The Cost-Effective Project: How to Deliver Results without Breaking the Bank
The cost of a project is like the beating heart of the project. It is the lifeblood that keeps the project alive and moving forward. Without proper cost management, a project can quickly go off track and even fail.
![Kevin G. Jogin [M.P.M, GCERT.P.M, CPPP]](/content/images/size/w100/2023/07/Kevin_Jogin_2023.jpeg)
When undertaking a project, it is crucial to take into account the expenses involved. Each activity in the project has a cost, which, when combined, represents the total cost of the project. The different categories of costs include labor, overheads, materials, supplies, equipment rental, administration, and profit.
The Project Management Body of Knowledge (PMBOK) outlines four phases for managing project costs. These include preparing and organizing by planning cost management, estimating costs, determining a budget, and finally, carrying out the project work while controlling costs.
Creating guidelines, procedures, and records for managing project expenses is a vital step in ensuring a successful project. By utilizing a Cost Management Plan, which involves expert judgment, analytical techniques, and meetings, the project team can effectively manage the project costs from start to finish. The team can develop a clear direction by utilizing the Project Management Plan, Project Charter, Enterprise environmental factors, and Organizational process assets. With this plan in place, the team can focus on achieving their objectives and delivering a successful project.
Inputs for the Cost Management Plan include the Project Management Plan, Project Charter, Enterprise environmental factors, and Organizational process assets. The tools and techniques used in developing the plan include expert judgment, analytical techniques, and meetings. The output of this process is the Cost Management Plan.
Preliminary Estimate Cost
Determining the preliminary estimate cost is a crucial step before starting the planning process. It helps to decide if the project is financially feasible to proceed. However, this estimation is often done with limited information since the project documentation may be incomplete or unavailable for a firm price.
To estimate the cost, you need to consider the following inputs: Cost Management Plan, Human Resource Management Plan, Scope baseline, Project Schedule, Risk Register, Enterprise environmental factors, and Organisational process assets.
There are various tools and techniques available to estimate costs, including Analogous estimating (similar projects), determining resource cost rates, Parametric estimating (qty x historical rate), reliable quotations, and vendor bid analysis.
Once you have completed the estimation, the output will be the Activity cost estimates.
Determine Budget
When planning a project, it's important to accurately estimate costs. This can be achieved by utilizing various tools and techniques that consider factors like activity cost, project schedule, and more. The budget estimate is then used to gain approval from the project sponsor and proceed with activities like preparing tender documentation.
To make these estimates, inputs such as the Cost Management Plan, Scope baseline, Activity cost estimates, and more are considered. Tools and techniques like Cost aggregations, Reserve analysis, Expert judgement, and Funding limit reconciliation are used to analyze these inputs and determine the most accurate budget estimate.
The output of this process is the Activity cost estimates, which can then be used to guide the project's financial planning and decision-making.
Resource Planning
One of the essential components in attaining the objectives outlined in the work breakdown structure is the proficient allocation of resources. It is imperative to assign appropriate resources to each task to ensure that the work is carried out efficiently and effectively. Through prioritizing resource planning, we can maximize our output and guarantee that our targets are accomplished within the desired timeframe and cost constraints.
Cost Estimating
Once the resources have been allocated to Work Breakdown Structure (WBS) elements, the subsequent step is to estimate the cost. This involves meticulous planning of the duration of each project activity and assigning a monetary value to individual WBS elements. The calculation of this value involves considering the resource cost rates, direct costs associated with each of the elements, and appropriate overhead allocations. The process of cost estimation can be quite complex and requires a thorough understanding of the project's objectives, scope, and constraints. However, it is a crucial step in ensuring that the project is completed within the allocated budget and timeline.
Cost Budget
In project management, cost budgeting plays a crucial role in ensuring that the project stays within its financial limits. This process involves the creation of a cost baseline, which serves as a reference point for measuring project performance. The cost baseline is typically developed using cost estimates and project schedules, which are used to determine how much money is needed to complete each task or phase of the project. Additionally, cost budgets are typically phased over time, meaning that spending and income plans can be created based on the project's progress and needs. By creating a detailed cost baseline and budget, project managers can better understand their financial constraints and make informed decisions to ensure that the project stays on track.
