Project Management - Estimating Project Times and Costs

Project Management Chapter 5 Estimating Project Times and Costs    Estimating: the process of forecasting or approximating the time and cost of completing project deliverables. o Frequently classified as top-down and bottom-up o Top-down estimates are usually done by senior management  Analogy, group consensus, or mathematical relationships o Bottom-up estimates are typically performed by people who are doing the work  Based on estimates of elements found in the work breakdown structure Cost, time, and budget estimates are the lifeline for control; they serve as the standard for comparison of actual and plan throughout the life of the project o Ideally, project managers and the customer would prefer detailed project status reports for every work package, however, that is not always possible Factors Influencing the Quality of Estimates o Planning Horizon: estimates of current events are close to 100 percent accurate but are reduced for more distant events  The accuracy of time and cost estimates should improve as you move from the conceptual phase to the point of defining individual work packages o Project Complexity: time to implement new technology has a habit of expanding in an increasing, nonlinear fashion o People: accuracy of estimates depends on the skills of the people making the estimates o Project Structure and Organization: which project structure is chosen to manage the project will influence the time and cost estimates  Advantage of having a dedicated project team is the speed gained from concentrated focus  Operating in a matrix environment can help reduce costs by more efficiently sharing personnel o Padding Estimates: allowing for error for personal interests  For example, depending on why you need to be somewhere, you may change your estimate of how long it takes to get there  In work situations, most are inclined to add a little padding to reduce risk of being late or over budget o Organizational Culture: organizations vary in the importance they attach to estimates  Some organizations think that detailed estimating takes too much time and is not worth the effort  Other organizations believe that accurate estimates are the bedrock of effective project management o Other Factors: non-project factors can impact time and cost estimates      Equipment down-time, national holidays, vacations, legal limits  Project priority Seven Guidelines to Develop useful work package estimates: 1. Responsibility: at the work package level, estimates should be made by the persons most familiar with the task a. These people will not have some preconceived, imposed duration for a deliverable in mind, they will give and estimate based on experience b. Those responsible will hopefully “buy in” to seeing that the estimate materializes when they implement the work package 2. The use of several people to estimate: it is well known that a cost or time estimate usually has a better chance of being reasonable and realistic when several people with relevant experience or knowledge of the task are used 3. Normal Conditions: estimates should be based on normal conditions, efficient methods, and a normal level of resources a. Sometimes these are hard to discern, but it is important that everyone is at a consensus as to what “normal conditions” means in this project 4. Time units: specific time units to use should be selected early in the development phase of the project network a. All task time estimates need consistent time units 5. Independence: estimators should treat each task as independent of other tasks that might be integrated by the WBS 6. Contingencies: work package estimates should not include allowance for contingencies a. The estimate should assume normal or average conditions, even though every work package will not materialize as planned b. For this reason, the top management needs to create an extra fund for contingencies that can be used to cover unforeseen events 7. Risk assessment added to the estimate to avoid surprises to stakeholders: simply identifying the degree of risk lets stakeholders consider alternative methods and alter process decisions a. A simple breakdown by optimistic, most likely, pessimistic for task time could provide valuable info regarding time and cost Top-Down estimates are preferred under these conditions o Strategic decision making o High uncertainty o Internal, small project o Unstable scope Bottom-Up estimates are preferred under these conditions o Cost and time important o Fixed-price contract o Customer wants details Top-down estimates: estimates that use surrogates to estimate project time and cost (also called macro estimates) usually are derived from someone who uses experience and/or information to determine the project duration and total cost o These estimates are sometimes made by top managers who have very little knowledge of the component activities used to complete the project o These estimates rarely represent low-cost, efficient methods Bottom-Up estimates: detailed estimates of work packages, usually made by those who are most familiar with the task (also called micro estimates) o Establish low-cost, efficient methods o Good sense suggests that project estimates should come from the people most knowledgeable about the estimate needed o The use of several people with relevant experience can improve the time and cost estimate o This approach also provides the customer with an opportunity to compare the low-cost, efficient method approach with any impose restrictions The preferred approach in defining the project is to make rough top-down estimates, develop the WBS/OBS, make