Lecture05 Abridged

8/10/2019 Lecture05 Abridged

1/75

Yarmouk UniversityHijjawi Faculty For Engineering Tech

1

Project Management and

Quality Control

Dr. Mwaffaq [email protected]

Fall 2012

Cost Analysis and RiskManagement

Lecture05 Mwaffaq Otoom


2/75

2

Overview

Cost Budgeting

Risk Analysis

2Lecture05 Mwaffaq Otoom


3/75

3

Cost Overruns on Projects

0

-100

100

200

300

19101920

19301940

19501960

19701980

19902000

Costoverrun%

Year of decision to build



4/75

4

Sources of Cost Escalation and

Overruns Uncertainty and Lack of Accurate Information

Changes in Requirements or Design

Economic and Social Factors

Inefficiency, Poor Communication, and Lack of Control

Ego Involvement of the Estimator

Project Contract Bias and Ambition



5/75

5

Cost Estimating and the Systems

Development Life Cycle

Costestimate

Contingencyfund

Cumulativeco

st

Time

Regions of time-cost uncertainty

At projectinitiation

At project

definitionAt projectexecution



6/75

6

System Life Cycle Costs

Life cycle costs(LCC)

Allcosts of a system throughout its fullcradle-to-grave life cycle, i.e.:



7/75

7

System Life Cycle Costs

Purpose of life cycle cost analysis To anticipate the realities of operating,

maintaining, and (ultimately) disposing ofthe

end-item system To establish target costsfor operating,

maintaining, and disposing of the end-item

system. To designthe system so it will meet those

target costs.



8/75

8

Estimating Process

Estimate versus Target or Goal Estimate: a realistic assessment

Target or goal: a desired outcome, commitment, orpromise.



9/75

9

Estimating Process

Accuracy versus Precision



10/75

10

Estimating Process

Estimating Methods1. Expert opinion

2. Analogy + compensation for differences

3. Parametric: Formula or Cost Function, e.g.,



11/75

11

Estimating Methods (cont.)

4. Cost engineering



12/75


Cost Engineering Example


13/75


Cost Engineering Example

(Cont.)


14/75

14

Estimation Process

Functional Management(FM)

Work Team Leads

Project Management(PM)

WBSinformation

2.

3.

1.

Procedure for larger projects



15/75

15

Estimation Process

Functional Management

Work team

Project Management

Labor and costestimates

4., 5.

6.



16/75

16

Estimation Process


Work team

Project Management 7., 8.

WBSinformation



17/75

17

Estimating Process (contd)

7. PM: Adds in contingency amounts.

Two possible contingencies

1. Base estimate = (WP estimates + WP contingency)

(to handle known-unknowns)

2. Final estimate = Base estimate + overheads + projectcontingency

(to handle unknown unknowns; PM controls this)8. PM: Compares bottom-up estimates to top-down targets or goals.

Attempt to reconcile differences.


Work team

Project Management

WBS

information

7., 8..

Procedure for larger projects, steps 7-8



18/75

18

Elements of Typical BudgetI. Direct Costs

Direct Labor (DL)

Charges for labor working directly on project 50,000.00

DirectOverhead on Labor (% of DL) E.g., 40%Labor support: benefits, etc.

20,000.00

Direct Nonlaborand Materials (M)Subcontractors, consultants, travel, telephone, materials,

purchased parts, etc.

10,000.00

Direct Overhead on Nonlabor and Materials (% of M)

Shipping, insurance, security, etc. E.g., 33.33%3,333.33

Direct Total

83,333.33

II. General & Administrative (% of Direct Total) E.g., 20%(Indirect overhead)

Corporate overhead: proposals, publicity, president, etc. 16,667.00

Budget Amount 100,000.00



19/75

19

Project budget subdivided into control

accounts

ROSEBUD

$ 356,755

Projectmanagement

Basicdesign

Hardware Software FinalTests

$ 12,550$31,362 $179,868 $122,228

$10,857

Assembly

InstallationMaterials Procedures

Specifications SystemTest

UserTest

$138,571

$20,945 $21,272$4,235

$6,622$20,352$100,846

J

M

VL W

Y Q X

Project Budget

CostAccounts



20/75

20

Performance Analysis

BCWS - Budgeted Cost of the Work Scheduled

(Planned Value or PV)

ACWP - Actual Cost of the Work Performed

(Actual Cost or AC)

BCWP - Budgeted Cost of the Work Performed

(Earned Value or EV)

BCWP = BCWS for task completed BCWP subjective estimate of costs for tasks started but not

yet completed


PV = Hourly Rate * TotalHours Planned

AC= Hourly Rate * TotalHours Spent

EV = Baseline Cost * (% ofComplete Actual)

(% Complete Actual) = AC /EAC


21/75


21

Over budget ?

Under budget ?

How much of

project was done?


