1.RMJJ ProjectManagementNotes June2010 59

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Author: Remi MalahieudeBased on: Release PR-A2-engb 2/2008 (1006) John Rhoton 's PM Notes from 2010 Date: June 09, 2010

Dear fellow students,

This notes are based on John Rhotons notes from 2010. They are pretty much the same, in a slightly differentlayout and with some additions or some removals, based on my own taste.

My final notes were much more complete that this document. The reason being is that I printed the whole file onone sided pages, bonded the whole, and completed them with either hand-written notes from Past Papers, or theblack book such as diagrams and figures (not hand-written, just printed them on big etiquette and pasted them inmy notes binder.

Whatever you decide to do, my suggestion is to customize any notes to your own taste so that they becomeYOUR notes.

I wish you all the best in your study.

Remi Malahieude


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Module 1 Introduction1. What is a Project?2. What is Project Management?3. Characteristics of Project Management4. Potential Benefits and Challenges of Project Management5. The History of Project Management6. Project Management Today

Module 2 Individual and Team Issues1. Introduction

2. The Project Manager3. The Project Team4. Project Team Staffing Profile and Operation5. Project Team Evolution6. Project Team Motivation7. Project Team Communications8. Project Team Stress9. Conflict Identification and Resolution

Module 3 Project Risk Management1. Introduction2. Background to Risk3. Risk Handling4. Types of Risk5. Risk Conditions and Decision making

6. The Concept of Risk Management7. Risk, Contracts and Procurement

Module 4 Project Management Organisational Structures and Standards1. Introduction2. Organisational Theory and Structures3. Examples of Organisational Structures4. Project Management Standards

Module 5 Project Time Planning and Control1. The Concept of Project Time Planning and Control2. The Process of Project Time Planning3. Project Replanning4. Trade-off Analysis5. Resource Scheduling

6. Project Planning Software

Module 6 Project Cost Planning and Control1. Introduction2. Project Cost Planning and Control Systems3. The Project Cost Control System

Module 7 Project Quality Management1. Introduction2. Quality Management as a Concept3. The Quality Gurus4. The Quality Management Six Pack5. Total Quality Management6. Configuration Management7. Concurrent Engineering and Time-Based Competition

Module 8 Case Study1. Aims and Objectives of the Case Study2. Introduction (Module 1)3. Individual and Team Issues (Module 2)4. Risk Management (Module 3)5. Case Study First Supplement6. Organisational Structures (Module 4)7. Case Study Second Supplement8. Time Planning and Control (Module 5)9. Cost Planning and Control (Module 6)

10. Quality Management (Module 7)


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Module 1 - Introduction

1 What Is a Project?

Projectone-off process with single definable end-result or product.

Three key variables: Time, Cost, Quality.

Production system takes resource inputs, passes through transformation, changes into desired outputs.

Projects and Other Production Systems

Mass productionlargenumber of repetitive items, maximum efficiency, capital intensive, mechanistic, little managementBatch productionnon-continuous demand, modifications at intervals, less mechanistic, more management, functional groupingsProject productionone-off, non-repetitive, no learning curve, complex management planning and control

A programme is a set of identifiable projects aimed at achieving some goal or objective. Some no specified enddate until decision taken to stop or replace them.

Characteristics of Projects

Single definable purpose, product or result Defined constraints, targets

Skills & talents from multiple professions/ organisations

Unique, unfamiliar

Temporary

Interlinked process; directed at achieving goal

Secondary importance to organisation

Complex

Project management

Plans, coordinates, controls complex & diverse activities in projects

Is in essence the General management of an organisation Requires skills

- Financial awareness- Marketing appreciation- Technical knowledge- Planning skills- Strategic awareness- Quality management

Project types

External (revenue source)

Internal (improve operations)&

Hardware (tangible physical result)

Software (end result is system or process)


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Definition of Project Management

Achieving time, cost, quality targets

Within context of overall strategic and tactical clientrequirements

By using project resources

Planning and controlling from inception to completion (life cycle)

Decide on success criteria (time, cost, quality)

Running the project as single entity

Driving the team to success

The Basic Project Management Structures

Internal (non-executive) Project Management

Project members also part of functional structure

Single designated responsible (the project manager)

Acts independently (outside functional structure)

Equal authority to functional managers

Single leader coordinates resources to achieve objectives

Multidisciplinary group to integrate

Negotiates with functional managers shared resources Two lines of authority for members

Decision-making, accountability, rewards shared

Temporary structure

Can originate from any organisational level (pdt dev from Mkg, IT systems upgrade) Require assistance from support structures (FI, HR, IT)

External Project Management

Agent on behalf of client

More flexible than internal system

Instructions/communications cross organisational boundary

Lower team allegiance

PM has direct control Functional structure not relevant

Requirement for risk transfer and contractual control

No built-in knowledge of firm

Characteristics of Project Management

Differences to traditional management

Uses both international standards and

industry-specific benchmarks

Advise on the full life-cycle

Multiple Objectives

Ensure project-success criteria are met within changing constraints of time-cost-quality continuum.

