because of the time needed to correct the situation Can be used to forecast the expected final cost and the expected end date of the project - Cost at completion, EAC, as: EAC = BAC/ CPI - Time at completion as: New project length = Original project length / SPI

Earned value management system [EVMS] [Page 752-753]

- Considered to be a component of the MCCS - The determination of earned value - Without EVMS, determining status would be difficult - Emphasizes prevention over cures by identifying and resolving problems early - An early warning system allowing for early identification of trends and variance from the plan - Provides and early warning system, thus allowing the PM sufficient time to make course corrections in small increments - Should be used continuously throughout the project in order to detect the variances while they are small and possibly easy to correct Provides the following benefits: - Accurate display of project status - Early and accurate identification of trends and/or problems - Basis for course corrections Answers the following questions: - What is the true status of the project? - What are the problems? - What can be done to fix the problems? - What is the impact of each problem? - What are the present and future risks?

Project management information system (PMIS) [Page 793]

- Contains all of the essential and supporting information for project approval, initiation, planning, scheduling, execution, monitoring and control, and closure -While an earned value measurement system (EVMS) is a critical component of the PMIS, today's PMIS contains significantly more metrics than just time and cost - A good PMIS can prevent projects from failing - PMIS also make is easy for team members and functional managers to input the information necessary for effective status reporting The PMIS can provide significant benefits if designed properly, such as: - Satisfying the information needs for the various stakeholders in a timely manner - Providing the correct information for informed decision-making - Having the correct amount of information, rather than too much or too little - Lowering the cost of collecting the right information - Providing information on how the project interacts with various initiatives that are part of the ongoing business - Providing information on how one project interacts with other projects being supported by line managers - Providing value to the company

MCCS planning activities [Page 739-740]

- Contract receipt (if applicable) - Work authorization for project planning - Work breakdown structure - Subdivided work description - Schedules - Planning charts - Budgets

Value-base metrics [Page 807]

- Customers make decisions to hire a contractor based upon the value they expect to receive and the price they must pay to receive this value - The client may perceive the value of your project to be used internally in their company or pass it on to their customers through their customer value management program - If an organization cannot offer recognized value to clients and stakeholders, they value (i.e. loyalty) will not be able to be extracted from them in return and will defect to other contractors - According to a study by the American Productivity and Quality Center (APQC): "Although customer satisfaction is still measured and used in decision-making, the majority of partner organizations have shifted their focus from customer satisfaction to customer value." When managing projects for value, five fundamental concepts must be embraced: - Concept #1: Projects derive their value from the benefits the organization accrues by achieving its stated goals - Concept #2: Project can be viewed as investments made by management - Concept #3: Project investors and sponsors tolerate risk - Concept #4: Project value is related to investment and risks - Concept #5: Value is a balance among the three key project elements: performance, resource usage, and risk Problems with measuring values: [REFER TO PAGE 809]

Enterprise resource planning (ERP) systems [Page 794]

- ERP is an enterprise-wide information systems designed to coordinate all the resources, information, and tasks needed to complete various business and project processes - ERP supports supply chain management, finance and account, human resource management, and project management

Once the variance analysis is completed, both project and functional management must diagnose the problem and search for corrective actions. This includes: [Page 785]

- Finding the cure for the problem - Developing a plan to recover the position

Cost performance index (CPI) calculation [Page 758]

- Formula used to calculate the performance efficiency as a percentage of EV CPI = BCWP / ACWP - If CPI = 1.0, then it is a perfect cost performance - If CPI < 1.0, then physical progress is being accomplished at a greater cost than forecasted (unfavorable and emphasis should be placed upon improving the productivity by which work was being performed) - If CPI > 1.0, then physical progress is being accomplished at less than the forecasted cost (favorable)

Schedule performance index (SPI) calculation [Page 758]

- Formula used to calculate the performance efficiency as a percentage of EV SPI = BCWP / BCWS - If SPI = 1.0, then it is a perfect schedule performance - If SPI < 1.0, then physical progress was accomplished at a slower rate than what was planned (unfavorable and emphasis should be placed upon improving the timeliness of the physical progress) - If SPI > 1.0, then physical progress was accomplished at a faster rate than what was planned (favorable)

Management Reserve [Page 751-752]

