I have two very important announcements from The Project Notebook:
1) I've been selected by the Project Management Institute to participate in a group of 25 volunteer leaders from around the globe in the 2010 PMI Leadership Institute Masters Class (LIMC). This is a year long program scheduled to begin October 5-7 2009 in Orlando Florida. The program consists of three physical meetings in addition to virtual participation.
The class experience includes:
· Participant Evaluations: LIMC participants will complete a 360-degree Assessment. Additional psychometric tools and assessments will also be incorporated into the program.
· Coaching: Individual coaching sessions will be provided to each participant.
· Virtual Leadership Forums: Participants are provided with an ongoing and open forum for continued learning and discussion between the face to face meetings.
2) My next offering of Controlling Project Costs and Risks Online through UCSD Extension begins the week of October 5 too! This online course is delivered by the UCSD BlackBoard Learning System.
Project control is simplified by good planning from the start. Explore project selection, evaluation, initiation, and the planning that follows. Discuss project scope and its relationship to costs, as well as the cost estimating process. Learn how simple but effective tools, like MS Excel and MS Project, can help control project costs. You will also study risk management – including the nature of risk factors; methods of assessing and estimating impact of risk; and ways of avoiding or mitigating risks. Other topics include monitoring and reporting, sustaining commitment, resource reallocation, balancing time versus quality, performance measurement and change management.
Controlling Project Costs and Risks is now in its 7th year and offered fully online. The next online class begins on Monday, October 5th for 10 weeks. Enhance your project management career or complete the PM Certificate requirements for UCSD Extension. For more information or to enroll in the class, please visit Controlling Project Costs and Risks at UCSD Extension.
Showing posts with label costs. Show all posts
Showing posts with label costs. Show all posts
Friday, June 19, 2009
Friday, April 24, 2009
Practical Budgeting for Project Managers - Conclusion
Budget Risk Assessment
Once you have created your draft budget, it should be subjected to the same review process as estimates discussed within the course materials. A line by line review should look for all the risks. Depending on your company and/or client policy, having a 15-25% contingency to manage risks is normal. You may want to consider an additional contingency for unplanned risks.
Most budgeting risk is centered around people. There may be project team members with unknown skill levels, insufficient staffing, outsourced work which cannot be managed as closely, or unique, specialized resources which are difficult to obtain at the right times. Another standard risk for the construction industry is the environment and weather. Each risk will require evaluation and a potential budget adjustment to ensure the best possible budget is formulated.
Longer term, multi-year projects need to consider inflation. Take the case of the interstate highway system which was constructed over a 35 year period. Inflation during the 60s and 70s was high and drove the project significantly over budget. Another example of a construction project impacted by inflation was the “Big Dig” in Boston. A factor for inflation might be added to the budget through the risk management process.
Budget Presentation
There is obviously no one single format for budgets. You should select categories according to the expense types and in alignment with your company’s financial reporting. Here an an example:
Bibliography
PMBOK® Guide, Fourth Edition; PMI 20081
Project Management: Engineering, Technology, and Implementation; Shtub, Bard, & Globerson; Prentice Hall 1994
Quantitative Costs in Project Management; Goodpasture; J. Ross Publishing 20042
Project Management Jumpstart; Heldman; Sybex 20052
Identifying & Managing Project Risk (2nd Edition); Kendrick; AMACOM 2009
Once you have created your draft budget, it should be subjected to the same review process as estimates discussed within the course materials. A line by line review should look for all the risks. Depending on your company and/or client policy, having a 15-25% contingency to manage risks is normal. You may want to consider an additional contingency for unplanned risks.
Most budgeting risk is centered around people. There may be project team members with unknown skill levels, insufficient staffing, outsourced work which cannot be managed as closely, or unique, specialized resources which are difficult to obtain at the right times. Another standard risk for the construction industry is the environment and weather. Each risk will require evaluation and a potential budget adjustment to ensure the best possible budget is formulated.
Longer term, multi-year projects need to consider inflation. Take the case of the interstate highway system which was constructed over a 35 year period. Inflation during the 60s and 70s was high and drove the project significantly over budget. Another example of a construction project impacted by inflation was the “Big Dig” in Boston. A factor for inflation might be added to the budget through the risk management process.
Budget Presentation
There is obviously no one single format for budgets. You should select categories according to the expense types and in alignment with your company’s financial reporting. Here an an example:
Bibliography
PMBOK® Guide, Fourth Edition; PMI 20081
Project Management: Engineering, Technology, and Implementation; Shtub, Bard, & Globerson; Prentice Hall 1994
Quantitative Costs in Project Management; Goodpasture; J. Ross Publishing 20042
Project Management Jumpstart; Heldman; Sybex 20052
Identifying & Managing Project Risk (2nd Edition); Kendrick; AMACOM 2009
Friday, April 17, 2009
PMP® Challenge Question - 4/15
Happy Tax Day! Just a little late with the post since I took the day off in celebration. On 4/1, I asked what does each abbreviation stand for:
CR - Cost Reimburseable. This is a contract where the seller is reimbursed for their costs. There is usually a fee or some other payment representing the profit.