International Co-operation and Standards

IPMA International Project Management Association

National agencies allow for cultural and economic differences:- APM Association for Project Management (UK)- PMI Project Management Institute (US)


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Multi-Industry/Multidisciplinary Practitioners

Largest membership groups in APM:- Information Technology (IT)- Process engineering- Construction

Generic BenchmarksBS6079current UK standard for PM practice

ISO10006European code of practicePRINCE2controlled environment industries and UK governmentCny-specific responses: British Telecom and Construction Industry Council codes of practice

Specific Provisions

Professional project managerspecialist manager, trained in PM with relevant industry experience in PM

Project Life Cycle

Inceptionassemble basic proposalFeasibilityvalidate the proposal (financial, time-dependent, technological, political perspectives) PrototypeFull design development

Tendering and contractual arrangementsManufacturingCommissioning (switching system on)Operation (may be longest part but not always, e.g. moon rockets)Decommissioning (switching system off)Removal and recycling (legislative and environmental concerns)

Potential Benefits and Challenges of PM

Potential Benefits of PM

Focus on objectivesEfficient use of resourcesAccountability

Competition with functional unitsReduced disruptionVisibilityLife-cycle costsRelease speedCommunicationsControl multiple objectivesSecurity of project informationTeam spirit/cohesionInnovationSkill development

Potential Challenges to PM

Impact on functional performanceDetrimental effect to compete for resourcesConflicting ordersFunctional manager deprives resourcesAdditional level of authorityContingency on flexible approach/attitudeReadjustment to functional working after project


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The History of Project Management

Pyramids, Great Wall, Roman roads/aqueductsIndustrial Revolution: traditional management practicesworked well for batch/mass production1900s Gantt chart1940s Los Alamos/ Manhattan Projectfirst complex, high-tech project1950 Network diagrams for industrial processes1957 DuPontCPM Critical Path Method

1958 US NavyPERT Program Evaluation and Review TechniqueLate 1960s Project Management Institute (PMI) & Association for Project Management (APM)

1988 APM Body of Knowledge (BoK)1996 BS60791997 ISO10006


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Module 2 - Individual and Team Issues

No urgent need for developing tools further. People make projects succeed or fail.

The term project manager means different things to different peopleWide variation in roles and duties

Selecting the Project Manager Charged with organising and managing a project team to meet objectives

Sole responsibility for outcome

Responsible to project sponsor

Temporary role without traditional hierarchical power

Authority to make decisions about priorities

No authority to issue direct orders

Sources of influence:Competency

ProfessionalismProject Reputation FunctionalManager Skill Managers

Interpersonal skills

Alliances

May manage across functional, departmental, organisational and geographic boundaries

Central position High volume of communications

Intellect to devise strategy and diligence to ensure execution

Primary requirements

- Planning

- Organising team

- Interfacing

- Negotiating

- Managing resources

- Monitoring/controlling status

- Identifying issues

- Finding solutions

- Resolving conflicts

Interface managementwith a balance between managerial and technical functionsTo control project creep or creeping scope i.e. any changes. Only changes agreed are authorized orcontracted for.

Soft management skills

- Flexibility

- Parallel focus

- Initiative

- Persuasiveness

- Communications

- Organization

- Generalist rather than specialist

- Planning & Implementing

- Problem identification

- Time management

- Negotiation / influence / diplomacy

Hard skills

- Team set-up and management

- Complex time/ cost plans

- Contracts, procurement, purchasing,personnel

- Training / Development

- Technology

- Business strategytranslate into objectives

Selection

- Internal (best) good functional manager with PM skillsshould not retain functional role!- External consultant is alternativeLearning curveDisparity of interest (no allegiance)


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Some Essential Project Manager Requirements