- Generally the dollar amount established for categories of unforeseen problems and contingencies resulting in special out-of-scope work to the performers - Interpretations on how the control of the management reserve should be used: 1. The management reserve is actually excess profits and should not be used at all. It should be booked as additional profits as soon as possible (Accounting) 2. The management reserve should be spent on any activities that add features or additional functionality to the product. Our customers will like that. It will also build up good customer relationships for future work. (Marketing) 3. The management reserve should be used for those activities that add value to our company, especially our image in the community. (Senior management) 4. The management reserve should be used as part of risk management in developing mitigation strategies for risks that occur during the execution of the project. Scope changes not originally agreed to should be billed separately to the customer. (Project manager) 5. The management reserve should be sued for the additional hours necessary to show that our technical community can exceed specifications rather than merely meeting them. This is our strength. The management reserve should also be sued as "seed money" for exploring ideas discovered while working on this project. (Engineering and R&D)

Quantitative reasons on why not to pull the plug and cancel the project: [Page 779]

- High exit barriers - Significant expenditures have been made and are unrecoverable - Penalty clauses - Breach-of-contract lawsuits - Payments to terminated workers - Low salvage value of goods and property - High plant closing costs - Moving people may end up violating seniority and labor agreements

EAC (estimate at completion) [Page 766-767, 769]

- Identifies either the dollars or hours that represent a realistic appraisal of the work when performed - The sum of all direct and indirect costs to date plus the estimate of all authorized work remaining - Best estimate of the total cost at the completion of the project - A periodic evaluation of the project status EAC = cumulative actuals + the estimate-to-complete EAC = (ACWP/BCWP) * BAC = BAC / CPI (Where BAC is the value of BCWS at completion) Several other formulas: I: EAC = (ACWP / BCWP) * BAC - Assumes that the burn rate (i.e., ACWP/BCWP) will be the same for the remainder of the project - Easiest to use - Burn rate is updated each reporting period II: EAC = (ACWP / BCWP) * (Work completed and in progress) + (Actual (or revised) cost of work packages not yet begun) - Assumes that all work packages not yet opened will be completed at the planned cost - It is possible for planned cost to be revised based upon history from completed work packages III. EAC = (Actual to date) + (All remaining work to be at planned cost including remaining work in progress) - Assumes that all remaining work is independent of the burn rate incurred thus far - May be unrealistic unless all remaining work can be reestimated if necessary

No all variances require corrective action. There are four major responses to a variance report: [Page 788-789]

- Ignoring it (When variance is within in permitted deviations for the level of the organization) - Functional modification (When variance is marginal or even within limits) - Replanning (When major variances occur) - System redesign (When major variances occur) If replanning cannot be accomplished without system redesign, then system specification may have to be changed = the worst possible case because performance may be sacrificed to satisfy the constraints of time and moeny

Costs must be justified before some executive committee. Every company has its own evaluation criteria cost summary approval process. Typical elements that must be justified or supported by hard data include: [Page 775-777]

- Labor rates: For estimating purposes, department averages or skill set weighted averages can be used. This is sometimes called the blended rate. The best-case scenario would be estimating from actual salary or skill set of the workers to be assigned - Overtime: If resources are scare and the company has no intention of hiring additional resources, then some work must be accomplished on overtime. This could increase the costs of the project and an allowance must be made for possible mistakes made during this period of excessive overtime. - Scrap factors: If the project includes procurement of raw materials, then some scrap factor allowance may be necessary. This calculation may be impacted by the skill set of the resources assigned and suing the materials, previous experience using these materials, and experience o these types of projects. - Risks: Risk analysis may be based upon the quality of the estimates and experience of those who made the estimates. Other risks considered include the company's ability to achieve the anticipated benefits or the designated profits, and if a disaster occurs, the company's exposure and liability for lawsuits/ - Hidden costs: These costs (i.e., cost of capital, shipping/postage, travel, attending meetings) can erode all the profitability expected on a project. Another potentially hidden cost is the yearly or monthly workload availability (hours available per year, less vacation, less sick leave, less paid holidays, less jury duty)

Not all companies have a uniform methodology for variance thresholds. Permitted variances may be dependent on such factors as: [Page 756]

- Life-cycle phase - Length of life-cycle phase - Length of project - Type of estimate - Accuracy of estimate

Disciplined use of MCCS is designed to put pressure on the project manager to perform exceptionally good project planning so such changes will be minimized: [Page 741]