Cost Control
Project management requires a meticulous approach towards cost control to ensure that the project's budget stays well within the pre-established limits. This process entails keeping a close track of all actual expenses and progress made throughout the project's lifecycle. To maintain a project's financial stability, any deviations from the budget must be carefully analyzed, and the findings communicated to all relevant stakeholders. In the event of changes to the project's scope, quality, or duration, they must be managed through formal change management processes to ensure that the project's budget is updated accordingly. A systematic approach towards cost control is key to ensuring the success and sustainability of any project.
When in the initial stages of planning and designing a project, it is essential to have a precise and unchanging understanding of the costs involved. This can be achieved through the use of tender documentation to obtain quotes from potential vendors and by performing take-offs to accurately calculate the costs of materials and labor. By utilizing fixed rates for these expenses, a comprehensive and dependable budget can be established, ensuring that the project is completed on time and within the allotted budget constraints.
PROJECT PHASE ACTIVITIES
ACTIVITIES IN THE PROJECT CONCEPT LIFECYCLE PHASES
During the concept phase of a project, the scope of the project is defined. This involves comparing different concepts to determine the most suitable one. For instance, the concept comparison could be between a large building and a group of smaller buildings, an expensive piece of equipment with low maintenance costs versus a cheaper one with higher maintenance costs, or developing a system internally versus outsourcing the development.
To make an informed decision, each concept must be evaluated and compared, which involves estimating the life cycle cost of each alternative. Life cycle cost refers to the total cost of ownership over the asset's lifespan.
A project has a defined scope and schedule that covers the development, production, and introduction of an asset into service. Non-acquisition costs fall outside the project's defined scope. However, it's essential for project managers to be aware of the trade-off between project costs and life cycle costs. For example, extra design effort may lead to increased project costs but could result in reduced operations and maintenance costs. Project managers should be willing to make adjustments to the project to achieve these savings when it's justified.
Business Case: Once a preferred concept has been chosen, it is customary to create a comprehensive business case. This document serves to delineate the parameters of the project and is instrumental in obtaining project approval and funding. It typically contains an itemized budgetary estimate as well as a quantification of the expected benefits of the project. This business case is an essential step in the process of executing successful projects.
Budgetary Estimates: During the concept phase of a project, estimating costs will mostly focus on the higher levels of the Work Breakdown Structure (WBS). It's unlikely that all project elements will be precisely costed at this stage. Instead, order-of-magnitude and preliminary estimates are commonly used. The accuracy of these estimates is approximately 30% for order-of-magnitude estimates and 20% for preliminary estimates. It's crucial to establish reasonable expectations during the concept phase. Project managers, clients, and sponsors should understand the estimation methods and the variability that comes with them. Without a detailed design, it's challenging (if not impossible) to commit to an accurate project cost.
Development Phase: The Development phase is an important part of any project, as it involves detailed analysis, planning, and design to establish a solid foundation for the project. During this phase, project elements are defined and cost estimates are made based on the level of detail that has been determined for each element. The accuracy of these estimates may vary depending on the stage of the project, with earlier activities being better defined than later ones. Typically, accuracies of 5% and 10% are achieved for early and later activities respectively.
The Development phase is also when the project's budget baselines are established, which will be used for performance measurement in the future. These budgets should reflect the expected flow of costs as the project progresses, and cash-flow budgets may also be established to help manage project cash flow.
With more accurate design and costing information available, the project manager will confirm whether the business case benefits will still be achieved. This is a critical decision point, as it will determine whether the project will proceed to the Implementation phase.
Implementation Phase - Cost Management Activities: During the Implementation phase of a project, the project plan is executed according to the established project baselines. From a cost management perspective, this phase involves several activities, including:
- Regularly reviewing the actual costs of the project and how they are allocated to specific elements of the Work Breakdown Structure (WBS).
- Monitoring the progress made on WBS elements in terms of scope and quality, and comparing it to the established baselines.
- Revising the estimated cost of the project periodically.
- Analyzing any differences between the established cost baseline, the actual costs incurred, and the progress made so far.
- Planning and implementing corrective actions to address significant variances.
- Following the change management plan, which includes maintaining the project budgets and monitoring the flow between them.
Finalisation Phase: In the final phase of a project, it is important to tie up all loose ends by closing out financial arrangements and settling any remaining obligations between contractual parties. This process includes producing final project cost variance reports that show how the project performed in relation to the budget-at-completion. Additionally, it is essential to review and update cost management procedures, and incorporate any lessons learned into post implementation reports. It is recommended that these reports are widely disseminated within the organization to ensure that everyone has a clear understanding of the project's outcomes and financials.