Functions1. Project planning2. Authorizing3. Team organizing4. Controlling

5. Directing6. Team building7. Leadership8. Life-cycle leadership

Constraints/ success-failure criteria:TimeCostQualityRisk levelEnvironmental impactHealth and safety

1. Project Planning

Time, cost, quality

Define authority linkages with Task Responsibility Matrix (TRM)

- Milestones

- Important activities

- General & Specific responsibilities

- responsibilities

- Dates

2. Authorising

Accumulate sufficient authority to get the job done

Delegate to others

Authority is the ability to control and direct (Power is given)

Approval Preparation Checking Making and input Authorising


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3. Team organising

Classical/ traditional theory

- People are merely components of a production process (e.g. automotive)

- Emphasis on the produced goods or services

Empirical theory

- Essential similarities between systems and processes

- Observation and interpretation

- Correct process will materialise from sample and data set

- e.g. trains

Behavioural theory

- Human relations school Interpersonal relationship between people and work/ organization (Intrinsic links) Profit sharing Expectancy theory

- Social system school Social characteristics of organisations and individuals Evolution as people leave/join External influences e.g. smoking ban, health and safety regulations

Decision theory

- Mathematical: management science - operations research

Systems management theory

- Organisation characterised by throughput of resources

- Inputprocessingoutput

Functional managers favour Classical, Empirical, Behavioural theory.Project managers favour Decision and Systems management theory.

Organising throughout the life-cycle but greatest organisational development at beginning.Clarify at first meeting:

- Individual responsibilities

- Organisational Breakdown Structure OBS

- Task Responsibility Matrix TRM

- Communication links

- Authority links

- Configuration Management System CMS

- Project programme

4. Controlling1. Targeting

- Aligned with success and failure criteria

- Cost, output, quality2. Measuring

- Formal (objective eg EVA), informal (subjective)

3. Evaluating

- Identification/isolation of problem

- Alternative options

- Corrective action

- Variance analysis in conjunction with forecasting4. Correcting

- Identify source of problem

- Correct it

- Monitor actual and planned correction performance (2nd level variance analysis)


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5. Directing

Setting up project team

Training and development

Supervision

- Individual targets, evaluation, discipline, definition of objectives and responsibilities

Motivation (team and individual)

- Rewards, evaluation, feedback, reconciliation of individual/organisational goals

Co-ordination

- Prioritisation of work; monitoring resources

6. Team buildingEarly stages most critical (initial culture often continues)1. Team/ Individual commitment

- Common objectives, reward system, motivation drivers2. Team spirit (not same as commitment)3. Obtaining necessary resources

- Number of people, mix of skills4. Clear team/individual goals and success criteria5. Formalisation of visible management support (attendance at key meetings)6. Effective programme leadership

- Accuracy of planning, efficiency of monitoring/control. Ownership of large problems

7. Open formal/informal communications8. Rewards and retribution systems (good performers rewarded, poor performers reprimanded)9. Identification /management of conflict

- High pressure is common source

- Sudden change in energy levels can be a sign10. Heterogeneity and cohesiveness

7. Leadership

Decision-making ability

Problem-solving ability

Integration of new members (flexibility, provision of sufficient learning time)

Interpersonal skills (comradeship and trust) Identify and manage conflict (when objectives/limitations are changed)

Communication skills(most important tool)

Interface management (upward, downward, horizontal)

Factor-balancing skills

8. Life-cycle leadership

- Project teams last relatively short period of time

- Project team changes to meet needs/challenges

Phase Characteristic Task People Effect1 Inception High Low Telling

2 Development High High Persuading3 Stabilisation Low High Participating

4 Maturity Low Low Delegating


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The Project Team

Project Teams within Functional Organisations

Allocated to most appropriate department

Using resources from one function or across several

Contrast with Pure project organisation for relatively large one-off projects (e.g. Millennium Dome)

Advantages of projects within functional organisation

- Flexibility and full use of employees

- Employees gain new experience/skills

- Cross-functional working attitude

- Experts create new synergies outside rigid functional structure

- Follow primary career path within function or new career path through project

- Less costly than external consultants

Disadvantages

- Function is depleted of resources

- Functional managers offload less efficient people

- Difficulty in adapting to the demands of project environment

- Prioritisation of simultaneous projects

- Communication barriers (compared established channels of functional units)

- Motivation (unless senior management support)

Team Multi-disciplinary & Heterogeneity Issues

Sentience: tendency to identify with own profession/background rather than with project and organisation

Interdependency: tendency for teams to depend on input from more than one individual

- Pooled interdependency (sections/divisions make contributions)

- Sequential interdependency (input from multiple individuals required to move to next phase)

- Reciprocal interdependency

Integration: process of defining responsibilities and control, ensuring everyone adheres to same definition

Differentiation (specialism) contributes to sentience

Multidisciplinary nature tends to increase sentience and interdependencyGreater range of backgrounds reduces overall bias (but more discussion and conflict)

Group and Team Processes

Group: collection of individuals with common objective

Team: group working under direction of team leader

Organisation contains many formal and informal groups.Informal tend to form quickly and voluntarily for social reasons.