bottom-up estimates, develop schedules and budgets, and reconcile differences between top-down and bottom-up estimates o These steps should be done before final negotiation with either an internal or external customer In conclusion, the ideal approach is for the project manager to allow enough time for both the top-down and bottom-up estimates to be worked out so that a complete plan based on reliable estimates can be offered to the customer, allowing for false expectations to be minimized for all stakeholders and reducing negotiation Top-Down Approaches for Estimating Project Times and Costs o Consensus Method: simply uses the pooled experience of senior and/or middle managers to estimate the total project duration and cost  Typically involves a meeting where experts discuss, argue, and ultimately reach a decision as to their best guesstimate o Ratio Method: a method that uses the ratio of past actual costs for similar work to estimate the cost for a potential project. This method of forecasting cost does not provide a sound basis for project cost control, since it does not recognize differences among projects  Usually used in the concept of “need” phase of a project to get an initial duration and cost estimate for the project o Apportion Method: the costs allocated to a specific segment of a project by using a percentage of planned total cost  This is an extension to the ratio method  Used when projects closely follow past projects in features and costs  Common in projects that are relatively standard but have some small variation or customization o Function Point Methods for Software and System Projects: in this industry, software development projects are frequently estimate using weighted macro variables called function points or major parameters such as number of inputs, o       number of outputs, number of inquiries, number of data files, and number of interfaces  Function points: points derived from past software projects to estimate project tine and cost, given specific feature of the project  The total adjusted count provides the basis for estimating the labor effort and cost for a project o Learning Curves: a mathematical curve used to predict a pattern of time reduction as a task is performed over and over  Managers know that the time to perform a task improves with repetition Bottom-Up Approaches for Estimating Project Times and Costs o Template Method: a method that uses a prepared form to develop project networks, costs, and time estimates  Templates are created base on the costs of previous, similar projects  This approach enables the firm to develop a potential schedule, estimate costs, and develop a budget in a very short time span  Development of such templates in a database can quickly reduce estimate errors o Parametric Procedure Applied to Specific Tasks: just as this technique can be the source of top-down estimates, the same technique can be applied to specific tasks  Based on past conversion projects, the project manager can determine specific cost estimates o Range Estimating: an estimating technique in which multiple points are given based on some logic  Works best when work packages have significant uncertainty associated with the time or cost to complete  Three time estimates; low, average, high  Having a group determine the low, average and high cost of duration gives the best results by bringing more evaluation judgements to the estimate and potential risks  Group range estimating gives the project manager and owner an opportunity to assess the confidence associated with project times Phase Estimating: this approach is a hybrid that begins with a top-down estimate for the project and then refines estimates for phases of the project as it is implemented. o Used when an unusual amount of uncertainty surrounds a project and it is impractical to estimate times and costs for the entire project o Uses a two-estimate system over the life of the project; a detailed estimate is developed for immediate phase and a macro estimate is made for the remaining phases off the project o AS the project progresses through its life cycle and more info is available, the reliability of the estimates should be improving o This method is preferred by those working on projects where the final product is not known and the uncertainty is very large   Types of Costs o Direct costs: clearly chargeable to a specific work package, they can be influenced by the project manager, project team, and individuals implementing the work package  Examples are; labor, materials, equipment  Represent real cash outflows and must be paid as the project progresses o Direct Project Overhead Costs: typically, organization costs that are not directly linked to a specific project  Can be tied to project deliverables or work packages  Cover general expenses such as upper management, legal, market promotion, and accounting  Usually charger per unit of time or as a percentage of labor or material costs  Examples include the salary of the project manager and temporary rental space for the project team  Although it is not an out-of-pocket expense, it is real and must be covered in the long run if the firm is to remain viable o General and Administrative Overhead Costs (G&A): represent organization costs that are not directly linked to a specific project  Carried for the duration of the project, including organization costs across all products and projects such as advertising, accounting, and senior management above the project level  Varies, but is usually allocated as a percentage of total direct cost or a percent of the total of a specific direct cost Reasons why the numbers could be so far off of