Planning and Monitoring a Project.

Estimating the Cost

 

There are several types of budgeting. Many organizations use a combination of the strategies, depending on where they are in the life cycle of a project.

Top-down estimating (Analogous estimating)

This method is used when few details are known about a project. It is often used in the early stages of a project and based on previous projects of a similar nature.

Example, if a builder is building homes in a subdivision that average $200,000 for a four-bedroom home, and $175,000 for a three-bedroom home, an analogous estimate for a typical buyer of a four-bedroom home would be $200,000.

It is usually less accurate, but it is cheaper to produce analogous estimates. It is most reliable when previous projects are VERY similar, and the preparers have expertise in building estimates.

Bottom-up estimating

This is used when most of the details are known about a project. It is often used in the later stages of a project. Typically, estimators, or the people who are doing the work, look at each activity and estimate the cost of that activity. The costs are aggregated into an overall budget.

Example, when that same builder walks through a model home with a potential buyer and the buyer selects all of the fixtures, lighting, floor coverings, and so on, and identifies all of the requested options, he or she can build a much more accurate budget. In most cases, this budget is much higher. That $200,000 could easily grow into a $240,000 budget.

Bottom-up estimating is usually more reliable, but it costs more to produce because these estimates take longer to create.

Fixed costs are costs that remain constant regardless of the duration of a project or scale of business activity. For example, a purchase of a crane or computer system is the same cost regardless of the duration of the project.

Variable costs are costs that vary with time or resource changes. For example, hourly labor costs are dependent on the number of hours.

When the project budget is set, it is then allocated across the various work packages. For example, if the budget was set at $200,000 for the model home, there may be $50,000 allocated to lighting fixtures, $50,000 allocated to fixtures and accessories, and $100,000 allocated to floor coverings.

Earned Value Analysis

Now that the budget has been set, and allocated across the work packages, it is critical to monitor and control the budget throughout the duration of the project. A tool PMs can use to manage projects is exception reporting and calculating earned value. We use cost variance (CV), schedule variance (SV), and indexes to help us focusing on the activities that are in danger of not being met or going over budget.

• Cost Variance = BCWP - ACWP A negative result means that you are over budget.

• Schedule Variance = BCWP - BCWS A negative result means that you are behind schedule.

BCWS = Budgeted Cost of Work Scheduled

ACWP = Actual Cost of Work Performed

BCWP = Budgeted Cost of Work Performed

If a project is reporting cost variances or schedule variances that are too favorable, this could be an indication that work is not being performed with high quality or the efforts have been overestimated. If the project is reporting cost variances or schedule variances that are too negative, it means that the efforts have been underestimated. The sooner the variances are reviewed, the quicker corrective action can be taken. Some projects use variance levels as triggers to alert management to potential oversight; too much variance in either direction should be closely reviewed.

Another way of calculating cost efficiency of the project is to calculate the cost performance index (CPI). Similarly, the schedule efficiency index (SPI) of the project can be calculated. In organizations that have multiple projects, comparisons are made among projects to determine which efficiencies are the best and worst among various project teams.

• CPI = BCWP/ACWP; A low ratio means the project is NOT cost efficient; a ratio of 1.0 is on budget, a ratio closer to 0 is very inefficient.

• SPI = BCWP/BCWS; A low ratio means the project is NOT time efficient; a ratio of 1.0 is on track, a ratio greater than 1.0 is very efficient.

Estimate at Completion

The EAC computation is used to predict the total project budget after the project has begun. This calculation is usually made when project estimates have not been accurate.

• EAC = Actual to date + remaining project budget modified by a performance factor
• Used when current variances are seen as typical of future variances.
• EAC = Actual to date + a new estimate for all remaining work
• Used when original estimates are fundamentally flawed or no longer relevant due to changes in conditions.
• EAC = Actual to date + remaining budget
• Used when original estimates are expected to be accurate in the future.

AIB Method (Activity In Box Method)

AIB Method (Activity In Box Method)

AIB Method (Activity In Box Method) is the best and one of the most popular methods project managers use when building a network diagram.

The good thing about using a tool like Microsoft Project is that it makes it easy to build a network diagram. The bad thing about the tool is that it makes it so easy; project managers don't always understand what they are doing. They just plug in the activities and move on.

Every project manager should know how to build an AIB manually so that he or she really understands the concepts before working in Microsoft Project. The project managers who understand it are much more effective and know how to use the tools more effectively. Those who do not know how to build a schedule manually often make mistakes and negatively impact a project's triple constraints. 