Groups better at problem solving than individuals. Groups tend to:

- Brainstorm

- Consider wider range of factors

- Enhanced logic flow

- Generate more original ideas

- More potential solutions

- Solve problems more accurately and quickly

Project Team Performance

Most important factors contributing to performance:

- Heterogeneityin qualifications, experience, outlook- Cohesivenessalignment of personal and team goals; commitment and morale of members


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Project Team Staffing Profile and Operation

Project Team Staffing

Balance of skills:

- Technical

- Management

- Administrative

- Interpersonal

Other considerations:

- Immediate and long-term availability

- Ability

- Continuity requirements

- Teamworking skills

- Special skills

Trade-off between continuity and ability

Mix of internal and external staff

Guidelines:

- Voluntary staffing

- Staffed to add value to project

- Operated less formally than functional teams

- PMgr Lead by example

- Flexible and responsive

- Interface across organisational boundaries

- Teams innovate and evolve

- Functional managers receive recognition and credit for provided resources

- Conflict should be promoted during staffing (the sooner the better)

Project Team Profile

Widest interpretation of project team:

- Contractors personnel-

Subcontractors- Clients

- In-house staff

- Other interested bodies (inspectors, government, lobby groups)

In almost everyones interests to meet objectives in timely and cost -effective manner

Project office: focal point, physical hub of project

Three specials project-management positions:

- Project manager (managing director)- Project planner (operations director)- Project controller (financial director)


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Project Team Operation

1. Establish measurable objectives

- Identify and acknowledge stakeholders

- Establish dimensions of success

- Agree on criteria for success

2. Stakeholder management

- Invisible team can provide great source of support

- Protect image of team

- Develop network of useful contacts

- Exploit network for quality project resources

3. Establish/plan measurable targets

- Understandable and practicable

- Multi-level

- Plan for unknown (contingencies)

- Realistic milestones

4. Plan and establish processes

- Firm ground rules

- Create open environment to be creative and take responsibility

- Develop relationships

- Flexible environment when needed

5. Leadership

- Clear direction, stimulate high performance

- Reward good performance

6. Membership and identity

- Members must trust PM

- Active followership more valuable than passive

- Temporary drafts must be seen in positive light

- Clear understanding of roles

- Members recognise their own value

7. Communication systems

- Formal/informal meetings to confirm identity, provide opportunities, reinforce rules, celebrate success

- Accept and address conflict

- Efficient communication with external bodies

- Meetings result in actions, documented with time scales and responsibilities

8. Team separation

- Members can rely on fellow team members

- Commitment and momentum maintained even when physically separated

- Regular contact enables clear communications

9. Information technology

Advantages

- Reduced need for specific facilities (video)-

Reduced direct interactionfewer personality clashes- Record keeping, simplified accountability and audit- Less direct supervision

- Less control bureaucracy

Disadvantages

- Expensive remote support

-

Loneliness- Loss of managerial control

- Time differencecoordination- IT can go wrong

- Cohesion severely restricted

10. Teams in general (optimal when)

- Regular face-to-face meetings

- Performance measures and criteria are clear

- Members have responsibility and accountability

- Clear time commitments established


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Project Team Evolution

Project Life CyclesConception and feasibilityOutline proposals and definitionTooling upOperation and productionDecommissioning

Project Change Control and Management

Historically little attempt to standardise life-cycle phasesBS6079 proposes Strategic Project Plan (SPP) defining standard planning & control system

Project Team Evolution

Forming

- TRM Task Responsibility Matrix

- OBS Organisational Breakdown Structure

- Project staff register

- Baseline set of team and project objectives

Storming

- Establish cohesiveness

- Increasing tendency of conflict

- Attempts to depose leader

Norming

- Formal/informal

- Behaviour

- Performance

Performing

- Team members satisfied that team is balanced

- New conflicts dealt with by team

Groupthink

Groupthink is the tendency for teams to delude themselves over the quality and reliability of the product. Most oftenencountered in long-term teams where there has been initial success.