CPFF - Cost Plus Fixed Fee. The contract is a variant of cost reimburseable with a fixed fee component. This type of contract tends to favor the buyer.
FPFT - Fixed Price, Fixed Time. This is a contract in which the seller absorbs all the risk by guaranteeing a price and time to complete.
CPRC - Oops? Did you think this stood for something? Its not a valid procurement abbreviation.
Now for the 4/15 challenge:
Explain the function of sum of the years depreciation.
Good luck with the challenge!
CR - Cost Reimburseable. This is a contract where the seller is reimbursed for their costs. There is usually a fee or some other payment representing the profit.
CPFF - Cost Plus Fixed Fee. The contract is a variant of cost reimburseable with a fixed fee component. This type of contract tends to favor the buyer.
FPFT - Fixed Price, Fixed Time. This is a contract in which the seller absorbs all the risk by guaranteeing a price and time to complete.
CPRC - Oops? Did you think this stood for something? Its not a valid procurement abbreviation.
Now for the 4/15 challenge:
Explain the function of sum of the years depreciation.
Good luck with the challenge!
Practical Budgeting for Project Managers - Part II
As you start to plan your budget, you should review previous budgets for similar work if they are available. You will need to form the budget based on historical experience and performance, plus your current WBS and estimates. When the schedule is created, you will need to look at resource availability. The most difficult part of the process will be to think through ALL costs.
Basic Project Costs
Human resource costs. Here you want to use the fully burdened rate for all project team members. This includes salaries and wages, bonuses, and other benefits. For co-workers who are salaried employees, this information is usually treated as confidential, but your finance department may be willing to provide a composite rate representative of groups of employees or job classifications. Human resources costs, even for contractors, never have sales taxes involved.
Administrative costs. These are costs such as phone, copiers, office supplies in the event they aren’t supplied by your company as a part of their normal operations. These may include sales taxes and other fees.
Resource costs. These are other purchases of materials or equipment which may be needed for the project. Be sure to consider all costs, including fees and taxes.
Direct & Indirect Costs
Your project costs may be considered direct or indirect. Direct costs are those costs which are for items or resources specific to your project. These may include salaries, rentals, team training, software, and other materials. For example, the direct costs for a project to install a local area network would include routers and bridges, cabling, connectors, tools, labor to install cables and equipment, vendor training for the equipment, and so on.
Indirect costs are not directly related to the project. These may include shared costs such as the lease for the building your company occupies or utility bills for power and water. Indirect costs aren’t usually within the control of the project manager or project team, so it is rare they need to be considered in your budget. You should discuss this with your project sponsor, however, to find out how the company accounts for these costs.
Capital Budgeting
Capital budgeting involves large ticket purchases. The capital budget is usually determined by techniques such as Net Present Value to maximize shareholder return. The large ticket purchases are usually paid for immediately in cash, but the company is permitted to recognize the expense over time.
By representing the expense over time, it is believed investment will be encouraged. This is perhaps done through a compromise. First, the impact of the expense on the company balance sheet is lessened, enabling a more favorable picture. Second, the time period is determined by an accounting concept of “useful life”. The standards for “useful life” are usually shorter than the operating time of an asset. Computers, for example, are often written off over a three year period, but can often run in production for many years beyond their “useful life” period. Once they have been fully written off (all the expenses recognized), companies still have an operating asset and can invest on other needs, establishing a cycle of upgrades to plant and equipment which enable continuous improvement to the operations of the business.
Capital budget items might include upgrades to plant and equipment, purchase of expensive new equipment, or expensive software licenses. The expenses are usually recognized over time by a technique known as depreciation. Depreciation determines how much of the expense needs to be recognized every year and is usually based on the reduction of value due to wear and tear, the passage of time (obsolescence), depletion, or inadequacy. Capital budgeting and depreciation are complex topics and should not be approached without discussion with your finance or accounting department.
Depreciation Illustrated
This chart adopted from Quantitative Costs in Project Management by Goodpasture illustrates just two of several techniques to manage depreciation. It illustrates the effect on the company balance sheet and a P&L statement which could represent project expenses passed on to the project manager’s budget.
