Expert Reference Series of White Papers. Importance of Schedule and Cost Control

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1 Expert Reference Series of White Papers Importance of Schedule and Cost Control COURSES

2 Importance of Schedule and Cost Control Bill Scott, PE, PMP, PgMP Outline I. Project Baselines II. III. IV. Project Budget A. How to develop a project budget B. Why a project budget is important C. Tips on managing a project budget Project Schedule A. How to Develop a Project Schedule B. Why a Project Schedule is Important C. Tips on managing a project schedule Why Projects are Late and Over Budget I. Project Baselines Stakeholders measure projects by how well they are executed within the project constraints or baselines. A baseline is an approved plan for a portion of a project (+/- changes). It is used to compare actual performance to planned performance and to determine if project performance is within acceptable guidelines. Every project has at least four project baselines. There may be others, depending on the project and definitions used. Project Baselines 1. Budget 2. Schedule 3. Scope 4. Quality Schedule and Budget are the focus of this paper and the terms activity and work elements are synonymous. Schedule and cost (budget) are two of the major legs of the project constraint polygon. Without the schedule and budget baselines plans, one does not know where the project stands relative to planned schedule progress or planned budget performance. Copyright 2012 Global Knowledge Training LLC. All rights reserved. 2

3 The schedule and budget baselines, along with other baselines, are developed in the planning phase of the project. The project plan is approved prior to execution by the project sponsor or an appropriate senior level manager. The project plan includes the budget and schedule. Schedule determines when work elements (activities) are to be completed, milestones achieved, and when the project should be completed. The budget determines how much each work element should cost, the cost of each level of the work breakdown schedule (WBS), and how much the total project should cost. Actual performance can be compared to these plans to determine how well the project is progressing or finished. Schedules and budgets are interlocked, and most likely an increase in one causes an increase in the other. II. Project Budget The project budget is a financial plan for all project expenditures (cost). Success in project budget management depends on, amongst other things, the creation of a comprehensive, consistent, and reliable project budget. Some people want to use the term accurate in the above definition. But, the word accurate has no place in the project world. Reliable and consistent are the terms that should be used. By definition, the project budget cannot be accurate as it is an estimate. Normal ranges of project budget variability depends on the project, the organization, type of business (and many other factors) but usually falls within +/- 10%. A. How to Develop a Project Budget In the Project Management Body of Knowledge Guide world, there are two processes to developing a project budget. The first process is Estimate Cost, which is often confused with the Determine Budget process. Both of these processes are normally preceded by a project management team planning process, which is executed as part of the Develop Project Management Plan. This planning process is known as the Project Cost Management or the Cost Management Plan. The Cost Management Plan outlines the processes involved in determining organizational cost categories, estimating, budgeting, and controlling cost, so that the project can be executed within the approved budget. The Estimate Cost process is not only confused with Determine Budget but is also widely misunderstood. Many think that this process estimates the total cost of the project. But this is not correct, at least not directly. The Estimate Cost process estimates the cost for each of the work elements and records the basis of that cost. That is as far as Estimate Cost goes! The second of the three processes in Project Cost Management is the Determine Budget process, which rolls work element cost upward, applies cost aggregation, applies project contingency, makes a cash flow estimate, and now you have a budget for the various levels of the WBS and the total project. B. Why a Project Budget is Important Based on the work above, we now have a budget for: 1. Individual Activities 2. Work Packages 3. Deliverables 4. The Total Project Copyright 2012 Global Knowledge Training LLC. All rights reserved. 3