- Make retroactive changes to budgets or costs for work that has been completed - Rebudget work-in-progress activities - Transfer work or budget independently of each other - Reopen closed work packages

Two primary methods of measurement (variances are used on both types) [Page 754]

- Measurable efforts: discrete increments of work with a definable schedule for accomplishment, whose completion produces tangible results - Level of effort: Work that does not lend itself to subdivision into discrete scheduled increments of work, such as project support and project control

For value-driven projects, the potential problems with life-cycle phases include: [Page 811-812]

- Metrics can change between phases and even during a phase - Inability to account for changes in the enterprise environmental factors - Focus may be on the value at the end of the phase rather than the value at the end of the project - Team members may get frustrated not being able to quantitatively calculate value Reasons that benefits and value at completion may be difficult when periodically reevaluating: [REFER TO PAGE 812] Reasons for value trade-offs: - Changes in the enterprise environmental factors - Changes in the assumptions - Better approaches have been found, possibly with less risk - Availability of highly skilled labor - A breakthrough in technology

MCCS planning charts are worksheets used to create the budget. These charts include planned labor in hours and material dollars. MCCS planning is accomplished in one of these ways: [Page 740]

- One level below the lowest level of the WBS - At the lowest management level - By cost element or cost account

Work Authorization [Page 744]

- Phase II of the operating cycle (work release phase) - After planning is completed and a contract is received, work is authorized via a work description document - The work description, or work project work authorization form, is as contract that contains the narrative description, organization, and time frame for each WBS level - Used to release the contract, authorize planning, record detail description of the work outlined in the WBS, and release work to the functional departments

A well-disciplines MCCS will produce the following results [Page 740]

- Policies and procedures that will minimize the ability to distort reporting - Strong management emphasis on meetings commitments - Weekly team meetings with a formalized agenda, action items, and minutes - Top-management periodic review of the technical and financial status - Simplified internal audit for checking compliance with procedures

Common causes of cost problem include: [Page 792]

- Poor estimating techniques and/or standards, resulting in unrealistic budgets - Out-of-sequence starting and completion of activities and events - Inadequate WBS - No management policy on reporting and control practices - Poor work definition at the lower levels of the organization - Management reducing budgets or bids to be competitive or to eliminate "fat" - Inadequate formal planning that results in unnoticed, or often uncontrolled, increases in scope of effort - Poor comparison of actual and planned cots - Comparison of actual and planned cots at the wrong level of management - Unforeseen technical problems - Schedule delays that require overtime or idle time costing - Material escalation factors that are unrealistic

Projection Report [Page 785]

- Printed out for the earned value measurements system - These reports calculate EAC, ETC, SPI, and CPI, as well as any other forward-looking projections - Emphasize where we will end up

Exception report [Page 785]

- Printed out for the earned value measurements system - These reports identify exceptions, problems, or situations that exceed the threshold limits on such items as variances, cash flow, resources assigned, and other such topics

Status report [Page 772-773, 785]

- Printed out for the earned value measurements system - These reports identify where we are today and use the information from the performance reports to calculate SV and CV The preparation of status report, whether they be for internal management or for the customer, should, at minimum, answer two fundamental questions: 1. Where are we today (with respect to time and cost)? 2. Where will we end up (with respect to time and cost)? The information necessary to answer can be obtained from the following formulas: 1. - Cost variances (in dollars/hours and % complete) - Schedule variances (in dollars/hours and % complete) - Percent complete = BCWP / BAC - Percent money spent = ACWP / BAC 2. - Estimate at completion (EAC) - The remaining critical path - SPI (trend analysis) - CPI (trend analysis)

Performance report [Page 785]

- Printed out for the earned value measurements system - These reports indicate the physical progress to date, namely, BCWS, BCWP, and ACWP - The report might also include information on material procurement, delivery, and usage, but most companies have separate reports on materials

Understanding metrics and their benefits: [Page 795]