In the depreciation technique known as “straight line”, equal amounts of the expense are represented on the P&L statement each year (in the case of the crane, one fourth of the $500,000 expense). So in the year the crane was purchased, we see the $500,000 asset on the balance sheet and no depreciation. In subsequent years, the value of the asset is decreased by the $125,000 amount of the straight line depreciation.
The software license illustrates a technique known as “sum of the years”. In this case, a fraction of the expense is represented on the P&L statement each year. The fraction is determined by the number of years added together as the denominator (4+3+2+1=10). I’ve written the years in backwards order, since this is the order in which the years become the numerator. So for the first year, 4/10 or 40% of the expense is represented on the P&L statement. 30%, 20% and 10% are applied for subsequent years until 100% of the asset is fully depreciated.
As I’ve mentioned, the depreciation techniques and decisions are typically made by senior management and the finance department. Be sure to consult with them if there are questions about capital budgets. For those interested in the handling of revenues, the applicable term is amortization.
Next week: budget risk
Basic Project Costs
Human resource costs. Here you want to use the fully burdened rate for all project team members. This includes salaries and wages, bonuses, and other benefits. For co-workers who are salaried employees, this information is usually treated as confidential, but your finance department may be willing to provide a composite rate representative of groups of employees or job classifications. Human resources costs, even for contractors, never have sales taxes involved.
Administrative costs. These are costs such as phone, copiers, office supplies in the event they aren’t supplied by your company as a part of their normal operations. These may include sales taxes and other fees.
Resource costs. These are other purchases of materials or equipment which may be needed for the project. Be sure to consider all costs, including fees and taxes.
Direct & Indirect Costs
Your project costs may be considered direct or indirect. Direct costs are those costs which are for items or resources specific to your project. These may include salaries, rentals, team training, software, and other materials. For example, the direct costs for a project to install a local area network would include routers and bridges, cabling, connectors, tools, labor to install cables and equipment, vendor training for the equipment, and so on.
Indirect costs are not directly related to the project. These may include shared costs such as the lease for the building your company occupies or utility bills for power and water. Indirect costs aren’t usually within the control of the project manager or project team, so it is rare they need to be considered in your budget. You should discuss this with your project sponsor, however, to find out how the company accounts for these costs.
Capital Budgeting
Capital budgeting involves large ticket purchases. The capital budget is usually determined by techniques such as Net Present Value to maximize shareholder return. The large ticket purchases are usually paid for immediately in cash, but the company is permitted to recognize the expense over time.
By representing the expense over time, it is believed investment will be encouraged. This is perhaps done through a compromise. First, the impact of the expense on the company balance sheet is lessened, enabling a more favorable picture. Second, the time period is determined by an accounting concept of “useful life”. The standards for “useful life” are usually shorter than the operating time of an asset. Computers, for example, are often written off over a three year period, but can often run in production for many years beyond their “useful life” period. Once they have been fully written off (all the expenses recognized), companies still have an operating asset and can invest on other needs, establishing a cycle of upgrades to plant and equipment which enable continuous improvement to the operations of the business.
Capital budget items might include upgrades to plant and equipment, purchase of expensive new equipment, or expensive software licenses. The expenses are usually recognized over time by a technique known as depreciation. Depreciation determines how much of the expense needs to be recognized every year and is usually based on the reduction of value due to wear and tear, the passage of time (obsolescence), depletion, or inadequacy. Capital budgeting and depreciation are complex topics and should not be approached without discussion with your finance or accounting department.
Depreciation Illustrated
This chart adopted from Quantitative Costs in Project Management by Goodpasture illustrates just two of several techniques to manage depreciation. It illustrates the effect on the company balance sheet and a P&L statement which could represent project expenses passed on to the project manager’s budget.
In the depreciation technique known as “straight line”, equal amounts of the expense are represented on the P&L statement each year (in the case of the crane, one fourth of the $500,000 expense). So in the year the crane was purchased, we see the $500,000 asset on the balance sheet and no depreciation. In subsequent years, the value of the asset is decreased by the $125,000 amount of the straight line depreciation.
The software license illustrates a technique known as “sum of the years”. In this case, a fraction of the expense is represented on the P&L statement each year. The fraction is determined by the number of years added together as the denominator (4+3+2+1=10). I’ve written the years in backwards order, since this is the order in which the years become the numerator. So for the first year, 4/10 or 40% of the expense is represented on the P&L statement. 30%, 20% and 10% are applied for subsequent years until 100% of the asset is fully depreciated.
As I’ve mentioned, the depreciation techniques and decisions are typically made by senior management and the finance department. Be sure to consult with them if there are questions about capital budgets. For those interested in the handling of revenues, the applicable term is amortization.
Next week: budget risk
Saturday, April 11, 2009
Practical Budgeting for Project Managers - Part I
[In a recent update to an online course, Controlling Project Costs and Risks, I added a version of this material]
What is a Project Budget?