Typical symptoms:Absolute commitment to the projectLack of respect for competitorsIntolerance of dissentersFear (of authority or majority)Self-delusion (invincibility)common in successful teams with high cohesion and commitmentSelective reporting

Project Team Motivation

McGregor

Theory Xoperatives are basically lazy and unmotivated. Require threat and punishment.(Often espoused by autocratic functional managers.)

Theory Yoperatives are willing to work and complete job without close supervision. Want to successbecause it generates greater self-respect. (Typically preferred by project managers.)

Maslows hierarchy of needs

Self-actualisation

Esteem

Belongingness

Safety

Physiology


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Implications:

Relative importance of needs

Time-based requirements (higher levels require more time)

Unsatisfied needs (no guarantee) Complex needs (higher level needs more subjective)

Anticipation (fulfilled needs become hygiene factors rather than motivators)

Equity theoryperceived fairness compared to othersChoices during perceived inequity

Seek promotion

Seek increased reward level

Reduce contribution

Increase other inputs

Expectancy theorymotivated in obtaining desired rewards

Project Team Communications

Inward and outwardFormal and informal

Project Communication

High-quality information sharing and exchange

Quantity and Quality of face-to-face meetingAccess to meetings should be open to all team membersEncouraged to attend

Communication methods:

- Meetings

- Telephone

- Letters/memos

- Email

- Notice boards

- Chats

- Seminars

- Project plans and reports

- Newsletters

Formal and Informal Communication

Operational islands: sections defined by power and functional boundaries

Formal lines of communication essential for collecting and disseminating project information

Formal communication tools:

- Frequent reports on all aspects with clearly defined distribution lists

- Regular project meetings (debate encouraged)

- Project memos

-

Newsletters- Notice-board

- Away-days and events

Informal communication revolves around the grapevineInfluence ita gauge of feeling- Identify and expose issues quickly

- unhealthy grapevine harbours resentmentand disillusionment

Lunch and dinner

- Telephone

- Coffee breaks

- Evenings in the bar

- Social events


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Internal and External Communications

Typically internal are informalOpen communication encouraged

External is formal, explicitrequire absolute control on dissemination of information

Project Team Stress

Origins and Symptoms of Team Member Stress Sources of project stress

- Dual reportingproject manager & functional manager- Strict time, cost and quality limits

- Short life span of teams

- Project complexity

- Frequently changing environment

Main sources of stress

- Personal

- Work (project and functional)

- Environment

Symptoms- Psychological

- Physiological

- Behavioural

Stress Management

Individual stress management

- Diet

- Reduced alcohol, tobacco

- Exercise

- Physiological awareness

- Communication (most important single element)

- Realignment of goals and self-limits

- Psychological self-examination

- Breaks/holidays

Project-team stress management

- Deregulation (rigid to flexible working times)

- Reasonableness

- Fairness

- Open-mindedness

- Flexibility

- Approachableness


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Conflict Identification and Resolution

Constructive/ meaningful conflict

Sources of Conflict

Onerous resource constraints

Pressure to increase speed/reduce costs

Imposition of new aims/objectives

Change and realignment Conflicting function and project demands

Personality clashes

Different interpretations of requirements

Incorrect/ late information/ communication

Perceived inequalities

Underlying resentment

Conflict Characteristics

Potential for conflict increased by

- Heterogeneity, multidisciplinary nature

- Lower PM authority in functional organisation

-

Lower degree of specified/ quantifiable objectives- Lower communication and accountability

- Greater degree of change

- Lower perceived prestige of project

Approaches to Conflict

Areas of conflict

- Onerous deadlines

- Change occurs

- Errors/ omissions discovered

- Resources reduced or inadequate

- Personality clash

- Agreeing on areas for concentration

- Agreeing on priorities

- High uncertainty

Questions to ask

- What is source

- Why?

- Impact?

- How to reduce or eliminate

- How to foresee and avoid in future

Project objectives should be SMART, and also:

- Compatible with strategic plan

- Agreed by senior management

- Communicated to team

- Communicated to stakeholders

Conflict Management

Conflict avoidance

Conflict absorption

Conflict resolution imposition

Negotiated conflict resolution


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Module 3 - Project Risk Management

Human beings naturally consider risk and reward as part of the decision-making process.Project manager inherent risk takerPrimary Function to identify and control risk

Background to Risk

The Concept of Risk

Risk management evolved from design of nuclear reactors (1950s),Energy source is inherently dangerous, consequences catastrophic, no point in examining single events

Riskmeasure of probability and consequence of not achieving specific goal.

