MQS111: PROJECT MANAGEMENT SYSTEMS

Term 2 2012 Lecture 11

MCM 211: PROJECT MANAGEMENT SYSTEMS Sessions: 20 Course objective: To develop project management capabilities for effective project planning, scheduling, monitoring and control. Course content: Project Management Fundamentals: Project: Meaning, Types of construction projects; Project scope; Project deliverables; Technical requirements of a project; Project constraints; Project as a business; Project stakeholders; Project Life cycle. Project Management: Meaning; need for project management; Functions of project management; systems approach; project management system. Project Planning: Project structure; Organizational breakdown structure; Work breakdown structure; Major aspects of project planning. Project Scheduling: Steps in project scheduling; Scheduling techniques; Bar chart; Network scheduling; Linear scheduling. Network Scheduling: Basic terminologies; Network diagramming methods; A-O-A and A-O-N networks; Time-scaled network; Fundamental concepts underlying CPM and PERT; Network analysis for CPM; Floats and their significance; Time cost trade-off; Resources scheduling; Precedence diagramming method; Analysis of PERT schedule, Line of balance method. Project Monitoring and Control: Progress monitoring through records, reports and reviews; Project time and cost control; Use of S-curve; Earned value concept; Project variances and performance indices; Forecasts for project completion; Corrective actions; Updating project plans. Computerising Planning and Control System: Computer system components, PM application packages, System specification, Selecting System, Computerisation benefits and limitation, Role and function of the planning chiefs. Reference Books Meredith Jack R, Mantel Samuel J, Project Management A Managerial Approach, 5th edn. John Wiley, New York, 2006. Lester A., Project, Planning & Control, Butterworths, Oxford, 2007. Burke R., Project Management Planning & Control Techniques, John Wiley, New York, 2003. Chitkara KK, Construction Project Management: Planning, Scheduling of Controlling, Tata McGraw Hill, New Delhi, 2007. James P. Lewis, Project Planning Scheduling & Control, Tata McGraw Hill Publishing Co. Ltd., New Delhi 2004. Harison F. L., Advanced Project Management: A Structural Approach, Metropolitan Book co., New Delhi, 93. John M. Nicholas, Project Management for Business & Technology, Prentice-Hall of India Pvt. Ltd. New Delhi, 2006. Clifford F. Gray & Erik W. Laroun, Project Management The Managerial Process, Tata McGraw Hill Publishing Co. Ltd. New Delhi, 2006. Feigenbaum L. Construction Scheduling with Primavera project planner, Prentice Hall, N.Delhi, 98. Thakurta Shah K., Construction Project Management, Multitech Publishing Co., Mumbai, 2003. Hira N. Ahuja; Project Management: Techniques in Planning and Controlling Construction Projects; John Wiley and Sons Harold Kerzner; Project Management: A Systems Approach to Planning, Scheduling and Controlling, 2006. Callahan, Queckenbush and Rowing; Construction Project Scheduling; McGraw Hill Publications Donald S. Barrie, Boyd C. Paulson; Professional Construction Management; McGraw Hill Publications, 1992.

Construction Cost Planning

Useful in developing standard costs, financial forecasts, project budget and cost control Ultimate goal is to achieve project profit/cost objectives

Standard Costs

Used for costing work packages, work items or activities Standard Costs facilitate the planning and controlling of costs

Financial Forecasts

Indicate the trends of expected sales, production expenses and profit and cash flow at specified intervals of time.

Project Budget

Quantifies the project plan in monetary terms and outlines the financial plan for implementation.

Construction Budget Planning

Reflects the financial plan of operations It is divided into responsibility centers with specific goals clearly outlined, along with the costs expected to be incurred

Construction Budget Planning

In a contracted construction project, the client and the contractor have separate budgets. The client's construction budget is primarily a capital budget designed to formulate time- phased funds requirement and the sources from which these funds are to be provisioned On the other hand, a contractor's budget is a resources-cost and sales-income-oriented budget

Construction Project Controls

Scope Control Resources Control Cost Control Time Control

Project Cost Control

Primarily concerned with the project budgeted costs It aims at controlling the changes to the project budget The goal is to minimize waste, update current budget estimates, forecast cost trends and make decisions about the future Uncontrollable costs fall under risk management

Project Cost Control Objectives

The cost control objectives of the client and the contractor differ Client - After taking into consideration the contract commitments, the escalation and the contingencies, the client formulates his cost budget for the project. Contractor - It is the contractor who executes the contracted works and it is he who bears the cost of the input resources employed by him for the execution of the work. These input resources and the site expenses include the cost of men, materials, machinery and capital.