Let’s start with the PMBOK® Guide, Fourth Edition definition:
Consistent with the PMBOK® Guide, this presentation is going to exclude consideration of revenue. Those managing product development may indeed be required to look at revenue, and the budgeting principles are very much the same as for expenses. Those managing products also need to be able to trace the flow of money at times to defend their product. For example, I was once turned down funding for a product which was given to all users for free. Tracing how the money flowed, I found that more than half of the revenue of a particular high profit margin product would be cut off if the “free” product didn’t exist. Using that argument, I was successful in securing the necessary funding to improve the package for which I was responsible.
The Project Manager Role in Budgeting
Project manager involvement in the budget process often depends on company culture, process, and policy. During my career, I’ve been personally involved with budgets at different levels:
-Projects where all resources were salaried employees and their costs were not tracked at the project level.
-Projects where I was provided with a budget and had to work within its constraints.
-Projects where I created a plan, then a budget, and negotiated the final budget with senior management.
-Business units including projects with projects managed to one of the above levels.
Understanding some basics of budgeting will enable you to successfully work in any project environment.
There are many ways to approach budgets. The high level budget presented in the project charter is usually top down, based on rules of thumb or heuristics. To successfully manage project costs, the project manager will need a more detailed understanding of the project and should create a budget bottom up based on the work packages of the work breakdown structure. For larger projects or rapid application development projects, the bottom up budgets may be reviewed iteratively.
Next week: We'll look at the budget considerations for types of costs.
What is a Project Budget?
Let’s start with the PMBOK® Guide, Fourth Edition definition:
[Budgeting] is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.Unlike corporate balance sheets and income statements, project budgets are normally about expenses and not revenues. Revenues are normally considered a part of the sales process or product management process, where sales must meet revenue targets established by senior management. Senior management initiates projects to create products and services, and the project manager is often responsible at some level for the budget.
Project budgets constitute the funds authorized to execute the project. Project cost performance will be measured against the authorized budget.
Consistent with the PMBOK® Guide, this presentation is going to exclude consideration of revenue. Those managing product development may indeed be required to look at revenue, and the budgeting principles are very much the same as for expenses. Those managing products also need to be able to trace the flow of money at times to defend their product. For example, I was once turned down funding for a product which was given to all users for free. Tracing how the money flowed, I found that more than half of the revenue of a particular high profit margin product would be cut off if the “free” product didn’t exist. Using that argument, I was successful in securing the necessary funding to improve the package for which I was responsible.
The Project Manager Role in Budgeting
Project manager involvement in the budget process often depends on company culture, process, and policy. During my career, I’ve been personally involved with budgets at different levels:
-Projects where all resources were salaried employees and their costs were not tracked at the project level.
-Projects where I was provided with a budget and had to work within its constraints.
-Projects where I created a plan, then a budget, and negotiated the final budget with senior management.
-Business units including projects with projects managed to one of the above levels.
Understanding some basics of budgeting will enable you to successfully work in any project environment.
There are many ways to approach budgets. The high level budget presented in the project charter is usually top down, based on rules of thumb or heuristics. To successfully manage project costs, the project manager will need a more detailed understanding of the project and should create a budget bottom up based on the work packages of the work breakdown structure. For larger projects or rapid application development projects, the bottom up budgets may be reviewed iteratively.
Next week: We'll look at the budget considerations for types of costs.
Friday, March 20, 2009
"Yours, Mine, or Ours": Is Outsourcing the Answer?
By: Susan Peterson, M.B.A., PMP
Copyright 2008, Susan Peterson, All Rights Reserved
Both private and public service sector organizations face an ongoing challenge to determine whether functions should be performed internally or externally. While much is written about how to make this decision from an organizational strategic perspective, there are few guidelines for the project manager to use during the initiation and planning phases. Too often outsourcing decisions are made on the basis of past practices rather than assessing the current project situation. This month’s column is the first in a multi-part series that addresses project-related considerations regarding whether to outsource, insource, or employ a hybrid approach. The first area of focus covers some considerations of the initial decision.
“How could the core competencies have changed?”
It might appear that an organization’s core competencies are “cast in concrete”. However, in this environment of continual mergers/acquisitions, spinoffs, virtual entities, and other structural impacts, project managers often find that the composition of their teams changes frequently. What an organization once considered a strength, such as specialty engineering design or innovative research capabilities, may drop in priority and thus no longer be supported through effective hiring practices or major budget funding. In determining if appropriate in-house personnel will be available, a project manager needs to perform a scan of other current and proposed projects. What activities are being outsourced for other projects? Does the outsourcing appear to be the result of personnel shortages due to short-term allocation issues or to an overall lack of skilled personnel? If the constraints are short-term, then outsourcing may be a viable alternative. However, if the constraints are long-standing, a decision needs to be made by the organization to address long-range outsourcing/insourcing strategies.