(event, uncertainty, consequence) = 1st level equation for risk

Risksomethingor the lack of somethingcauses a risky situation.

(event, hazard, safeguard) = 2nd level equation for riskHazardsource of dangerSafeguardmitigation against the hazard

Exposure: vulnerability of parts of organisation to risk impacts

Sensitivity to risk composed of 3 elements: significance(severity/impact), likelihood, ability to manage implications

Effective Risk Exploitation (ERE) makes use of non-balance-sheet assets (SCM, IP, KM)

Risk is the distribution of possible outcomes in performance over time due to changes in key variables (greater range = greater risk

Considerations:World is uncertainRisk cannot always be eliminatedRisk is a function of opportunityRisk can be an advantage (intimidates competition)Risk management is set of analytical toolsOperates at all levelsRisks may be foreseeable, partially foreseeable and wholly unforeseeable.No risk management is infallible

The Human Cognitive Process

Cognitive process in risk assessment:

Pattern recognition

Attention

Memory

Bounded Rationality

- Generally we opt for rational behaviour within constraints

- Examine possible actions and possible outcomes

- Risk forecasting

Based on experience, present, extrapolation (aka Prediction Momentum) Combination of subjective and complex modelling (chaos theory)Success factors:

Accurate data

Time limits

Cost (effort)

VisionoIntuitioncombination of experience and extrapolationsoBiastendency to misinterpret data because of own perceptions/preferences


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Risk Handling

Risk Assessment and Control

Risk analysis determination of probability of risk events and establishing measure of consequencetogether with monitoring and control system

Risk handling process of dealing with riskRisk feedback occurred risks are analysed and results fed back to system for future strategiesRisk control risk analysis, handling and feedback

Typically risk management considered: risk assessment and risk control.

Risk assessmentiterative process identifying and assessing all potential risksRiskcombination of uncertainty and constraint (e.g. legislative deadline)

Risk controlinvestigation of entire project (project plans, scrutiny of critical path)

Risk identificationsource and effects Individual perception of risks will vary according to:

- Organisational position

- Power level

- Area of authority

- Responsibilities

Project and Strategic Risk

Project risk limited to risk considered entirely within project (delays, errors, cost increases)Strategic risk long-term, complex, difficult to model (economy, competition)Variance envelope allows divergence to a certain limit

Types of Risk

Generic Risk Headings

Strategic risk long-term performance of organisationOperational risk process itself, asset base, project members, legal controls (e.g. project risk)

Financial risk market, credit, capital structure, reportingKnowledge risk IT hw/ sw, IM, KMCatastrophic risk cannot be predicted or quantified, usually covered with reserve/contingency sum

Market Risk and Static RiskMarket risk (Dynamic risk)potential gains/lossesCannot be reduced or controlledonly diversified

Market business risk (MBR) company trading with its assetsconcern to all stakeholders (shareholders, creditors, employees) Market financial riskgearing ratio, concern to equity holders

Static risk (specific risk or insurable risk)losses only; potential losses and safeguards. Insurance policy Fire insurance, tortuous liability insurance (professional indemnity), personnel insurance

External Risk and Internal Risk

External risks

Competitor risk

Market demand risk

Innovation risk

Exposure risk (e.g. gearing ratio)

Shareholder risk

Political risk

Statute risk

Impact risk


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Internal risk

Operational processes risk

- Resource availability

- Production capacity

- Process failure

- Time-based competition

Financial risk

- Borrowing

- Cash flow

- Exchange rate

Management risk

- Management error

- Strategy implementation

- Communications

IT and Technology risk

- System obsolescence

- Breakdown and failure

- Malicious virus

- Capacity limit

Predictable Risks (known unknowns)and Unpredictable Risks (unknown unknowns)

Risk Conditions and Decision making

Conditions of certainty gravity

Conditions of risk weather/rain

Conditions of uncertainty earthquake, hurricane

Decision Making under Conditions of Certainty

Example: when same strategy optimal for all possible states/conditions (pay-off matrix)

Decision Making under Conditions of Risk

Typically: higher profits implies higher potential risks/losses

Payoff-matrix: Profit-matrix for strategy x state, whereby each state has assigned probabilityMultiply payoff by probabilitysum for each strategy