22/75


22


23/75


23


24/75


24


25/75

25

Example

Parmete Co. is to remove 1,000 parking metersand replacing them with new ones for whichthey will receive $200 per meter. Estimate they

can install 25 meters / day.

For day 18,

BCWS = 18 x 25 x 200 = $90,000



26/75

26

Example (cont.)

If by day 18, only 400 meters are finished, then

BCWP = 400 x 200 = $80,000

Schedule Variance = BCWP - BCWS

= -$10,000

Note: -$10,000 does not represent a cost savings, butrather that the project is 2 days behind schedule



27/75

27

Example (cont.)

Scheduled Project Costs

0

50,000

100,000

150,000

200,000

0 10 20 30 40

Time

Costs

BCWS

BCWP



28/75

29

Variances

Accounting Variance

AV = BCWS - ACWP

Schedule Variance

SV = BCWP - BCWS

Time Variance

TV = SD - BCSP SD :- Status DateBCSP :- date when BCWS = BCWP

Cost Variance

CV = BCWP - ACWP



29/75

31

Logon Project (Week 20)

SV = BCWP - BCWS = -$80,000

Logon Project Status

0

100

200

300

400

500

600

0 5 10 15 20 25

Week

Cost($1,0

00

)

BCWSBCWP

ACWP

AV

SV



30/75

34

Performance Indices

SPI = Schedule Performance Index

SPI = BCWP/BCWS

SPI > 1 work ahead of schedule

CPI = Cost Performance Index

CPI = BCWP/ACWP

CPI > 1 project under-budget



31/75

35

Logon Project (Week 20)

SPI = BCWP/BCWS

= 432/512 = .84

CPI = BCWP/ACWP

= 432/560 = .77

Project is behind scheduleWith budget overrun



32/75

Example

Assume a project that has exactly one task

The task was baselined at 8 hours, but 11 hourshave been spent and the estimate to complete is1 additional hour

The task was to have been completed already

Assume an Hourly Rate of $100 per hour

36


33/75

Example

Hourly Rate = $100PV or BCWS = Hourly Rate * Total Hours Planned or Scheduled

PV = $800 or ($100 * 8 hours)AC or ACWP = Hourly Rate * Total Hours Spent

AC = $1100 or ($100 * 11 hours)

EV or BCWP = Baselined Cost * % Complete Actual

EV = $734 or (baseline of $800 * 91.7% complete)(NOTE % Complete Actual (below) to get the 91.7% )

(% Actual Complete = 11 hours spent /12 hours estimated to finish)

37


34/75

Example

SV = Earned Value (EV) - Planned Value (PV)

SV = -$66 ($734 EV - $800 PV)

SPI = Earned Value (EV) /Planned Value (PV)

SPI = 0.91 ($734 EV / $800 PV) [ SPI


35/75

39

Forecast Cost At Completion

FCAC = Forecast Cost At Completion

= % by which on schedule x BCAC

= (ACWP/BCWP) x BCAC

= BCAC/CPI

where

BCAC = Budgeted Cost At Completion



36/75

40

Logon Example

For Logon, the Budgeted Cost at Completion is given by

BCAC = $990,000

At week 20, BCWP = 432 whereas ACWP = 560

we are running 560/432 = 1.30 times over budget

FCAC = 1.3 x 990,000 = $1,283,333



37/75

41

Forecast Cost To Complete

FCAC = FCTC + ACWP

FCTC = Forecast Cost To Completion

= Forecast Cost At Completion - ACWP= FCAC - ACWP

= BCAC/CPI - ACWP

= (BCAC - BCWP)/CPI



38/75

42

Logon Example

FCTC = (BCAC - BCWP)/CPI

= (990,000 - 432,000)/.77

= $724,675

Summary: In week 20 we have completed 432,000 of

budgeted work at a cost of 560,000. Given the currenttrend, we expect to complete the project at cost remainingof $724,675 for a final project cost of $1,283,333.



39/75

43

Logon Example

Logon Status & Forecast

0

200

400

600

800

1000

1200

1400

0 10 20 30 40 50

Week

Cost($1,0

00's)

BCWS

FBCWP

FACWP

SD

BCAC

FCAC



40/75

45

Logon Example

Logon Status & Forecast

0

200

400

600

800

1000

1200

1400

0 10 20 30 40 50

Week

Cost($1,0

00's)

BCWS

FBCWP

FACWP

SD

BCAC

FCAC

ScheduledCompletion

RevisedCompletion



41/75

46

Risk Concepts

The likelihoodthat some problematical event will

occur

The impactof the event if it does occur

Risk =f (likelihood, impact)

Project is considered risky if at least one factor islarge



42/75

47

Risk Identification

Risk tolerance is a function of experience

Risk of Failure

Risk of Opportunity



43/75

48

Risk Identification (Cont.)