Cost Control Parameters

Stages in Profit Computation Nature of Control

Sales value (income)

Sales value control

B C D

Less direct cost Gross margin (A - B) Less variable overhead

Direct cost control

Variable overheads control

Contribution (C - D)

Contribution control

Less fixed overheads

Fixed overhead control

Operating profit (E - F) control

Budgetary

Budgetary

Control Estimates

The feasibility study during the inception stage outlines the approximate cost of the project A master control estimate for establishing the baseline for overall cost control The master control estimate is prepared during the project planning stage The approved original master control estimate, called project budget, remains unchanged throughout the life of the project Generally, expenditure is incurred at various levels/departments within the amount earmarked in the project budget All costs are planned and controlled by the cost controller/authorized manager

Cost Planning
Level 0 1 2 3 Scope Total project cost Subproject cost Task/logistics costs Workpackage costs Cost Control Responsibility Cost accountant Cost accountant Respective managers/contractors Cost centers

Budgeting Costs

The budget relates the expected costs and revenue with the time progress Budget - reflects the expected costs of performance under expected conditions. Standard Costs - stands for the costs achievable under efficient operating conditions. Commitment Costs - marks the booked cost of resources utilized/consumed or expected. Value of work performed - implies the monetary value of the work completed. In contracted projects, it is equal to the value of the work done at contract rates. Earned value analysis - is the method for measuring project budgeted performance with the time progress

Cost Monitoring

Cost reports are generally initiated at the level of the responsibility centers (cost centre) The cost reports of construction/production centers should reflect a comparison of the standard and actual costs Preferably, cost reports should be initiated weekly / monthly and their frequency can be increased in the early stages of the project The project cost controller monitors the responsibility centre cost reports. He updates the project budgeted costs, changes order, keeps track of variations in the control estimates and forecasts the trends pertaining to the remaining project costs.

Cost Performance - Project Earned Value

Depending upon the nature of the project, Earned Value of project can be measured in one or more of the three parameters

cost effort (like man-hours) value of work done

For example, the cost performance of a project can be determined as

CumulativeEarnedValueofWorkPer formed 100 ContractValueof Pr ojectatCompletion

Contractors' Pr ojectFinancial Pr ogress (%)

Evaluation of Financial Progress of Project

Work Package Particulars Work Package Progress Planned Value at Completion Earned Value on Data Date Work Package Progress (%) Project (%)

WP - A Code A 126
127 128 Total WP - A WP - B WP - C

PV 15,000
20,000 45,000 80,000 xxxxx xxxxx

EV
15,000 16,000 9,000 40,000 xxxxx xxxxx

Progress(%)
100 80 20 50 xxx xxx

EV/BAC
3.0 3.2 1.8 8.0 x x

BAC

5,00,000

xxxxx

xxx

xx

Earned Value Measurement

The method of measurement of the up-to-date work done value varies with the nature of the work The various methods of measuring the progress of different types of work packages can be categorized as Ratio method:

Repetitive-type work packages:

Earned Value Measurement

Non-repetitive complex construction work packages:

The activities in the work package are grouped into a chain of broad sequential stages Thereafter, each stage in the chain can be assigned a pre-determined percentage of the budget catered for the work package The overall progress of the work package at a given point of time can then be estimated by totaling the percentages of the stages completed In certain tasks, such as the preparation of drawings, the procurement of materials, the planning of project, the investigation of soil, the start and completion are well defined but the progress of the intermediate stages is difficult to estimate. For such tasks, an arbitrary percentage can be assigned to mark the start and the balance can be considered after the task is completed

Start-Finish method:

Sales Value (Value of Work Done) Control

Work Done Value Variances

Change
A B Budget forecasts cumulative Contract value of work done

Original Work
xxxx

Materials at Site Work Order

xxx xx

Upto previous month During current month Cumulative (B)

C D E F Actual approved (cumulative) Work done value or quantity variance (A - B) Price variance (B - C) Budget variance (A - C)

xxx xx xxxx
xxx xx xx xxx

xx x xxx
xx xx xx xx

xx x xx
xx x x xx

Sales Value (Value of Work Done) Control

Accounting Work Done Progress Value of work done = Contract price Actual quantity of work done Accounting Direct Materials Inventory The value of the materials-at-site consumed during the month = (Value of opening stock for the month) + (Value of materials inducted during the month) (Value of closing stock for the month)