You will conduct a forward pass through a network to determine the early start and early finish of each activity. When you complete the forward pass, you know which activity will be the last one to complete. The Early Finish for that activity is the earliest date that your project can complete. Next, you will conduct a backward pass to determine the late start and late finish for each activity. Last of all, you calculate the slack/float for each activity.

Let's define a few terms:

• Critical Path (CP) - by definition, it is the path of activities that all have a slack/float of 0. This path is especially important because if any of them complete later than scheduled, your project may not complete on time.
• Early Start (ES) - is the EARLIEST time the activity could possibly start.
• Early Finish (EF) - is the EARLIEST time the activity could possibly finish.
• Late Start (LS) - is the LATEST time the activity can start and not jeopardize the scheduled completion of the project.
• Late Finish (LF) - is the LATEST time the activity can finish and not jeopardize the scheduled completion of the project.
• Slack/Float - is calculated by: LF - EF, or LS - ES (both formulas will result in the same answer; if not, one of your numbers is incorrect). The slack/float tells you the number of days/weeks/months that an activity can begin late, or the number of extra days/weeks/months that an activity can take without impacting the completion time of the project. However, this time is shared by all of the activities on a path. If you use up all of your slack on an activity at the beginning of a path, subsequent activities will have less slack or no slack.

Resource Constrained Planning

Once a project schedule established, we need to align the appropriate resources to accomplish the work. As resources are applied, conflicts may arise if resources become over-allocated.

A project manager can address resource conflicts in a variety of ways, but the first step is to realize there is a conflict. If the project team builds a schedule using a scheduling tool like Microsoft Project, the PM can run an 'Overallocated Resources' report.

Once the over allocation is identified, there are several key strategies to address them:

(1) Resource leveling

(2) Adding or modifying resources

(3) Changing the project

Most methods for addressing resource conflicts cost the project something, either more money, less functionality, or an extension in the scheduled completion.

In some cases, we have no choice - operational necessity. For instance, if the company has two bulldozers, and you need four on a particular week, you will have to address that resource conflict to complete both projects.

On other projects, resource conflicts take the form of people being over allocated. Ultimately, it will result in personnel turnover

Addressing resource conflicts improves morale, which increases quality, reduces defects, reduces re-work, decreases team turnover, and increases team commitment.

Resource Leveling

Resource leveling is easy to do if you are using an automated scheduling tool like Microsoft Project. You can also use the tool to try various what-ifs. 

For example, try plugging in new resources and see if their addition will change your scheduled completion time. If they are not working on a task on the critical path, their work will not even affect the project's scheduled completion.

This method smoothes out the peaks and valleys in the schedule without increasing the overall budget and ff you choose a level only within available slack as an option when you level the resources, leveling the resources will not extend your project's schedule either. However, if there is not enough slack in the schedule, it will not correct all of your allocation problems, in which case, you will have to use another method to relieve the problem.

In summary, the benefits of resource leveling are:

1. Minimizes period-by-period variations by shifting tasks within their slack
2. Utilizes resources more efficiently
3. Resources do not have days with no work scheduled and other days with too much work
4. Does not increase budget
5. Does not have to change scheduled completion

Adding or Modifying Resources

Adding people to a project must be approached carefully. Additional people are easier to absorb into projects that are well-documented. Adding personnel to well-defined tasks is straightforward when the plan is clear. Throwing people at projects that are in trouble, behind, and already managed poorly often results in an even bigger problem. 

Adding resources increases the budget and rarely doubles the work completed. This is because additional people must be trained, which ties up their time and the time of a team member who is training them, and adds to the communication channels. 

Modifying resources can take several forms: Assign a person with greater expertise or more experience to perform or help with the activity, and increase productivity through improved methods or technology. 

Dependencies

There are three different types of dependencies, including:

Mandatory - requires the completion of another task.
Discretionary - a best practice or convenience. However, the subsequent task can begin if the discretionary dependency is not completed.

Why a Critical path is important to a project?

The critical path is the path of activities that all have a slack/float of 0. It is important because if any of them complete later than scheduled, the project may not be completed on time.

Float

Float is the number of extra days/weeks/months an activity can take without impacting the completion time of the project. It is calculated by subtract Earliest Finish Time (EF) from Latest Finish Time (LF).

An activity duration estimate

The duration estimate for an activity is the time required to perform the work plus any associated waiting time.

Benefits of resource leveling

• Minimizes period-by-period variations by shifting tasks within their slack
• Utilizes resources more efficiently
• Resources do not have days with no work scheduled and other days with too much work.
• Does not increase budget
• Does not have to change scheduled completion