COST ESTIMATING: When it comes to cost estimating, the idea is to develop an approximate estimation of the resources required to complete project activities. However, it's important to remember that there is no absolute accurate estimate that exists. When a project is being performed under a contract, it's essential to differentiate between cost estimation and pricing. Cost estimation is all about assessing the likely quantitative result- how much it will cost the organization to provide the product or service. On the other hand, pricing is a business decision that determines how much the organization will charge for the product or service.
The cost estimating process involves identifying and evaluating different costing alternatives. For instance, additional work during a design phase is often considered to have the potential to reduce the cost of the production phase in most application areas. Therefore, the cost estimating process must consider whether the cost of additional design work will offset the expected savings.
Inputs to cost estimating include the work breakdown structure, resource requirements, task durations, program of activities, chart of accounts, historical information, analogous estimating, bottom-up estimating, and computer software.
Outputs from cost estimating include cost estimates, which are quantitative assessments of the likely costs of the resources required to complete project activities. These estimates can be presented in either summary or detail format, including all resources that will be charged to the project, such as labor, materials, supplies, inflation allowance, or cost reserve. Cost estimates are generally expressed in units of currency and may be refined during the project's course to reflect additional detail available.
PROJECT ACCOUNTS
To ensure the financial success of a project, it's important to not only make a profit but also manage cash-flow throughout the project's life cycle. The project manager is responsible for planning and controlling cash-flow, which is different from financial or management accounting used in corporate settings. However, there is some overlap between these concepts. Financial accounting records all financial transactions, including payments in and out and debts owed. Management accounting uses this financial information, especially from the profit and loss account, to analyze company performance. Project accounting combines financial and management accounting with specialized project management tools to integrate project accounts with other project parameters. The cash-flow statement tracks the flow of money in and out of the project, usually on a monthly basis to align with normal business accounting cycles. It's similar to a bank statement, but it groups and totals incomes (cash inflows) and expenditures (cash outflows). In a project, the contractor's income would come from monthly progress payments, while expenses would include wages and materials, among other things.
EARNED VALUE ANALYSIS
Earned Value Analysis focuses on the cost performance of a project, allowing you to monitor the amount of money spent compared to the amount of work completed at any given time. This enables you to determine if there is enough budget left to finish the project, if it will be completed on time, and if there is a risk of running out of money or work before the project is finished.
The analysis uses three fundamental values:
1. Budgeted Cost of Work Performed (BCWP), which is the cost of completed work relative to the budget. For instance, if 80% of the work is done, the budget consumed should be 80% of the total budget or $800. This is also known as the "Earned Value".
2. Budgeted Cost of Work Scheduled (BCWS), which is the budgeted cost of planned work to date. In a four-week task with a $1000 budget, the BCWS at the end of week three should be $750.
3. Actual Cost of Work Performed (ACWP), which is the actual cost of the work completed to date. For a task where $300 is spent each week, the ACWP after three weeks is $900.
Using these values, you can calculate two important indicators:
1. Cost Variance (CV), which is the difference between the budgeted cost and the actual cost spent. CV = BCWP - ACWP.
2. Schedule Variance (SV), which is the difference between the budgeted cost and the scheduled progress of a task. SV = BCWP - BCWS.
A positive variance indicates the task is ahead of schedule or under budget, while a negative variance means the task is behind schedule or over budget. By reallocating resources and money from tasks with positive variances to those with negative variances, you can optimize your project's performance.
In our example, the CV is -$100 ($800 - $900) while the SV is $50 ($800 - $750). This means the project is 5% ahead of schedule but 10% over budget.
Achieving Project Success with Duck Lidow's Alignment Theory
Many project management resources suggest that following guidelines for defining, planning, and implementing a project will guarantee its success. However, I believe that this approach is inadequate. Classic project management fails to consider certain critical factors and does not provide a realistic definition of success. It also overlooks the possibility that some projects may not succeed, even if they are well-defined, planned, and implemented. For instance, competitive exercises generally have a winner and a loser, making success difficult to measure. Similarly, projects that require unavailable technologies or capabilities are unlikely to succeed.
As the CEO of a global manufacturing company that trains its employees in classic project management, I understand the importance of project success. My concerns about the limitations of this approach were first sparked during a meeting in Italy in 1989. A project manager was having trouble installing a new product evaluation system, despite following the classic project management model. This incident, along with other troubled projects, highlighted the need for a more comprehensive approach to project management.