- Project-based metrics can change during each life-cycle phase as well as from project to project; therefore, the establishment and measurement of metrics may be an expensive necessity to validate the critical success factors (CSFs) and maintain customer satisfaction - If it cannot be measured, then it cannot be managed - What gets measured gets done - You never really understand anything fully unless it can be measured - Your problem is not as unique as you think - You have more data than you think - You need less data than you think - There is useful measurement that is much simpler than you think Benefits of using metrics: - Metrics tell us if we are hitting the targets/milestones, getting better, or getting worse - Metrics allow you to catch mistakes before they lead to other mistakes; early identification of issues - Good metrics lead to informed decision-making, whereas poor or inaccurate metrics lead to bad management decisions - Good metrics can assess performance accurately - Metrics allow for proactive management in a timely manner - Metrics improve future estimating and performance - Metrics make it easier to validate baselines and maintain the baselines with minimal disruptions - Metrics can more accurately assess success and failure - Metrics can improve client satisfaction - Metrics are a means of assessing the project's health - Metrics track the ability to meet the project's critical success factors - Good metrics allow the definition of project success to be made in terms of factors other than the traditional triple constraints

Three categories of metrics: [Page 803]

- RIs (Results Indicators): What have we accomplished? - PIs (Performance Indicators): What must we do to increase or meet performance? - KPIs (Key Performance Indicators): What are the critical performance indicators that can drastically increase performance or accomplishment of the objectives?

SPI/CPI and CV/SV difference [Page 758]

- SPI and CPI are expressed as ratios compared to the performance factor of 1.0 - CV and SV are expressed in hours or dollars

Three schools of thought for value measurement: [Page 810]

- School 1: The only thing that is important is the ROI - School 2: TIO can never be calculated effectively; only the intangibles (REFER TO PAGE 809] are important - School 3: If you cannot measure it, then it does not matter

Project budget [Page 750]

- The final result of the planning cycle of the MCCS - Must be reasonable, attainable, and based on contractually negotiated costs and the statement of work - The basis for the budget is either historical cost, best estimates, or industrial engineering standards - The budget must identify planned manpower requirements, contract allocated funds, and management reserve - All budgets must be traceable through the budget "log" including distributed or normal performance budget, management reserve, undistributed budget, and/or contract changes

Guidelines of the MCCS [Page 739]

- The level of detail is specified by the project manager with approval by top management - Centralized authority and control over each project are the responsibility of the project management division - For large projects, the project manager may be supported by a project team for utilization of the MCCS

First purpose of control becomes a verification process accomplished by the comparison of actual performance to date with the predetermined plans and standards set forth in the planning phase. The comparison serves to verify that: [Page 742]

- The objectives have been successfully translated into performance standards - The performance standards are, in fact, a reliable representation of program activities and events - Meaningful budgets have been established such that actual versus planned comparisons can be made (In other words, the comparison verifies that the correct standards were selected, and that they are properly used)

Second purpose of control is decision-making. Three useful reports are required by management in order to make effective and timely decisions: [Page 743]

- The project plan, schedule, and budget prepared during the planning phase - A detailed comparison between resources expended to date and those predetermined. This includes an estimate of the work remaining and the impact of activity completion - A projection of resources to be expected through program completion These reports, supplied to the managers and the doers, provide three useful results: - Feedback to management, the planners, and the doers - Identification of any major deviations from the current program plan, schedule, or budget - The opportunity to initiate contingency planning early enough that cost, performance, and time requirements can undergo corrected action without loss of resources

BAC (budget at completion) [Page 766]

- The sum of all budgets (BCWS) allocated to the project - This is often synonymous with the project baseline - This is what the total effort should cost

Requirements for an effective control system (for both cost and schedule/performance): [Page 741]

- Thorough planning of the work to be performed to complete the project - Good estimating of time, labor, and costs - Clear communication of the scope of required tasks - A disciplined budget and authorization of expenditures - Timely accounting of physical progress and cost expenditures - Periodic reestimation of time and cost to complete remaining work - Frequent, periodic comparison of actual progress and expenditures to schedules and budgets, both at the time of comparison and at project completion

ACWP (actual cost for work performed) [Page 754]

- Used to calculate variance - The amount reported as actually expended in completing the work accomplished within a given time period

BCWP (budget cost for work performed) or AEV (actual earned value) [Page 754]

- Used to calculate variance - The budgeted amount of cost for completed work, plus budgeted for level of effort or apportioned effort activity completed with in a given time period -Simplest formula for calculating BCWP (one must predict the percent complete): BCWP = (% complete) * BAC

BCWS (budgeted cost for work scheduled) or PEV (planned earned value) [Page 754-755]