Ways to identify project risksChronology

Type of work

High RisksApproachis New/Unusual

Technologyis New/Unusual

Staffneeds training in new Tasks/SkillsProcessusing New Equipment, Systems or

Procedures



44/75

49

Sources of Risk

Any factor of uncertain Probability which canaffect the Outcome is of a Project is a:

Risk Source

Risk Hazard



45/75

50

Sources of Risk (Cont.)

Internal Risks

Market Risk

Technical Risks



46/75

51

Sources of Risk (Cont.)

External Risks



47/75

52

Identification techniques

Analogy

Checklist

WBS Analysis



48/75


49/75

54

Cause and Effect Diagram



50/75

55

Risk Assessment

Risk Likelihood

Qualitative Rating

Composite Likelihood Factor (CLF)



51/75

56

Sources of Failure and Likelihood



52/75

57

Influence Diagram



53/75

58

Risk Assessment (Cont.)

Risk ImpactWhat happens if a Risk Hazard Materialized

Specified in Terms of

Time Cost

Performance Measure

Qualitative

High Medium

Low



54/75

59


Risk Impact (Cont.)

Numerical measure Between 0 and 1.0

0 NOT Serious

1.0 Catastrophic

Composite Impact Factor (CIF) is the Impact fromMultiple Risk Sources, Simple Weighted Average

CIF = (W1)TI + (W2)CI + (W3)SI


I t V l f T h i l C t


55/75

60

Impact Values for Technical, Cost,

and Time



56/75

61


Risk Consequence

Function of Likelihood and Impact

Risk Consequence Rating (RCR)

RCR = CLF + CIFCLF (CIF)

Risk Consequence = (Impact) * (Likelihood)


Ri k R Pl i H t


57/75

62

Risk Response PlanningHow to

Deal with the Problem

Transfer the Risk

Avoid Risk

Reduce Risk

Contingency Planning

Accept Risk (Do Nothing)



58/75


59/75

64

Transfer the Risk

Transfer Partly or Fully from Customer toContractor or Vice Versa

Use Contract Incentives

Fixed Prices

FP Incentive Fee

Cost Plus Incentive Fee

Cost Plus Fixed Fee (CPFF)



60/75

65

Avoid Risk

Alter the Initial Project Concept

Change Contractors

Incorporate Redundancies

Change Safety Procedures

Better to Reduce Risk to Acceptable Level ThanEliminate Payoff Opportunity



61/75

66

Reduce Risk Technical Performance

Best Technical Team

Perform Analysis of Key Technical ParametersModels and Simulations

Use CASE Tools Parallel Development on High-Risk Tasks

Incentive the Technical Team

Consultant for Critical Reviews and Assessments T&E




62/75

67


(Cont.)

Reduce System Complexity to a Minimum

Recognize Tasks

End Item Design

Decouple Activities

Use Design Margins



63/75

68

Reduce RisksMeeting Schedules

Create Master Project Schedule

Schedule Risky TasksEarlyto Allow Time toRecover

Focus on Critical and Near-Critical Activities

Best People on Time-Critical Tasks


Reduce Risks Meeting Schedules


64/75

69

Reduce RisksMeeting Schedules

(Cont.)

Incentive for OT

Do High Risk Activities in the Project Networkin Parallel

Organize Project Early with Adequate Staff



65/75

70

Reduce RiskMeeting Project Cost

Identify and Monitor Cost Drivers

Perform Design Alternative Reviews andAssessments

Validate System Design and Performance

Maximum Use of Proven Technology andCOTS



66/75

71

Reduce RiskMeeting Project Cost

Systems Engineering

Build Test Models to Verify Design

Focus on Meeting the Minimum Requirementsand Nothing More



67/75

72

Contingency Planning

The Get-Well-Plan

Form



68/75

73

Accept Risk (Do Nothing)

Not All Risks are Severe or Fatal

Cost Benefit Analysis

Not for Risks which are Potentially Severe


Risk Management is Project


69/75

74

Risk Management is Project

Management

Another Tool for PM Supplements

Requirements Definition

Task DefinitionScheduling

Budgeting

Configuration ManagementChange Control

Performance Tracking and Control



70/75


71/75


72/75

77

Expect the Unexpected

Do All You Can

Cannot Cover every Contingency

Bonapartes Principle came along before

Murphys Laws, i.e., Something Surely Will Go

Wrong Plan for It to Occur



73/75

78

Caveats (Beware)

Input to RA is Subjective

Not What Will but Might

Analysis and Planning gives sense of Power

Managing not Eliminating

Stifles Imagination

Brute Force Approach to Technology

Micromanagement isNeverAppropriate



74/75

79

Risk Analysis Methods

Expected Value

Decision Trees

Uncertainty and Payoff Tables

Simulations



75/75

Questions

Lecture05 Abridged

Documents

Transcript of Lecture05 Abridged