“Who can keep a secret?”
Access to proprietary, competitive, and/or classified information may be an essential part of conducting a project’s activities. There are a number of legal agreements that are signed by employees and outsourcer organizations alike that stipulate restrictions on the use of knowledge obtained in the course of performing work. Typically, severe penalties are also documented in these agreements. In reality, violation of confidentiality may be difficult and/or costly to prove. Once proprietary information is “on the streets”, punishing the guilty does not mitigate the damage. Therefore, the primary consideration in assessing the risk of divulging company secrets to an outsourcer organization is to research its actual ethical conduct (not website statements) and its personnel practices.
“All of the problems will vanish.”
In so many cases problems do not disappear just because an outsourcer organization is contracted. The root causes of problems need to be analyzed to determine if the issues are internally based. For example, an organization may be experiencing project management problems due to its lack of understanding of effective project practices. In this type of situation an “outside” project manager may be a strong asset not only in leading a specific project but also in providing a positive example of good project management that the organization can emulate in the future. However, if the project management problems arise from constantly shifting priorities among multiple projects that cascade to under funding and inadequate resource allocation, then an “outsider” will also get pulled into the whirlpool of project dysfunction.
“Ours” blends diverse strengths and needs.
Outsourcing is not necessarily an “either or” decision. In some situations a “hybrid” approach may be effective both in the short term and in the long term. This approach involves outsourcing specific team responsibilities that will not be needed after the project is implemented. Internal employees are then assigned to roles on the team that will either continue after implementation or that will transition to other projects. Additional contract workers may be used to augment certain project tasks that need extra people only for the duration of the project. This approach provides the long-term benefit that knowledge learned during the project remains within the organization while addressing the short-term need for specific expertise and additional labor.
By this point in reading this column, readers may note that nothing has been mentioned about costs. Too often illusions about costs drive the outsourcing decision without regard for project needs. Next month’s column will include cost considerations that should be addressed only after the true project needs have been identified.
Susan Peterson, M.B.A., PMP, is a consultant who manages diverse programs and projects in both the private and public sectors for individual organizations and consortia. She also conducts enterprise assessments of project portfolio management practices. An overview of her program and project specialties is available at http://www.pmi-sd.org/Consultants. She teaches the Project Management Simulation capstone course in the University of California, San Diego, Project Management certificate program and is a member of the curriculum committee. She can be contacted at susanada@aol.com.
Copyright 2008, Susan Peterson, All Rights Reserved
Both private and public service sector organizations face an ongoing challenge to determine whether functions should be performed internally or externally. While much is written about how to make this decision from an organizational strategic perspective, there are few guidelines for the project manager to use during the initiation and planning phases. Too often outsourcing decisions are made on the basis of past practices rather than assessing the current project situation. This month’s column is the first in a multi-part series that addresses project-related considerations regarding whether to outsource, insource, or employ a hybrid approach. The first area of focus covers some considerations of the initial decision.
“How could the core competencies have changed?”
It might appear that an organization’s core competencies are “cast in concrete”. However, in this environment of continual mergers/acquisitions, spinoffs, virtual entities, and other structural impacts, project managers often find that the composition of their teams changes frequently. What an organization once considered a strength, such as specialty engineering design or innovative research capabilities, may drop in priority and thus no longer be supported through effective hiring practices or major budget funding. In determining if appropriate in-house personnel will be available, a project manager needs to perform a scan of other current and proposed projects. What activities are being outsourced for other projects? Does the outsourcing appear to be the result of personnel shortages due to short-term allocation issues or to an overall lack of skilled personnel? If the constraints are short-term, then outsourcing may be a viable alternative. However, if the constraints are long-standing, a decision needs to be made by the organization to address long-range outsourcing/insourcing strategies.
“Who can keep a secret?”
Access to proprietary, competitive, and/or classified information may be an essential part of conducting a project’s activities. There are a number of legal agreements that are signed by employees and outsourcer organizations alike that stipulate restrictions on the use of knowledge obtained in the course of performing work. Typically, severe penalties are also documented in these agreements. In reality, violation of confidentiality may be difficult and/or costly to prove. Once proprietary information is “on the streets”, punishing the guilty does not mitigate the damage. Therefore, the primary consideration in assessing the risk of divulging company secrets to an outsourcer organization is to research its actual ethical conduct (not website statements) and its personnel practices.
“All of the problems will vanish.”