Sales Value (Value of Work Done) Control

Accounting Work Changes Orders In construction projects, work changes through deviations in orders are inevitable. In some projects, such deviations may run into hundreds. The cost of extra work can be determined by any of the following mutually or contractually agreed methods

Lump sum price for each work change order. Actual cost plus fixed percentage to cater for the contractor's overheads and profits. Actual cost or guaranteed maximum price, whichever is greater. For accounting purposes, each change order for extra work is allotted a serial number; it is documented and resources employed for its execution are properly accounted.

Sales Value (Value of Work Done) Control

Revenue Variance made up of 2 components

Work done quantity variances Sale price variances

Direct Cost Control

Direct costs constitute over 60% of the total project costs. Direct cost control with pre-determined labour rates and materials purchase prices, can best be exercised at the lowest organizational level at the production centre or even the work centre, where the cost is actually incurred The basic concept behind controlling the direct costs is that each work package for which the standard cost is established, is identifiable, measurable and costable Direct cost control is exercised by comparing the actual direct costs with the standard direct costs, analysing the reasons for variations, and applying corrective measures to improve the performance

Direct Cost Control

A pre-requisite for controlling the direct costs is that the standards must be expressed in terms of the physical and monetary value of each item of resource needed for accomplishing the work package
Type of resources Direct labour Direct materials Direct equipment Physical measure Man-hours (MH) Unit quantity Equipment hours (EH) Monetary value example Labour employment cost Materials usage cost Equipment utilization cost
Other direct costs

Direct other expenses -

The primary purpose of introducing standard direct costs is to generate information by comparing actual performance against the standards and to analyze variance
Direct cost variance = Standard direct cost Actual direct cost. If variance > 0, it is favourable (F). If variance < 0, it is unfavourable (U).

Causes of Unfavourable Direct Cost Variances

Some of the main causes for unfavourable variances are given below Material price variance Materials usage variance Labour rate variance Labour operating variance Equipment rate variance Equipment operating variance Other common reasons. Unrealistic standards, higher resource procurement costs, higher sub-contract costs, mismanagement of resources

Budgeted Performance Control Using Earned Value Analysis

The earned value analysis is the management tool to track the deviations from the budgeted cost performance on the data date and to forecast trends. It serves two main purposes

To apprise the project management of the possible cost overrun or underrun for taking timely corrective actions, such as modifying cash flow and updating financial forecasts and project profitability expectations. To update key personnel on anticipated cost changes in their field of responsibility, so as to create cost consciousness for exploring means of minimising wastage and reducing costs.

The earned value cost analysis relates the budget costs with the time progress

The Commonly Used Budget Monitoring Parameters

Budgeted Cost for Work Scheduled (BCWS): It represents the cumulative, time-phased cost projections made in the budget for activities that are scheduled to be performed. It shows what is planned for execution. Budgeted Cost for Work Performed (BCWP) or the value earned: It shows the cumulative cost budgeted for the work performed. Actual Cost for Work Performed (ACWP): It represents the cumulative actual cost incurred on date in accomplishing the work

Cost and Schedule Variances

Unfavourable Variance Favourable Variance

Cost and Schedule Variances

Scheduled Variance (SV) = (Earned work hours or value) (Budgeted work hours or value) SV = BCWP BCWS

Cost Variance (CV) = (Earned work hours or value) (Actual work hours or value) CV = BCWP ACWP

Cost and Schedule Variances

Time schedule overrun and under run are usually expressed in terms of percentage

Cost-trends Forecasts

Variance analysis reveals the extent and causes of variances Performance efficiency determines how efficiently the task was done and what its implications would be on the future trends The future cost and time performance can be predicted as
Cost Performance Index (CPI) = BCWP/ACWP

Scheduled Performance Index (SPI)

= BCWP/BCWS

An index of 1.0 or greater indicates better performance and less than 1.0 implies poor performance Performance indices vary during the execution of a project

Cost-trends Forecasts

The trends can be used to forecast : Estimate to completion (ETA) for the balance works:

Estimate at completion (EAC) for the project: EAC = ETC + ACWP Project cost overrun at completion in percentage (PCOC):