During a discussion with a plant manager who had encountered difficulties with their project, I realized that the issues they faced were similar to ones I had seen in other International Rectifier (IR) locations. After reviewing project results company-wide, my management team and I discovered that there were five areas that, if not properly addressed, could lead to project failure: comprehension, motivation, skills, resources, and communication. We found that taking certain actions in each of these areas before launching a project was crucial to its success. This led to the development of IR's Duck Alignment Theory, which outlines a sequence of actions to maximize project success. It's important to note that while no process can guarantee success for all projects, Duck Alignment minimizes risks and improves the chances of success. We've found that noncompetitive projects that follow the theory have a higher success rate than those following classic project management guidelines. Duck Alignment can be applied to projects of all sizes and types, as it recognizes that successful project management requires creating the right conditions for change. While some refer to the Ducks as preconditions, they are specific actions taken to establish these conditions.
Comprehension
To ensure successful project management, it is crucial that all members of the project team have a clear understanding of the project mission and objectives. Unfortunately, it is common for individuals assigned to work on the same task to interpret missions and objectives differently, resulting in chaos and inefficiency. This is why it is important to achieve universal comprehension or alignment of understanding among team members.
Rather than overspecifying objectives, which can be a waste of time, it is recommended to focus on alignment of understanding as the first step of any project. This may require treating alignment as a standalone project, particularly for large and long-term projects such as changing the culture of a corporation after a merger.
To obtain and measure alignment, the following steps can be taken:
1. Question team members and sponsors using written questionnaires covering the importance of the change, who will be affected, how the change will be accomplished, and what will happen if the change is not made.
2. Discuss questionnaire responses as a group, with responses compiled anonymously by someone not involved in the project.
3. Assess group alignment using a form that assigns weights to questionnaire responses.
4. Improve alignment through group discussion and replacing team members who do not understand the project or consider it important.
By achieving alignment of understanding, project teams can work together more efficiently and effectively to achieve their goals.
To ensure the success of a project, it is important to ensure that all members of the project team are motivated to achieve the team objective. Classic project management often overlooks human feelings, which can negatively impact the success of a project. However, by identifying and addressing negative emotions early on, they can be defused or redirected. Accessing the power of positive emotions is also important for the success of most endeavors, group as well as individual. Motivational alignment is an essential precondition to successful change since emotions underlie our actions.
Motivation
Motivation is often the most difficult aspect to align since it requires team leaders to understand what motivates each member. This understanding cannot be acquired simply by asking people why they want to participate in a given project. Our process for aligning motivation consists of the following steps:
Step 1: Identify personal goals. Private meetings between team leaders and members facilitate goal identification. Leaders ask probing questions and pay attention to emotions and body language accompanying the oral responses to learn what excites members.
Step 2: Align organizational and personal goals. Team leaders meet with project sponsors to create better alignment between the goals of team members and those of the organization. Modifications could include reducing project scope or adding new objectives to make the project more challenging and exciting for certain team members.
Step 3: Create incentives. Positive motivations such as recognition and rewards work better than negative ones such as threats. Recognition includes all forms of acknowledgment or praise for progress and achievements. Rewards need not be monetary. Ideally, team members will work toward project goals because they have internalized them and feel good about their contributions.
Step 4: Facilitate project implementation. Team leaders make it easy for team members to perform their assigned roles by eliminating distractions and keeping bureaucratic procedures to a minimum. Providing supplemental training to team members can also be helpful.
Skills
When embarking on a project, it is essential to ensure that all team members possess the necessary skills to accomplish their assigned tasks successfully. Unfortunately, traditional project management often overlooks this critical aspect. However, we consider the Skill Duck to be an essential component of any project. Aligning these skills can be challenging since no single person or group of individuals can predict all the tasks and challenges that a project will pose.
Moreover, people may not always possess the skills they claim to have or the flexibility to apply them to unfamiliar situations. Therefore, we have identified a core set of general skills that are required for virtually any change process. These core skills include listening, communication and training, project leadership, process design, failure analysis, and planning. Each of these skills is crucial in its way and contributes to the overall success of the project.
However, beyond these core skills, every project requires people with specific skills to implement the desired change. It's best to talk to people who have participated in similar projects to determine which skills are needed. These people have firsthand experience and can provide valuable insights into the skills necessary for success. Moreover, if a project depends on an innovative skill that is impossible to find, we recommend making the development of that skill a specific sub-project and putting the rest of the project on hold until the appropriate skill is developed.