In so many cases problems do not disappear just because an outsourcer organization is contracted. The root causes of problems need to be analyzed to determine if the issues are internally based. For example, an organization may be experiencing project management problems due to its lack of understanding of effective project practices. In this type of situation an “outside” project manager may be a strong asset not only in leading a specific project but also in providing a positive example of good project management that the organization can emulate in the future. However, if the project management problems arise from constantly shifting priorities among multiple projects that cascade to under funding and inadequate resource allocation, then an “outsider” will also get pulled into the whirlpool of project dysfunction.
“Ours” blends diverse strengths and needs.
Outsourcing is not necessarily an “either or” decision. In some situations a “hybrid” approach may be effective both in the short term and in the long term. This approach involves outsourcing specific team responsibilities that will not be needed after the project is implemented. Internal employees are then assigned to roles on the team that will either continue after implementation or that will transition to other projects. Additional contract workers may be used to augment certain project tasks that need extra people only for the duration of the project. This approach provides the long-term benefit that knowledge learned during the project remains within the organization while addressing the short-term need for specific expertise and additional labor.
By this point in reading this column, readers may note that nothing has been mentioned about costs. Too often illusions about costs drive the outsourcing decision without regard for project needs. Next month’s column will include cost considerations that should be addressed only after the true project needs have been identified.
Susan Peterson, M.B.A., PMP, is a consultant who manages diverse programs and projects in both the private and public sectors for individual organizations and consortia. She also conducts enterprise assessments of project portfolio management practices. An overview of her program and project specialties is available at http://www.pmi-sd.org/Consultants. She teaches the Project Management Simulation capstone course in the University of California, San Diego, Project Management certificate program and is a member of the curriculum committee. She can be contacted at susanada@aol.com.
Saturday, March 14, 2009
Controlling Project Costs and Risks
Project control is simplified by good planning from the start. Explore project selection, evaluation, initiation, and the planning that follows. Discuss project scope and its relationship to costs, as well as the cost estimating process. Learn how simple but effective tools, like MS Excel and MS Project, can help control project costs. You will also study risk management – including the nature of risk factors; methods of assessing and estimating impact of risk; and ways of avoiding or mitigating risks. Other topics include monitoring and reporting, sustaining commitment, resource reallocation, balancing time versus quality, performance measurement and change management.
Controlling Project Costs and Risks is now in its 7th year and offered fully online. The next online class begins on Monday, March 30th and runs through Sunday, June 7th. Enhance your project management career or complete the PM Certificate requirements for UCSD Extension. For more information or to enroll in the class, please visit Controlling Project Costs and Risks at UCSD Extension.
Controlling Project Costs and Risks is now in its 7th year and offered fully online. The next online class begins on Monday, March 30th and runs through Sunday, June 7th. Enhance your project management career or complete the PM Certificate requirements for UCSD Extension. For more information or to enroll in the class, please visit Controlling Project Costs and Risks at UCSD Extension.
Friday, October 31, 2008
Just Think of all the Money That We’ve Saved!
[This week I'm pleased to announce that Susan Peterson, a long time colleague and admired author will be joining The Project Notebook as a monthly contributor. Up to this point, The Project Notebook has focused on Project Management basics and topics related to project control. With Susan's contributions, as well as a new direction for my articles, The Project Notebook will expand its offering for mid- and senior-level Project Maangement topics. Please join me in welcoming Susan to the team!]
By: Susan Peterson, M.B.A., PMP
Copyright 2008, Susan Peterson, All Rights Reserved
Organizations continue to enforce relentless cost reduction efforts in the face of global competition. Given the emphasis on minimizing costs, virtually every project manager has had at least one project budget that is woefully inadequate. After so many years of hearing “less is more”, “lean and mean”, and other well-worn clichés, project managers have come to expect that initial budgets will seldom be realistic to achieve expectations. This month we explore some legal “creative financing” options to address the challenges of underfunded projects.
The “Right” People
Quantity and quality are not synonyms in the project management world. While selecting the right human resources for a project does not necessarily
mean getting the most “expensive” personnel, acquiring those people with appropriate skills and relevant expertise does take concerted effort. It means taking time to carefully review resumes, to conduct meaningful interviews, and to ponder the potential effectiveness of the mix of people on the project team. Of course, the “right” people are typically in great demand to participate on multiple teams. Therefore, a project manager may need to rearrange activities and/or dependencies so that the appropriate people can participate. Typically, a few “good” people can outperform a large number of lesser talented resources in a shorter time period. Rescheduling is well worth the effort when it results in fewer personnel costs as well as a shorter time to implementation.
