Cost Overrun

1. Cost Overrun • Cost Overruns are the additional percentage or amount by which actual costs exceed estimates

2. COST OVERRUNS IN PROJECT MANAGEMENT 1.Pay a lot of attention to project planning Think of all the major scenarios and flesh out the complete scope of the project before a single line is coded. Once the scope is defined, get a sign-off from all the stakeholders. 2. Check a vendor’s capabilities before hiring • Find out their team’s capabilities and check if that matches your project requirements. • Improper skill-sets match can cause a significant drag in your projects. • Find out if their cost estimates are realistic. • Check how good are they at sticking to deadlines in their previous projects.

3. COST OVERRUNS IN PROJECT MANAGEMENT 3. Attempt to stay within the scope that was originally planned • Fighting scope creep is the biggest challenge for a project manager. • The developers want to add their favorite features, the clients start asking for things that were not originally planned and the testing team wants a change in some of the features. Sounds familiar • It is essential to exert control and convince all the stakeholders why the increased scope can harm the project.

4. 4. Use good scheduling tools & charts • Proper scheduling is a must in complex projects. Improper scheduling can cause wrong cost estimations and increase the idle times of some of the team members. • Read our earlier article on charting tools you could use for project management.

5. 5. Make sure the stakeholders in the project are on the same page • Effective communication can help reduce the delays by avoiding working on wrong things and making the scheduling work better. • As a project manager, it is your responsibility to keep the communication among the team members work seamlessly. • Read our earlier article on best practices in stakeholder communication.

6. 6.Constantly track and measure the progress •  You can’t improve what you don’t measure. • A project manager has to constantly track the progress of the various tasks and have various metrics to measure in the projects. • This will provide early signals of project delays, while also giving you opportunities to fix the issues before they boil over.

7. What Went Wrong? • Many people have a poor view of plans based on their experiences. Top managers often require a project management plan, but then no one follows up on whether the plan was followed. • For example, one project manager said he would meet with each project team leader within two months to review their project plans. The project manager created a detailed schedule for these reviews. He cancelled the first meeting due to another business commitment. He rescheduled the next meeting for unexplained personal reasons. • Two months later, the project manager had still not met with over half of the project team leaders. Why should project members feel obligated to follow their own plans when the project manager obviously did not follow his? • Could this cause cost overruns?

8. Integratedchange control process

9. Scope Verification cause for Cost Overruns

10. Cost Management Principles • Profits • Life cycle costing • Cash flow analysis • Tangible and intangible cost/benefits • Direct and indirect costs • Sunk costs • Learning curve theory • Reserves • Earned value analysis

11. PROJECT PLANNING : ESTIMATING • Guidelines • Where possible, use multiple techniques for verification • Analogous estimating – top down estimating (using actual costs of similar projects) • Parametric modeling – using project characteristics in a mathematical model projecting costs ($10/sqft) • Bottom – up • Computerized tools • Procurement estimating – Vendor bids • Use a systematic approach • Use multiple estimators • Document assumptions and techniques used

12. PROJECT ESTIMATING GUIDELINE Guidelines for estimation effort • Opportunity evaluation and project initiation represent 5-10% of project effort • Analysis and design represent 50 - 60 % of the total effort • Construction represents 30 - 40% of the total effort • Implementation and evaluation represent 5 - 15% of the total effort These numbers are guidelines only.

13. Problems With Cost Estimates • Despite the use of sophisticated tools and techniques many IT project cost estimates are still very inaccurate. • This inaccuracy is even more prevalent in IT projects involving new technology and software as there are no previous historical examples to compare with. • There are typically four reasons attributed to inaccurate cost estimates.

14. Problems With Cost Estimates • Developing an estimate for a large software project is a complex task requiring a significant amount of effort. • This is because many estimates must be prepared quickly, before system requirements are clearly defined and before proper analysis can be performed. • A process to be followed can be as follows: • Before the project begins a rough order of magnitude (ROM) budget estimate should be prepared. • This estimate is followed by a more accurate (typically higher cost) budget estimate.

15. Problem With Cost Estimates • This in turn is followed by the definitive estimate which, again, typically shows that it will cost more to do the project than previously estimated. • Something to consider… • As with schedule management the project manager must insist and ensure that proper cost estimates and analysis be performed before the project begins and that the definitive estimate needs to be revised and updated as necessary throughout the project

16. Problems With Cost Estimates • The people who develop software and hardware cost estimates often do not have enough experience with cost estimation, especially for large projects. • Not enough accurate project data available on which to base estimates because organizations do not properly archive and manage historical information. • To overcome these issues IT people should receive training and mentoring on cost estimating. • A proper archival and management system needs to be developed and used for important historical project information.