original estimates o Interaction costs are hidden in estimates: the time necessary to coordinate activities is typically not reflected in independent estimates  Coordination is reflected in meetings and briefings as well as time necessary to resolve disconnects between tasks  Time and cost devoted to managing interactions rises as the number of people and different disciplines involved increases on a project o Normal conditions do not apply: estimates are supposed to be based on normal conditions which rarely holds true in real life, especially when it comes to the availability of resources  Similarly, the decision to outsource certain tasks can increase costs and extend task durations o Things go wrong on projects: design flaws are revealed after the fact, extreme weather conditions occur, accidents happen o Project scope and plans change: as you get further into the project, a manager obtains a better understanding of what needs to be done, consequently leading to major changes in project plans and costs o People are overly optimistic: solid research indicates that people tend to overestimate how quickly they can get things done    o People engage in strategic misrepresentation: there is growing evidence that some project promoters underestimate costs and overestimate benefits just to win approval White elephants: a valuable, burdensome possession that is not easily disposed of and whose cost (particularly upkeep) is out of proportion with its usefulness Reference Class Forecasting (RCF): a sophisticated forecasting method in which you take an external view and forecast project costs based on actual outcomes of similar projects. This involves three major steps: 1. Select a reference class of projects similar to your potential project 2. Collect and arrange outcome data as a distribution. Create a distribution of cost overruns as a percentage of the original project estimate (low to high) 3. Use the distribution data to arrive at a realistic forecast. Compare the original cost estimate for the project with the references class projects. The benefits of RCF are compelling: o Outside empirical data mitigate human bias o Political, strategic, and promoter forces have difficulty ignoring outside RCF info o RCF serves as a reality check for funding large projects o RCF helps executives avoid unsound optimism o RCF leads to improved accountability o RCF provides a basis for project contingency funds Project Management Chapter 6 Developing a Project Schedule  Project network is the tool used for planning, scheduling, and monitoring project progress. o A visual flow design of the sequence, interrelationships, and dependencies of all the activities that must be accomplished to complete the project o Developed from the info collected for the WBS and is a graphic flow chart of the project job plan o Depicts project activities that must be completed, the logical sequences, the interdependencies pf the activities to be completed, and the times for the activities to start and finish along with the longest path through the network o Provides the basis for scheduling labor and equipment, enhances communication that melds managers and groups together, provides an estimate of project duration, gives the times when activities can start and finish, provides basis for budgeting cash flow, identifies which activities are “critical”. o They minimize surprises by getting the plan out early and allowing corrective feedback o Early times: the earliest an activity can start or finish based on network logic, the data date, and any schedule constraints.     o Late times: the latest an activity can start or finish without delaying the completion of the project. Constructing a Project Network Terminology: o Activity: an element of the project that requires time. Typically, it consumes time either while people work or while people wait. Usually represent one or more tasks from a work package o Parallel Activities: these are activities that can take place at the same time, if the manager wishes, however, the manager may choose to have parallel activities not occur simultaneously o Burst Activity: has more than one activity immediately following it (more than one dependency arrow flowing to it). o Merge Activity: has more than one activity immediately preceding it o Path: a sequence of connected, dependent activity o Critical path: when this term is used, it means the path(s) with the longest duration through the network; if an activity on the path is delayed, the project is delayed the same amount of time Basic Rules to Follow in Developing Project Networks 1. Networks flow typically from left to right 2. An activity cannot begin until all preceding connected activities have been completed 3. Arrows on networks indicate precedence and flow. Arrows can cross over each other. 4. Each activity should have a unique identification number 5. An activity identification number must be larger that of any activities that precede it 6. Looping is not allowed (in other words, recycling through a set of activities cannot take place) 7. Conditional statements are not allowed (that is, this type of statement should not appear: if successful, do something; if not, do nothing) 8. Experience suggests that when there are multiple starts, a common start node can be used to indicate a clear project beginning on the network. Similarly, a single project end node can be used to indicate clear ending There are three basic relationships that must be established for activities included in a project network. They can be answered by answering the following three questions 1. Which activities must be completed immediately before (predecessor) the activity? 