“Time is Money”
In an attempt to keep costs at a minimum project managers are often given completion dates that are unrealistic. Organizations believe that an aggressive timeframe keeps everyone motivated and does not allow for the cost overruns often associated with lengthy projects. Competitive pressures may also drive a tight time schedule. After all, being “second to market” is not a goal for most companies. In the face of this focus on time project managers need to assess what really needs to be accomplished on a project. This assessment needs to be made before developing the project schedule so that any tasks that are not essential to complete the core requirements can be eliminated. Too often project managers attempt to complete “everything” that is requested. In this futile effort the project may actually not accomplish anything concrete. In such situations the project either has to obtain more money in order to complete anything or has to be severely downsized or even scrapped. Any of the preceding three situations means that money has been wasted. It is better to complete a basic deliverable than to deliver only promises.
“We Can Fix It Later”
Every project includes some interim deliverables prior to the final deliverable that do not turn out as planned. The tendency is to say, “We can fix it later”. However, “later” seldom comes, and so the inadequate interim deliverables do not meet expectations. If an interim deliverable is part of a larger downstream deliverable, there can be a cascading failure effect. (Remember the Challenger’s “O” rings?) Even if the interim deliverable stands alone, its implemented version may not be used or worse yet, may result in a “work around”. The potential for interim deliverable failure needs to be a part of proactive contingency planning with scheduled backup tasks and resources to address those deliverables that truly need fixing now not later.
In summary, there are creative methods to stretch budget dollars effectively. While the tendency is to focus directly on costs, the concepts discussed in the above column represent some other types of actions that can be effective when project budgets are anything but realistic.
Susan Peterson, M.B.A., PMP, is a consultant who manages diverse programs and projects in both the private and public sectors for individual organizations and consortia. She teaches the Project Management Simulation capstone course in the UCSD Project Management certificate program and is a member of the curriculum committee. She can be contacted at.
By: Susan Peterson, M.B.A., PMP
Copyright 2008, Susan Peterson, All Rights Reserved
Organizations continue to enforce relentless cost reduction efforts in the face of global competition. Given the emphasis on minimizing costs, virtually every project manager has had at least one project budget that is woefully inadequate. After so many years of hearing “less is more”, “lean and mean”, and other well-worn clichés, project managers have come to expect that initial budgets will seldom be realistic to achieve expectations. This month we explore some legal “creative financing” options to address the challenges of underfunded projects.
The “Right” People
Quantity and quality are not synonyms in the project management world. While selecting the right human resources for a project does not necessarily
mean getting the most “expensive” personnel, acquiring those people with appropriate skills and relevant expertise does take concerted effort. It means taking time to carefully review resumes, to conduct meaningful interviews, and to ponder the potential effectiveness of the mix of people on the project team. Of course, the “right” people are typically in great demand to participate on multiple teams. Therefore, a project manager may need to rearrange activities and/or dependencies so that the appropriate people can participate. Typically, a few “good” people can outperform a large number of lesser talented resources in a shorter time period. Rescheduling is well worth the effort when it results in fewer personnel costs as well as a shorter time to implementation.
“Time is Money”
In an attempt to keep costs at a minimum project managers are often given completion dates that are unrealistic. Organizations believe that an aggressive timeframe keeps everyone motivated and does not allow for the cost overruns often associated with lengthy projects. Competitive pressures may also drive a tight time schedule. After all, being “second to market” is not a goal for most companies. In the face of this focus on time project managers need to assess what really needs to be accomplished on a project. This assessment needs to be made before developing the project schedule so that any tasks that are not essential to complete the core requirements can be eliminated. Too often project managers attempt to complete “everything” that is requested. In this futile effort the project may actually not accomplish anything concrete. In such situations the project either has to obtain more money in order to complete anything or has to be severely downsized or even scrapped. Any of the preceding three situations means that money has been wasted. It is better to complete a basic deliverable than to deliver only promises.
“We Can Fix It Later”
Every project includes some interim deliverables prior to the final deliverable that do not turn out as planned. The tendency is to say, “We can fix it later”. However, “later” seldom comes, and so the inadequate interim deliverables do not meet expectations. If an interim deliverable is part of a larger downstream deliverable, there can be a cascading failure effect. (Remember the Challenger’s “O” rings?) Even if the interim deliverable stands alone, its implemented version may not be used or worse yet, may result in a “work around”. The potential for interim deliverable failure needs to be a part of proactive contingency planning with scheduled backup tasks and resources to address those deliverables that truly need fixing now not later.
In summary, there are creative methods to stretch budget dollars effectively. While the tendency is to focus directly on costs, the concepts discussed in the above column represent some other types of actions that can be effective when project budgets are anything but realistic.