- Used to calculate variance - The budgeted amount of cost for work scheduled to be accomplished plus the amount or level of effort or apportioned effort scheduled to be accomplished in a given time period - Represents the time-phased budget plan against which performance is measured - For the total contract, BCWS is normally the negotiated contract plus the estimated cost of authorized but unpriced work (less any management reserve) - Determined at the cost account level by totaling budgets for all work packages, plus the budget for the portion of in-process work, plus the budget for level of effort and apportioned effort

Qualitative reasons on why not to pull the plug and cancel the project: [Page 779]

- Viewing failure as a sign of weakness - Viewing failure as damage to one's career - Viewing failure as damage to one's reputation - Viewing failure as a roadblock to promotion - Fear of exposing one's mistakes to others - Viewing bad news as a personal failure - Refusing to admit defeat or failure - Seeing what one wants to see rather than seeing reality

Dashboards [Page 813-814]

- Visual display mechanisms used in an operationally oriented performance measurement system that measure performance against targets and thresholds using right-time data - Lets operational specialists and their supervisors monitor events generated by key business processes - Displays performance visually, using charts or simple graphs, such as gauges and meters There are three types of dashboards: [REFER TO PAGE 814-815]

Scorecards [Page 814]

- Visual displays used in a strategically oriented performance measurement system that chart progress towards achieving strategic goals and objectives by comparing performance against targets and thresholds - Usually display summarized data for business executives who track strategic and long-term objectives or data for managers who need to chart the progress of their group of project toward achieving goals - Makes use of charts and visual graphs to indicate performance state, trends, and variance against goals

MCCS takes on paramount importance during the operating cycle of the project, which is composed into four phases: [Page 744]

- Work authorization and release (phase II) - Cost data collection and reporting (phase III) - Cost analysis (phase IV) - Reporting: customer and management (phase V)

Relationship between work authorization and the code of accounts [Page 745-748]

- Work orders define the charge numbers for each cost account - Work authorization form specifically identifies the cost centers that are "open" for this charge number, the man-hours available for each cost center, and the operational time period for the charge number - The major difficulty in using the cost account code breakdown and the work authorization form is related to whether the employees fill out time cards, and frequency with which the time cards are filled out

In-process work [Page 762]

- Work packages that have been started but have not been completed at the time cutoff for the report -Open work packages

Twelve characteristics of effective KPIs [REFER TO PAGE 805]

1. Aligned; 2. Owned; 3. Predictive; 4. Actionable; 5. Few in number; 6. Easy to understand; 7. Balanced and linked; 8. Trigger changes; 9. Standardized; 10. Context driven; 11. Reinforced with incentives; and 12. Relevant

When the actual material costs exceed a material budget, there are normally two causes: [Page 783]

1. The articles purchased cost more than was planned, called a "price variance" 2. More articles were consumed than were planned, called a "usage variance"

"SMART" rule: [Page 804]

A means of identifying the characteristics of metrics and KPIs - S = Specific: Clear and focused toward performance targets or a business purpose - M = Measurable: Can be expressed quantitatively - A = Attainable: The targets are reasonable and achievable - R = Realistic and Relevant: The KPI is directly pertinent to the work done on the project - T = Time-Based: The KPI is measurable within a given time period

Earned value management (EVM) [Page 752]

A systematic process that uses earned value as the primary tool for integrating cost, schedule, technical performance management, and risk management

What is meant by a management cost and control system (MCCS)? [Page 738]

A two-cycle process: A planning cycle (referred to as planning and control) and an operating cycle (referred to as the cost control system) The planning and control system must help management project the status toward objective completion Its purpose is to establish policies, procedures, and techniques that can be used in the day-to-day management and control of projects and programs It must provide information that: - Gives a picture of true work progress - Will relate cost and schedule performance - Identifies potential problems with respect to their sources - Provides information to project managers with a practical level of summarization - Demonstrates that the milestones are valid, timely, and auditable

In addition to being a tool by which objectives can be defined (i.e., hierarchy of objectives and organization accountability), exists as a tool to develop planning, measure progress, and control change [Page 738-739]

As a tool for planning, the system must be able to: - Plan and schedule work - Identify those indicators that will be used for measurement - Establish direct labor budgets - Establish overhead budgets - Identify management reserve As a tool for measuring progress and controlling change, the systems must be able to: - Measure resources consumed - Measure status and accomplishments - Compare measurements to projections and standards - Provide the basis for diagnosis and replanning