4 This level of detail allows a project manager (PM) to evaluate the budget performance of the project from the top down or from the bottom up. If a work package is running over or is in danger of over running the budget, the project manager can drill down until he/she finds the problem or potential problem. The drill down can be by the PM or in conjunction with the assigned team member. One other very powerful tool that helps in the analysis of project budget performance is the Earned Value Method (EVM). EVM can assist you in evaluating project budget performance (what are you accomplishing for the funds you are expending) and in calculating a Cost Performance Index (CPI), which is a representation of the effectiveness of your spending. EVM can calculate a Cost Variance (CV), which is the difference between the value of the work completed and the amount of funds expended to accomplish that work. This will tell you the magnitude of the over- or under-run or if you are on budget. EVM can be applied down to the work element level, if the appropriate level of detail exists. Variance analysis is another tool to help the PM understand why work elements (or above) are over- or underbudget. The Cost Management Plan probably sets thresholds for overruns (say 10%), a different threshold for under runs (say 15%), to trigger your attention. Understanding why work elements are overrunning will assist the PM todevelop solutions (action plans) to bring the project back within acceptable ranges. Understanding why work elements are significantly under budget assist the PM in feeding this information forward to new project budget development. Regardless of experience, care, or execution effort, project budget variances will occur. This is just a fact of the project world. While they cannot all be eliminated, they can be reduced for future projects. Some (not many) projects will finish very close to the budget. More projects will finish within acceptable ranges (+/-10%). Others (we hope not many) will finish well outside the acceptable range (>10% over or under). Using the techniques outlined here will reduce the number of projects in this category and reduce the size of the over runs. C. Tips on How to Successfully Manage a Project Budget 1. Capture all of the scope (scope statement, WBS, and WBS dictionary). If you do not capture the total project scope correctly, there is little hope that the project can be executed for the budget or schedule. 2. Insist on input from all stakeholders. Penetrate through stated needs and include implied needs. 3. Determine the various cost categories used at the organization. 4. Develop Project Team and Project Management Team trust. 5. Develop a reliable, consistent, sufficiently detailed WBS and time decomposition structure. Estimate Cost and Determine Budget. 6. Stop scope and grade creep. Eliminate gold plating. None of these adds value to the project. Your team is your first line of defense. 7. Perform EVM, variance, and trend analysis. 8. Continuously communicate to stakeholders on project status, project direction, and what the project will look like at completion. 9. Use organizational process assets (OPA) to develop, analyze, and challenge. 10. Avoid the pitfalls in Section IV. 11. Take action when indicated! Sooner rather than later. Copyright 2012 Global Knowledge Training LLC. All rights reserved. 4

5 III. Project Schedule The project schedule is a document that, if properly prepared, is usable for planning, execution, monitoring/controlling, and communicating the delivery of the scope to the stakeholders. The main purpose of a project schedule is to represent the plan to deliver the project scope over time. A project schedule, in its simplest form, could be a chart of work elements with associated schedule dates of when work elements and milestones (usually the completion of a deliverable) are planned to occur. In addition to guiding the work, the project schedule is used to communicate to all stakeholders when certain work elements and project events are expected to be accomplished. The project schedule is also the tool that links the project elements of work to the resources needed to accomplish that work. As a minimum, the project schedule includes the following components: 1. All activities 2. A planned start date for the project 3. Planned start dates for each activity 4. Planned finish dates for each activity 5. Planned finish date for the project 6. Resource assignments 7. Calendar based 8. Activity durations 9. The flow (sequence) of the various activities 10. The relationships of activities 11. An identified critical path(s) 12. Total and free float A. How to Develop a Project Schedule PMI has a Develop Schedule process and the main output is the project schedule. This is the result of four previous processes plus the work of up to eight tools and techniques for the Develop Schedule process. The previous processes are: 1. Define Activities (work elements) 2. Sequence Activities 3. Estimate Activity Resources 4. Estimate Activity Duration The tools and techniques available to develop the schedule are: 1. Schedule network analysis 2. Critical Path Method 3. Critical Chain Method 4. Resource leveling Copyright 2012 Global Knowledge Training LLC. All rights reserved. 5

6 5. What-if scenarios 6. Leads and lags 7. Schedule compression 8. Scheduling tools B. Why a Project Schedule is Important Based on the work above, we now have a schedule for: 1. Individual Activities 2. Work Packages 3. Deliverables 4. The Total Project This level of detail allows a project manager evaluate the schedule performance of the project from the top down or from the bottom up. If a deliverable is slipping or is in danger of slipping, the project manager can drill down until he/she finds the problem or potential problem. One other very powerful tool that will help in this analysis is the Earned Value Method (EVM). EVM can assist you in evaluating project schedule performance (what have accomplished related to the plan), calculate a Schedule Performance Index (SPI) which is a representation of the effectiveness of accomplishing your planned schedule. EVM can also calculate a Schedule Variance (SV) which is the difference between the value of the work completed and value of the planned work. This will tell you the magnitude of the behind schedule, ahead of schedule, or if zero you are on schedule. EVM can be applied down to the work element level, if the appropriate level of detail exists. EVM does have several draw backs, but there are solutions to the draw backs: 1. EVM ignores the critical path. There are two thing we can do to solve this problem. a. Perform a separate CP analysis. b. Strip out all non-cp work elements and perform a second EVM analysis. 2. As the project nears completion, EVM breaks down for schedule analysis. This is because as the project nears completion, EV approaches PV, and in fact reaches PV at project completion. SV and SPI lose their meaning Variance analysis is another tool to help the project manager understand why work elements (or above) are behind or ahead of schedule. The Time Management Plan probably sets thresholds for behind schedule (say 5%), a different threshold for ahead of schedule (say 10%), to trigger your attention. Understanding why work elements are behind schedule will assist the project manager in developing solutions (action plans) to bring the project back within acceptable ranges. Understanding why work elements are significantly ahead of schedule will assist the project manager in feeding this information forward to new project schedule development. Regardless of care or execution, project schedule slippages will occur. This is just another fact of the project world. While they cannot all be eliminated, they can be reduced for future projects. Some (not many) projects Copyright 2012 Global Knowledge Training LLC. All rights reserved. 6