Decision making under Conditions of Uncertainty

Assigned probabilities are not known. Sources of uncertainty can be

Externally drivenenvironment: inflation, interest rates, demographic changes

Internally drivenprocess: motivation, loyalty, new products, innovation

Decision-driveninformation: strategy planning, R&D, investmentMaximax / Hurwicz criterion always optimistic, maximise profits irrespective of lossMaximin / Wald criterion pessimistic, minimise losses (minimum profits in worst-case scenario)Minimax / Savage criterion minimise maximum regretLaplace criterionassign equal probabilities to all outcomes (assumes Bayesian theory)

The Need for a Risk Management Strategy

Total Strategic Risk Management (TSRM) must be holistic and pre-emptive (similar to TQM)


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The Concept of Risk Management

Risk management system must be

Practical

Realistic

Compliant (with internal & external standards)

Cost-efficient

Risk Management areas

identification classification

analysis

attitude

response

control, policy and reporting

Risk Identification

Detailed and thorough, identify source of risk

Internal risks use WBS to identify most obvious risk areas (3-4 level)

External risks e.g. interest rates, economic activitydifficult to identify and evaluateProject risks project administration and control techniquese.g. OBS, team membership, leadership, communication

Risk Objective sourcessum total of past experienceRisk Subjective sourcessum total of current knowledge (e.g. PERT analysis)

Brainstorming (Delphi, Nominal group, SWOT M7)1. Creative phase2. Evaluation phase

Risk Classification

Portfolio theoryconsiders from a financial point of view (beta coefficient)Classify as market risk (business/ dynamic risk) or static risk (systemic risk)

Three-level classification

Risk type

Risk extent

Risk impact (consequence)

- Maximum probably loss

- Most likely cost of loss

- Cost of covering loss

- Cost of insuring against event

- Reliability of predictions about event

Risk Analysis

1. Evaluate all options2. Consider risk attitude3. Consider characteristics of risks (internal/external, controllable)4. Establish measurement system5. Interpret results6. Make decision


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Alternative methodology1. Identify source2. SWOT analysisMap risk drivers3. Assess probably and impactActual risk map4. Consider all optionsDevelop target risk map5. Assess value added with recommended risk response6. Set up monitoring and reporting

Risk mapping = Risk profiling (aka Risk footprinting)4 quadrants reflecting high/low probability and impactRisk migrationfrom actual to target risk mapselected risks = controllable & internalShape (e.g. ellipse) versus point reflects variation limits

Risk gridtable Dimensions: multiple levels of probability and severity

Cell: indicates action (e.g. Retain, Part insurance, Full insurance, Cease activity)

Risk Attitude Risk seeking AGAP = all goes according to plan

Risk averse WHIF = what happens if

Individuals more risk averse than teamsInclination to risk increases with age of team (time since formed)Multidisciplinary teams seek more risk than unidisciplinary teams.

Risk Response

Considerations

Company policy

Missing information on cause/effect

Time of exposure Individual/team interests

Involuntary/voluntary risk

Alternatives

Risk distributionContracttool to allocate/share riskConsiderations

Is the outcome worth the risk?

Who controls most risk

Who is most liable?

Incentives?

High impact

Low probability(Quadrant 2)

High impact

High probability(Quadrant 1)

Low impactLow probability(Quadrant 4)

Low impactHigh probability

(Quadrant 3)Impact

Damage

Probability

Impact

Damage

Probability

A B

C

D Impact

Damage

Probability

C1C2

C3

NeutralSeeker

ImpactIe. max. reward or opportunity available

AverseEffort


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Response Options

Retentionignore risk (low-probability, low-impact) Reduction

Transfer (insurancecontract: General Terms and Condition)- Insurability of risk (not all are insurable)

- Cost of insurance

- Maximum probable loss

- Likely loss

- Likely cost of covering loss

Avoidance

- Pre-contract negotiations

- Rescission

- Exemption clauses

- Scope redefinition

Seeking further information

Risk Control, Policy and Reporting

Risk handbookit documents experience with risk and risk managementRisk reports should be regular and integral to strategy

Risk policy:

Overall aims and objectives

Accountability for managers (TRM)

Formalised reporting channels

Risk tolerances (variance)

Authorisation

Risk, Contracts and Procurement

Contract is tool for risk transfer and mitigation. It transfers liability.