2. Which activities must immediately follow (successor) this activity? 3. Which activities can occur while (concurrent or parallel relationship) this activity is taking place? Drawing the project network places the activities in the right sequence for computing the start and finish times of activities o Performing a few simple computations allows the project manager to complete a process known as the forward and backward pass  Forward Pass-Earliest Times 1. How soon can the activity start (early start-ES)? 2. How soon can the activity finish (early finish-EF)? 3. How soon can the project be finished (expected time-TE)? Backward Pass- Latest Time 1. How late can the activity start (late start-LS)? 2. How late can the activity finish (late finish-LF)? 3. Which activities represent the critical path (CP)? This is the longest path in the network, which, when delayed. Will delay the project 4. How long can the activity be delayed (slack or float-SL)? Forward Pass-Earliest Times o The forward pass starts with the first project activity and traces each path through the network to the last project activity. o The longest path denotes the project completion time for the plan and is called the critical path Backward Pass-Latest Times o The backward pass starts with the last project activity on the network o Before the backward pass can be computed, the late finish for the last project activity must be selected Determining Slack (or float) o Total slack tells us the amount of time an activity can be delayed and not delay the project o The difference between LS and ES ( Sensitivity: the likelihood the original critical path will change once the project is initiated Free Slack: the amount of time an activity can be delayed without delaying any immediately following activity o It can never be negative o Only activities that occur at the end of a chain of activities, where you have a merge activity, can have free slack o Occurs at the last activity in a chain of activities Looping is an attempt by the planner to return to an earlier activity Laddering: activities are broken into segments so the following activity can begin sooner and not delay the work Project Management Chapter 7 Managing Risk           Risk: the chance that an undesirable project event will occur and the consequences of all its possible outcomes o An uncertain event or condition that if it occurs, has a positive or negative effect on project objectives Risk management attempts to recognize and manage potential and unforeseen trouble spots that may occur when the project is implemented o Risk management identifies as many risk events as possible (what can go wrong), minimizes their impact (what can be done about the event before the project        begins), manages responses to events that do materialize (contingency plans), and provides contingency funds to cover risk events that actually materialize. As the project progresses toward completion, risk declines as the answers to critical issues are resolved. The cost impact of a risk event increases over the life of the project. Risk management is a proactive, rather than reactive, approach. o It is a preventive process designed to ensure that surprises are reduced and that negative consequences associated with undesirable events are minimized. o Successful management of project risk gives the project manager better control over the future and can significantly improve the chances of reaching project objectives on time and within budget and of meeting required technical performance There are external project risks such as inflation, market acceptance, exchange rates, and government regulations o These are often referred to as “threats”, considering that they are not within the project manager’s responsibility area Step 1 Risk Identification: the risk management process begins by trying to generate a list of all the possible risks that could affect the project o Typically, the project manager pulls together a risk management team that consists of core team members and other relevant stakeholders that brainstorm and identify potential problems o Often times, the focus is on objectives and not on the events that could produce consequences Risk Breakdown Structures (RBSs): a hierarchal depiction of the identified project risks, arranged by risk category and subcategory, that identifies the various areas and causes of potential risks. o Organizations use this in conjunction with WBSs to help management teams identify and eventually analyze risks o On a large project, multiple risk teams are organized around specific deliverables and submit their risk management reports to the project manager Risk profile: a list of questions that address traditional areas of uncertainty on a project o These questions have been developed and refined from previous, similar projects o Good risk profiles are tailored to the type of project in question o They recognize the unique strengths and weaknesses of the firm o They address both technical and management risks o They are generated and maintained usually by personnel from the project office Step 2 Risk Assessment: Scenario Analysis: technique for analyzing where team members assess the significance of each risk event in terms of probability and impact of the event o Risks need to be evaluated in terms of the likelihood the event is going to occur and the impact or consequences of its occurrence. o It is important that the different levels of risk probabilities and impacts be properly defined, even as simply as rating them from “very unlikely” to “almost certainly” or in number rankings    Program evaluation and review