7 will finish very close to the schedule date. More projects will finish within acceptable ranges (+/-5%). Others (we hope not many) will finish well outside the acceptable range (>>10% behind or ahead). Using the techniques outlined here will reduce the number of projects in this category and reduce the size of the behind variances. C. Tips on How to Successfully Manage a Project Schedule 1. Use all of the tips from Successfully Managing a Project Budget. 2. Avoid the pitfalls in Section IV. 3. Get reports, even if you have to have them customized, from your scheduling software that tells YOU what is going on with the project and schedule accomplishment. 4. When work elements slip, analyze the cause and impact. Take action as necessary. These things will not fix themselves. 5. When resources do not materialize as planned and agreed, estimate the impact, and communicate this to management! 6. When things go wrong, analyze why, estimate the impact, communicate with stakeholders and take action to bring the schedule accomplishment back within acceptable ranges. IV. Why Projects are Late and Over Budget A. Omissions Leaving out work that must be done. Examples could include documentation, interfaces with the PMO, or interfaces with other projects. B. Merging The point at which several project schedule paths meet. Successor work cannot begin until predecessor work is complete. The time to get through this point tends to increase with the number of activities being merged. C. Errors Mistakes or work not done at all. Errors, even though expected, are rarely provided for in the planning phase. D. Rework Work not completed in accordance with company standards and must be redone. There is a human nature reluctance to report bad news. E. Failure to understand the complexity of the project Our inability (especially true of technical people) to understand the complexity of the work planned. This causes us to underestimate both budgets and durations. F. Queuing Improper allocation of resources to critical path activities. G. Multitasking Most companies nowadays demand their people multitask. This causes project activities to wait on resources and suffer efficiency degrades, while switching activities as well as delays in the network as each activity is extended. H. Student Syndrome Team members waiting to start work till there is schedule pressure. This will ultimately affect the critical path and the project completion date. I. Policy Company policy about merits, bonuses, performance reviews, or other rewards can drive people to do the wrong thing. Rewards or punishments give out for being early, on time, late, over budget, on budget, or under budget will drive people to protect themselves and do things not to generate rewards but to insure no pain. Copyright 2012 Global Knowledge Training LLC. All rights reserved. 7

8 J. Level of effort Work that is not related to activities, but extends for the project duration will increase with schedule extensions. Learn More Learn more about how you can improve productivity, enhance efficiency, and sharpen your competitive edge through training. Schedule and Cost Control PMP Exam Prep Boot Camp Visit or call COURSES ( ) to speak with a Global Knowledge training advisor. About the Author As an instructor and consultant for Global Knowledge, Mr. Scott shares his experience and expertise as a Professional Engineer (PE), a certified Program Management Professional (PgMP) and Project Management Professional (PMP) who specialized in large, complex, long-term, and constructed environmental project work for electric utilities and heavy industry. Mr. Scott has over 30 years experience in engineering, managing projects, training and as a professional skills consultant. In addition to program and project management experience, Mr. Scott was a certified Arbitrator with the American Arbitration Association for 10 years specializing in construction and commercial disputes. He has authored numerous papers on project management, and developed the curriculum for many project management courses. Mr. Scott has BS in Electrical Engineering from the University of Alabama, a BS in Mechanical Engineering from the University of Alabama, a Certificate in International Operations from the Stockholm School of Economics, and has attended numerous short courses on Engineering, Business, Project and Program Management. Mr. Scott is a member of National Society of Professional Engineers (NSPE), the Institute of Electrical and Electronic Engineers (IEEE), and the Project Management Institute (PMI). Copyright 2012 Global Knowledge Training LLC. All rights reserved. 8

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