Susan Peterson, M.B.A., PMP, is a consultant who manages diverse programs and projects in both the private and public sectors for individual organizations and consortia. She teaches the Project Management Simulation capstone course in the UCSD Project Management certificate program and is a member of the curriculum committee. She can be contacted at
Wednesday, September 17, 2008
Controlling Project Costs and Risks
My popular UCSD Extension course is now available online through the BlackBoard Academic Suite platform. It's a true anywhere, anytime learning course with a guided, asynchronous discussion.
Project management and control is simplified by good planning right from the start. The course is totally online and includes 27 hours of instruction. For more details and to enroll on line, visit Controlling Project Costs and Risks. Questions? Drop a comment on this post or email sdcapmp@aol.com.
Project management and control is simplified by good planning right from the start. The course is totally online and includes 27 hours of instruction. For more details and to enroll on line, visit Controlling Project Costs and Risks. Questions? Drop a comment on this post or email sdcapmp@aol.com.
Friday, July 13, 2007
Look Before the Project - Part II
Last week we looked at the BCR -- Benefit-Cost Ratio as a way of evaluating a project. This week I'd like to look at a related technique -- Total Cost of Ownership (TCO). The purpose of many projects is to introduce a new product or service. Often this new product or service has a later ongoing operation. For example, if you have installed Oracle Financials, there is a need to develop the customized software and populate the initial data, but once that is complete, there are expenses associated with rolling out the project, paying the maintenance fees, hiring the staff to keep the data current, etc. Similarly if you project is to construct a housing development, there are ongoing expenses after the homes are built to sell them and get the buyers moved in.
Total Cost of Ownership goes beyond BCR in that it looks at the ongoing expenses associated with a project and let's you know more about what it will really cost to keep things going once the project has ended. This is an important component of expenses to examine since the "care and feeding" of a product or project can be significant. Likewise, the benefits may extend out as well. About a year ago I did a TCO analysis for installing and operating MS SharePoint. You can click here to download my analysis and follow along.
This analysis starts off quite straightforward. A minimal server is needed (for a small site), some software, some consulting, and some fractional personnel to maintain the system. These all represent the hard dollar costs. The hard dollar savings, however, are difficult to identify. There may be some reduced costs on the IT infrastructure, but predicting what they are is difficult, and chances are the savings are minimal. This would especially be true in the first year. Most of the savings comes from productivity increases. I identified a list in the lower right hand corner. The key, of course, is in organization and collaboration. The savings attributable to these is simply an estimate. I also envisioned a premium offering for customers based on a SharePoint implementation, but like the other hard dollar savings, I declined to include a committed estimate.
Note that I ran this analysis out for five years. This gave me some space to show ongoing operational requirements. Things that might have been included here would be increased server capacity if the number of users were to grow or add on software costs if additional packages would be required. The general observation you should make, however, is that the savings outweigh the costs, making this a reasonable investment. The lack of hard dollar savings might see it prioritized after other projects, but unless something better comes along, its likely to be implemented at some point.
Once again, if you have any questions about the analysis, please leave a comment or drop me an email. Next week, in the third and final part of Look Before the Project, I'll take a look at a Statement of Work and how it can be used to set and manage project expectations at the start.
Total Cost of Ownership goes beyond BCR in that it looks at the ongoing expenses associated with a project and let's you know more about what it will really cost to keep things going once the project has ended. This is an important component of expenses to examine since the "care and feeding" of a product or project can be significant. Likewise, the benefits may extend out as well. About a year ago I did a TCO analysis for installing and operating MS SharePoint. You can click here to download my analysis and follow along.
This analysis starts off quite straightforward. A minimal server is needed (for a small site), some software, some consulting, and some fractional personnel to maintain the system. These all represent the hard dollar costs. The hard dollar savings, however, are difficult to identify. There may be some reduced costs on the IT infrastructure, but predicting what they are is difficult, and chances are the savings are minimal. This would especially be true in the first year. Most of the savings comes from productivity increases. I identified a list in the lower right hand corner. The key, of course, is in organization and collaboration. The savings attributable to these is simply an estimate. I also envisioned a premium offering for customers based on a SharePoint implementation, but like the other hard dollar savings, I declined to include a committed estimate.
Note that I ran this analysis out for five years. This gave me some space to show ongoing operational requirements. Things that might have been included here would be increased server capacity if the number of users were to grow or add on software costs if additional packages would be required. The general observation you should make, however, is that the savings outweigh the costs, making this a reasonable investment. The lack of hard dollar savings might see it prioritized after other projects, but unless something better comes along, its likely to be implemented at some point.
Once again, if you have any questions about the analysis, please leave a comment or drop me an email. Next week, in the third and final part of Look Before the Project, I'll take a look at a Statement of Work and how it can be used to set and manage project expectations at the start.
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