technique (PERT) and PERT simulation can be used to review activity and project risk o Take a more macro perspective by looking at overall cost and schedule risks o The use of PERT simulation is increasing because it uses the same data required for PERT, software to perform the simulation is readily available Step 3 Risk Response Development: Responses to risk can be classified as mitigating, avoiding, transferring, escalating, or retaining. o Mitigating risk: action taken to either reduce the likelihood that a risk will occur and/or the impact the risk will have on the project  Testing and prototyping are frequently used to prevent problems from surfacing later in the project  Identifying the root causes of an event  An alternative mitigation strategy is to reduce the impact of the risk if it occurs o Avoiding risk: eliminating the risk cause before the project begins  Obviously, it is impossible to eliminate all risk events, but some may be avoided before you launch the project o Transferring risk: shifting responsibility for a risk to another party  Passing risk to another party almost always results in paying a premium for this exemption  This can include transferring risk from an owner to a contractor, insurance, or BOOT (Build-Own-Operate-Transfer) provisions o Escalating risk: notify the appropriate people of a risk that is outside the scope of the project or exceeds the authority of the project manager  An example could be that an engineer discovers through informal channels that a competitor is developing an alternative energy source  Another example could be informal discussions with team members reveal widespread dissatisfaction with pay and benefits among staff across the company o Retaining risk: when a conscious decision is made to attempt the risk of an event occurring (if the risk is too large, if the chance of occurring is slim, or if the contingency reserves can simply absorb the risk if it materializes  People vary in their risk tolerance; before deciding how to respond to a risk, you should consider the risk appetite of key stakeholders as well as the team Contingency plan: alternative plan that will be used if a possible foreseen risk event becomes a reality o It represents action that will reduce or mitigate the negative impact of the risk event o A key distinction between a risk response and a contingency plan is that a response is part of the actual implementation plan and action is taken before the risk can materialize, while a contingency plan is not part of the initial implementation plan and only goes into effect after the risk is recognized            o The availability of a contingency plan can significantly increase the chances for project success o Risk response matrices are useful for summarizing how the project team plans to manage risks that have been identified Technical risks can often be the kind that causes the project to be shut down o Backup strategies if chosen technology fails In addition to backup strategies, project managers need to develop methods to quickly assess whether technical uncertainties can be resolved CAD (computer-aided design) has helped resolve design problems o Technology offers many methods for early testing and validation o By isolating and testing key technical questions early in the project, project feasibility can be determined, and necessary adjustments made, such as reworking the process or in some cases closing down the project Opportunity: an event that can have a positive impact on project objectives Five types of response to an opportunity: 1. Exploit: seeks to eliminate the uncertainty associated with an opportunity to ensure that it definitely happens 2. Share: involves allocating some or all of the ownership of an opportunity to another party who is best able to capture the opportunity for the benefit of the project 3. Enhance: the opposite of mitigate in that action is taken to increase the probability and/or the positive impact of an opportunity 4. Escalate: some projects encounter opportunities that are outside the scope of the project or exceed the authority of the project manager, and should notify the appropriate authority 5. Accept: accepting an opportunity is being willing to take advantage of it if it occurs, but not taking action to pursue it Contingency funds: funds to cover project risks- identified and unknown o Divided to contingency reserves and management reserves Time Buffers: amounts of time used to cushion against potential delays in the project o Add to activities with severe risks o Add to merge activities that are prone to delays Step 4 Risk Response Control: Risk register: details all identified risks, including descriptions, category, probability of occurring, impact, responses, contingency plans, owners, and current status o The register is the backbone for the last step in the risk management process Risk control involves executing the risk response strategy, monitoring triggering events, initiating contingency plans, and watching for new risks. Change Management systems: involve reporting, controlling, and recording changes to the project baseline Sources of Change: o Project scope changes o Implementation of contingency plans   o Improvement changes Most change management systems are designed to accomplish the following: 1. Identify proposed changes 2. List expected effects of proposed changes on schedule and budget 3. Review, evaluate, and approve or disapprove changes formally 4. Negotiate and resolve conflicts of change, conditions, and cost 5. Communicate changes to the parties affected 6. Assign responsibility for implementing change 7. Adjust the master schedule and