Cost variance (CV) calculation [Page 755]

CV = BCWP - ACWP - A negative variance indicates a cost-overrun condition - To convert to percentage: Cost variance % (CVP) = CV / BCWP

Cost data collection and reporting [Page 749]

Constitutes the second phase of the operating cycle of the MCCs Four categories of cost data are normally accumulated: - Labor - Material - Other direct charges - Overhead

Cost control implies good cost management, which must include: [Page 738]

Cost estimating, cost accounting, project cash flow, company cash flow, direct labor costing, overhead rate costing, and other tactics such as incentives, penalties, and profit-sharing

An appropriate system must consider a: [Page 740]

Cost-benefit analysis

Work packages [Page 745]

Detailed short-span job or material items identified fro the accomplishment of required work

ETC (estimated cost to complete) [Page 773]

ETC = EAC - ACWP

When cost overrun occurs, the PM looks for ways of reducing costs. The simplest way is to reduce scope. Typical items that are cut or reduced in magnitude include: [Page 778-779]

Easy-to-cut items: - Project management supervision - Line management supervision - Process controls - Quality assurance - Testing Hard-to cut items: - Direct labor hours - Materials - Equipment - Facilities

Actual cost (ACWP) and the budgeted cost for work performed (BCWP) [Page 748]

For each contract or in-house project these are accumulated in detailed cost accounts by cost center and cost element, and reported

More on metrics (Why they are necessary, what they require, causes of failure, etc.) [Page 796-797]

Metrics are a necessity because: - Project approvals are often based upon insufficient information and poor estimating - Project approvals are based upon unrealistic return on investment (ROI), net present value (NPV), and payback period calculations - Project approvals are often based upon a best-case scenario - The true time and cost requirements may be either hidden or not fully understood during the project approval process Metrics require: - A need or purpose - A target, baseline, or reference point - A means of measurement - A means of interpretation - A reporting structure Even with good metrics, metrics management can fail. The most common causes of failure are: - Poor governance, especially by stakeholders - Slow decision-making processes - Overly optimistic project plans - Trying to accomplish too much in too little time - Poor project management practices and/or methodology - Poor understanding of how the metrics will be used Causes for lack of support for metrics management: [REFER TO PAGE 797] Characteristics of a metrics: [REFER TO PAGE 798-799]

Effective control system [Page 742]

Monitors schedule and performance as well as costs by setting budgets, measuring expenditures against budgets and identifying variances, assuring that the expenditures are proper, and taking corrective action when required

Budgeting and scheduling system variance [Page 754]

Must be compared because: - The cost variance compares deviations only from the budget and does not provide a measure of comparison between work scheduled and work accomplished - The scheduling variance provides a comparison between planned and actual performance but does not include costs

PV (Price variance) [Page 783]

Occur when the budgeted price value (BCWS) of the material was different than what was actually experienced (ACWP) Can arise from a host of reasons: - Poor initial estimates - Inflation - Different materials used than were planned - Too little month available to budget PV = [Budgeted price for the BOM (BCWS price) - Actual price paid for the BOM (ACWP price)] * (Actual quantity)

UV (Usage variance) [Page 783]

Occurs when a greater quantity of materials is consumed than were planned UV = [Budgeted quantity (BCWP qty)] - Actual quantity (ACWP qty)] * [Budgeted price (BCWS price)] Normally, usage variances are the resulting costs of materials used over and above the quantity calld for in the BOM

Project benefits [Page 740]

Planning and control techniques facilitate: - Derivation of output specifications (project objectives) - Delineation of required activities (work) - Coordination and communication between organizational units - Determination of type, amount, and timing of necessary resources - Recognition of high-risk elements and assessment of uncertainties - Suggestions of alternative courses of action - Realization of effect of resource level changes on schedule and output performance - Measurement and reporting of genuine progress - Identification of potential problems - Basis of problem-solving, decision-making, and corrective action - Assurance of coupling between planning and control

Project cost [Page 740]

Planning and control techniques require: - New forms (new systems) of information from additional sources and incremental processing (managerial tie, computer expense, etc.) - Additional personnel or smaller span of control to free managerial time for planning and control tasks (increased overhead) - Training in use of techniques (time and materials)