17. Problems With Cost Estimates • Human beings have a bias towards underestimation. • One of the reasons projects are underestimated is that senior IT employees often make estimates based on their own abilities and forget about junior team members working on the project. • Another issue is that estimators typically forget about are integration and testing costs. This occurs often in areas where the team is only producing a small component or module within the whole project. • To overcome these problems project managers and senior managers must review the cost estimates given to them by team members and ask questions to make sure the estimates are not biased. (I.e.. Get stakeholders or team members involved).

18. Problems With Cost Estimates • Management might ask for an estimate, but are really requesting a number to help them create a bid to win a major contract or get internal funding.

19. Surveyor Pro Project Cost Baseline

20. Cost Budgeting Project budget estimates for business replacement and explanations

21. Cost Control and measurement to help avoid Cost Overruns • There are many different accounting approaches to measuring cost performance, however, project managers most often use the earned value analysis (EV) approach. • EV is a project performance measurement technique that integrates scope, time and cost data. • Given a cost performance baseline the project manager and their team can determine how well the project is meeting scope, time and cost goals by entering in actual informationand comparing it to the baseline.

22. Cost Control – Actual Information • The actual information includes whether or not a WBS item or work package or activity was completed or approximately how much of the work was completed

23. Testing can reduce cost Overruns In this diagram the oval-shaped phases represent areas where you should do testing to help ensure quality on software development projects. By quality auditing and testing the customer should meet his/her acceptance criteria

24. Testing (An Example) This diagram also shows several phases which include work related testing, including: Unit Tests: These are done to test each individual component (often a program or module) to ensure it is as defect free as possible. Integration Tests: These occur between unit and system testing to test functionally grouped components.

25. Testing (An Example) This diagram also shows several phases which include work related testing, including: System Tests: These test the entire system as one complete entity. User Acceptance Tests: This is an independent test performed by the end user prior to accepting the delivered system.

26. Risk management • Involves identifying and measuring the risks associated with a project • The major components of risk management • Risk management planning • Risk identification • Qualitative risk analysis - Probability and Impact • Quantitative risk analysis – Assessing risks on objectives • Risk response planning • Risk monitoring and control

27. Risk Management • Questions that might be asked when addressing the Risk Management Plan. • Why is it important to take or not to take this risk wrt project objectives? • What is the specific risk? • How will the risk be mitigated? • Who is responsible for the Risk Management Plan • When will the milestones associated with the mitigation approach occur? • What are resources that are required to mitigate the risk?

28. Risk Identification Risks can also be identified based on the project knowledge areas.

29. Estimates and cost overruns • A large number of studies show the fact that cost overrun affects projects in all industries, in all countries either in the public or in the private sector • Cost Overrun = Actual Cost – Estimated Cost • The problem is that several cost estimates are usually produced during the project life cycle, but there is no standard rule to determine which one must be considered for computing the cost overrun

30. Suggestions for labour cost overruns • sharing the estimated time or labour costs for each phase or deliverable (WBS) with a seller of the project before work begins • Empower team leads or team to ensure responsibility or ownership of their deliverable by tracking, monitoring and being aware of cost savings on using or acquiring resources • Asking experienced colleagues for advice on your estimates

31. Suggestions for labour cost overruns • By having the field keep daily time cards separating the job into phases or deliverables so that overruns can be tracked and analyzed to the finest detail. These phases should be standardized in a company so that you estimate by phase or deliverable and are able to track job costs. • Instituting an incentive program which shares job cost savings

32. Subcontractor overruns • Ensure a bidder for a RFP understands the context of the business of the buyer (customer) before they bid on the contract to ensure that they are aware of the what they are getting themselves into which may provide a better estimate to the buyer thus removing the escalation of cost overruns • As a buyer try and obtain a “Fixed Price” contract as much as possible. This will ensure that the risks are taken on the bearer for that deliverable

33. Subcontractor overruns (Cont.) • By referencing your plans in your “sellers” / subcontractors' contracts. Ask the seller to let you know in writing (as part of their contract), if they are not including any labour or materials shown on the plans that would normally be in their area of specialty • Insisting that subcontractors let you know if there is a change to the scope of their work and what that extra cost will add to their contract before they actually perform the work.

34. Material Overruns • Try and order ahead for delivery by suppliers. This will ensure that your product or service will be in stock. Discourage pickup of material by your personnel. It bleeds profit and uses up labor hours. • By allotting some time on a regular basis cross check supplier prices. Choose some frequently ordered materials and get prices to see where you should be buying from

35. Material overruns • get multiple prices on large material orders • ask for discounts on materials you buy frequently and in large quantities. Often just asking will reduce your costs. – “Learning Curve theory”