budget 8. Track all changes that are to be implemented As part of the project communication plan, stakeholders define up front the communication and decision-making process that will be used to evaluate and accept changes Project Management Chapter 8 Scheduling Resources and Costs      Resource smoothing: a technique that uses slack to reduce peak resource demand to increase resource utilization Resource-constrained scheduling: scheduling a project in which resources are inadequate Resources are people, equipment, and material that can be drawn on to accomplish something o People: human resources are usually classified by the skills they bring to the project. The many differing skills of human resources add to the complexity of scheduling projects o Materials: project materials cover a large spectrum. Material availability and shortages have been blamed for the delay of many projects o Equipment: usually presented by type, size, and quantity. In some cases, equipment can be interchanged to improve schedules, but this is not typical. Most of the scheduling methods available today require the project manager to classify the project as either time constrained or resource constrained o Time-constrained project: one that must be completed by an imposed date o Resource-constrained project: one that assumes the level of resources available cannot be exceeded o In scheduling terms, time constrained means time (project duration) is fixed and resources are flexible, while resource constrained means resources are fixed and time is flexible. Splitting: refers to interrupting work on one task and assigning the resources to work on a different task for a period of time, then reassigning them to work on the original task. o No splitting means that once an activity is placed in the schedule, assume it will be worked on continuously until it is finished        Leveling: technique used to examine a project for an unbalanced use of resources and for resolving resource overallocations o All leveling techniques delay noncritical activities by using positive slack to reduce peak demand and fill in the valleys for the resources Heuristics: a rule of thumb used to make decisions. Frequently found in scheduling projects o They do not always yield an optimal schedule but they are very capable of yielding a “good” schedule for very complex networks with many types of resources o The parallel method is the most widely used approach to apply heuristics, which have been found to consistently minimize project delay over a large variety of projects.  It is an iterative process that starts from the beginning of project time and, when the resources needed exceed the resources available, retains activities first by the priority rules:  Minimum slack  Smallest duration  Lowest activity identification number EMR is the name given to a hand-held electronic medical reference guide that is being developed to be used by emergency medical technicians and paramedics. The limited resource schedule usually reduces slack, reduces flexibility by using slack to ensure delay is minimized, and increases the number of critical and near-critical activities. Splitting tasks is a scheduling technique used to get a better project schedule and/or to increase resource utilization o Planners should avoid the use of splitting as much as possible, except in situations where splitting costs are known to be small or when there is no alternative for resolving the resources problem. When making individual assignments, project managers should match, as best they can, the demands and requirements of specific work with the qualifications and experience of available participants o There is a natural tendency to assign the best people the most difficult tasks o Project managers need to be careful not to overdo this because over time these people may grow to resent the fact that they are always given the toughest assignments. At the same time, less experienced participants may resent the fact that they are never given the opportunity to expand their skill/knowledge base. Three of the more common problems encountered in managing multi-project resource schedules: o Overall schedule slippage: because projects often share resources, delays in one project can have a ripple effect and delay other projects o Inefficient resource utilization: because projects have different schedule and requirements, there are peaks and valleys in overall resource demands      o Resource bottlenecks: delays and schedules are extended as a result of shortages of critical resources that are required by multiple projects o To prevent problems with multiple projects, one approach is to use a first comefirst served rule in which a project queue system is created in which projects currently under way take precedence over new projects Many companies are using outsourcing as a means of dealing with their resource allocation problems Time-phased budget baseline: a cost baseline that is derived from the WBS and project schedule. The budgeted costs are distributed to mirror the project schedule The development of your work breakdown structure for each work package needs the following info to be developed: o Define work (what) o Identify time to complete a work package (how long) o Identify a time-phased budget to complete a work package (cost) o Identify resources needed to complete a work package (how much) o Identify a single person responsible for units of work (who) o Identify monitoring points for measuring progress (how well) Planned value (PV): the planned time-phased baseline of the value of the work scheduled. Previously was called budgeted cost of work scheduled (BCWS).