It's better to delay a project than to proceed with inadequate skills and risk disappointing results. While the work breakdown structure (WBS) is useful for identifying specific technical skills, it's no substitute for focusing on the core skills needed for project success. Therefore, it's crucial to ensure that all team members possess the necessary skills to accomplish their assigned tasks successfully. By doing so, you can ensure that your project is completed efficiently, effectively, and with the desired results.
Resources
In order to ensure the success of a project, it's important to allocate the necessary resources to the project team before work begins. All projects are competing for resources that could be used elsewhere, and successful projects tend to succeed at the expense of others. Unfortunately, many projects fail because the necessary resources were not made available when they were needed.
The Kepner-Tregoe resource requirement matrix can be a useful tool for identifying project resource requirements, but what's missing from classic project management tools is a robust methodology for assigning priorities to competing projects. Too often, project sponsors fail to provide the planned resources, or provide them too late, leading to unrealistic promises and over-commitment of resources. This misguided policy usually results in the destruction of team motivation and ultimately, project meltdown.
Sadly, management too often sets unrealistic goals, assuming that ambitious objectives will produce better results than more modest goals. However, only realistic objectives can produce good results, as they don't waste resources or demoralize personnel. Making every project a top priority is illogical and can lead to failure to prioritize, which causes only the least experienced team members to tackle their assignments wholeheartedly.
We know that resource alignment is crucial for success, meaning that the necessary resources must be in place before the project begins. If a project is still experiencing resource problems even after its scope has been reduced and appropriate resources have been made available, it may be the Motivation Duck or the Skill Duck that's out of line. In this case, reconfiguring the team may be necessary, but care must be taken not to make the reassignment of roles appear punitive, as this can lead to future alignment problems.
Communication
Action: Ensure that all individuals impacted by the project comprehend its significance. Classic project management fails to define success realistically. The methodology solely focuses on completing objectives on time and within budget, without considering if the change implemented by the project was worthwhile or lasting. This definition overlooks the constituents, the people who will be affected by and presumed to benefit from the change. Therefore, a new definition of success is necessary.
To align all constituents, it is essential to communicate with them from the beginning and continue to do so as the project progresses. Communication must be targeted as narrowly as possible, and feedback must be solicited and acknowledged to guarantee that all constituent groups agree that the project is worthwhile. Communications tools such as memos and newsletters cannot be relied upon to convince anyone of anything, as they may not be read and are data deliveries rather than true communications.
To ensure the support of project constituents, we use marketing communication processes similar to those we use for communicating with customers. First, we identify the constituencies and group them to develop different strategies to win the support of all segments. Then, we develop a segment-targeted communication plan, determining the content, type, and frequency of messages that need to be communicated to each constituency, and put all this information into a matrix. Finally, we monitor and modify the communication plan by testing constituent comprehension and support and modify the matrix accordingly.
In our experience, the fifth duck, Communication Duck, is often the most difficult to align. Obtaining support for change, even if it is perceived as beneficial, is hard work requiring a degree of openness that is not easy to maintain. Therefore, it is crucial to keep relevant constituents informed consistently and honestly to secure the support needed to make the project a complete success.
Implications
When it comes to implementing successful change within an organization, it's crucial to satisfy the needs and expectations of both the sponsors and the constituents involved in the process. This approach focuses on the long-term success of the desired change rather than solely on the completion of a particular project. While it may require more effort and resources than the classic project management paradigm, it ultimately makes success a more achievable and beneficial objective.
Another important aspect of successful change implementation is rethinking what constitutes failure. Instead of trying to anticipate and minimize problems, we should welcome them as essential learning experiences that can help us achieve successful implementation. By prioritizing projects based on their objectives, timing, and resource requirements, we can ensure that we are allocating our resources and efforts in the most effective way.
Critical projects, for instance, have fixed objectives and timing, but variable resource requirements. Important projects, on the other hand, have fixed resources but variable objectives or timing. Desirable projects, meanwhile, have all variable elements.
One effective approach to achieving successful change implementation is the Duck Alignment theory. This theory maximizes the chances of success under a wide variety of conditions and is an easy prescription to follow. Lining up the Ducks doesn't require spending money or diverting resources, but it does require a commitment to the process. If an organization is struggling to find the time to line up all five Ducks, it's crucial to prioritize and determine whether that something is more important than the project at hand. Ultimately, successful change implementation requires a comprehensive and strategic approach that prioritizes the needs and expectations of all stakeholders involved.
Reference: Derek Lidow, Udow Technologies Inc., 233 Wilshire Blvd, Suite 504, Santa Monica, California 90401 USA