Program Interrelationships [REFER TO PAGE 790-791 FOR FULL TABLE]

Program Manager versus Functional Manager and their relationship - The program manager must cross over functional boundaries to accomplish all of the above

Cost overruns can occur in any phase of project development. The most common causes for cost overruns are: [Page 792-793]

Proposal phase: - Failure to understand customer requirements - Unrealistic appraisal of in-house capabilities - Underestimating time requirements Planning phase: - Omissions - Inaccuracy of the WBS - Misinterpretation of information - Use of wrong estimating techniques - Failure to identify and concentrate on major cost elements - Failure to assess and provide for risks Negotiation phase: - Forcing a speedy compromise - Procurement ceiling costs - Negotiation team that must "win this one" Contractual phase: - Contractual discrepancies - SOW different from RFP requirements - Proposal team different from project team Design phase: - Accepting customer requests without management approval - Problems in customer communications channels and data items - Problems in design review meetings Production phase: - Excessive material costs - Specifications that are not acceptable - Manufacturing and engineering disagreement

Unallocated budget [Page 752]

Represents a logical grouping of contract tasks that have not yet been identified and/or authorized

When permitted variances are exceeded, cost account variance analysis reports are required ]Page 761-762]

Required signatures may include: - The functional employees and/or managers responsible for the work - The cost accountant and/or the assistant PM for cost control - The PM, WBS element manager, or someone with signature authority from the project office Five questions must be addressed during variance analysis: - What is the problem causing the variance? - What is the impact on time, cost, and performance? - What is the impact on other efforts, if any? - What corrective action is planned or under way? - What are the expected results of the corrective action?

Schedule/performance variance (SV) calculation [Page 755]

SV = BCWP - BCWS - A negative variance indicates a behind-schedule condition - To convert to percentage: Schedule variance % (SVP) = SV / BCWS

Infographics [Page 816]

The addition of more artwork than we need due to information overload Problems with the growth of infographis: [REFER TO PAGE 816]

Undistributed budget and contract changes [Page 752]

The budget that is associated with contract changes where time constraints prevent the necessary planning to incorporate the change into the performance budget (This effort may be time-constrained)

The two most common situations providing constraints on resource rescheduling are: [Page 785]

The end date is fixed: - With a fixed end date, program rescheduling generally requires that additional resources be supplied The resources available are constant (or limited): - Program slippage may be the only alternative unless a constant stream of resources can be redistributed so as to shorted the length of the critical path

An organization should focus on too areas: [Page 782]

The material plans (BCWS): - These frequently start at the point at which engineering or manufacturing or others have provided a definition sufficient to initiate an order for the items, regardless of when such items are actually ordered or received The material actuals (ACWP): - This is ordinarily the point at which the costs of the parts are recorded on the firm's account books, that is, when the bill is paid

Cost or financial baseline for a project [Page 773-775]

The summation of the time-phased budget (i.e., the distributed budget) and the undistributed budget; this will equal the released, planned budget at completion (BAC)

Using KPIs and their anatomy [Page 802-803]

The three high-level purposes of a KPI are: - Measurements that lead to motivation of the team - Measurements that lead to compliance with use of organizational process assets and alignment to business objectives - Measurements that lead to performance improvements and the capturing of lessons learned and best practices A KPI must do more than just function as a metric. When dissecting the KPIs, the following will be seen: - KEY = A major contributor to the success or failure of the project; A KPI metric is therefore only "key" when it can make or break the project - PERFORMANCE = A metric that can be measured, quantified, adjusted, or controlled; The metric must be controllable to improve performance - INDICATOR = Reasonable representation of present and future performance Selecting the right KPIs and the right number of KPIs will: - Allow for better decision-making - Improve performance on the project - Help identify problem areas faster - Improve customer-contractor-stakeholder relations Typically, between six and ten KPIs are standard. Factors influencing the number of KPIs: [REFER TO PAGE 804] There are several reasons why the use of KPIs often fails on projects, such as: [REFER TO PAGE 806]

Distributed or normal performance budget [Page 751]

The time-phased budget that is released through cost accounts and work packages

Variance analysis case studies [REFER TO PAGE 770-771 FOR ALL CASES]

Thirteen cases for comparing planned versus actual performance

VAC (variance at completion) [Page 766]

VAC = BAC - EAC