To insurance company for premium

Between suppliers/subcontractors Tender price reflects risk absorption

Reasons for conflict

Defective documentation

Inappropriate arrangements

Incorrect estimating/pricing

Unreasonable risk allocation

Communications breakdown

Insolvency

Ambiguity

Contract defines rights, dues, obligations, liabilities.

Commensurate riskinability to fulfill obligation due to own inadequacy,incapacity, inadvertence or errorUberrimae fidei (utmost good faith) obligation to disclose all relevant information to contract


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Basic Contract Theory

Contract items

- Signature block & project title

- Definition of terms and scope

- Information/facilities provided by client

- Project approvals

- Payment systems

- Working drawing

- Specification

- Schedules

- General conditions (sector-generic)

- Specific conditions

- Provisions for change

- Form of tender

- Dispute resolution

- Bonds and warranties

Contract requisites

- Offer and acceptance

- Consideration (e.g. deposit)depending on legal system- Capacity

- Legal relations

- Communication (acceptance to offeror)

Performanceall parties complete all duties and liabilities

Alternatives to performance

- Breachone party in contravention to terms- Frustrationcannot be fulfilled although both parties wish to- Rescissionerror or misunderstanding, rescinded by court if terms are not acceptable (contradictory term- Rectification

- Void (e.g. if goods are illegal)

- Termination/determinationin accordance with provisions of contract

ProcurementMost large organisations have Legal Services for procurement of contractsStrategic vs. Project procurement

Procurement phases

Objective phase

Exposure phase (advertisement, investigation into possible sources)

Alternatives phase (sources analysis)

Documentation (of requirements)

Tendering

Award

Contract administration

Characteristics of ContractsControllable (e.g. human error, decision making) vs. uncontrollable (adverse weather)

Fundamental contractual risks

Design defectslatent and patent Project cost

Safety and indemnification

3rd party insurance

Fire, flood Completion deadlines: Damages may be punitive, liquidative (cash) or ascertained (actual)

Express/implied terms (e.g. PII professional indemnity/ liability insurance)


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Transfer of Risk in Contracts

Indemnity clause transfers riskCourts unsympathetic to excessive transfer

Variation Orders(EU)& Change Notices(US)

Variationsallow for changes to contract without invalidating itMust be possible to price to compensate affected party

Claims Risk

Client risks

Failure to provide information

Late instructions

Errors/omissions in contract documents

Delays by nominated subcontractors or client consultants

Changes in statute

Non-availability of labour

Civil commotion, war, natural disasters Adverse weather

Determination of contract by contractor

Obligation of client to insure against:

Fire

Flood

Lightning

Impact of aerial devices

Radiation

Contractor insurance

Employer liability for employees

Liability for damage to 3rd party persons and property Escape of hazardous materials


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Module 4PM Organisational Structures and Standards

Internal (operational, non-executive) project managementExternal (executive) project managementInternal with external specialist support

Organisational Theory and Structures

People make projects succeed or failPeople are more difficult to predict/control than schedule/cost

1. The Project within an Existing Organisation

Most common form of PM groupingFundamental consideration is relationship between organisation and project; dependent on:

Size, status and importance of project

Resources available

Strategic fit

Functional organisational structure

Most common; preferred by inflexible organisations, examples:

- Government

- Police forces

- Military

- Most large private companies

Power/status defined by vertical hierarchy

Horizontal communications only at top levels

Projects may be contained within function

Benefits:

- Clear reporting, rules, responsibilities, chain of command

- Mirrors traditional authority structures

- Simple; intuitive

- Specialisation & focus (shared knowledge)

Disadvantages:

- Inflexible

- Cross-functional activity discouraged

- Boundaries, barriers

- Greater need for central support

- Development of organisational and operational islands

Pure project structure

Can exist within functional structure

Often have complete freedom within limits of final accountability

Set up to deliver very visible projects

Benefits:

- Flexible & responsive to change

- Encourages innovation and evolution

- Operational costs can be adjusted to workload variations

- No need to negotiate with functional manager for resources

- Shorter in/formal communication lines

- Authority contained within project

- Team members not distracted by functional loyalty

- Easier to incorporate external consultants

- Easier to execute related projects as programme

- In summary, best structure for a project


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Disadvantages:

- Concurrent projects may lead to duplication of effort

- High initial operating costs (until any projects are completed)

- Centralized direction

- Increased early operating costs if PMs think ahead to resources needed- Team members concern about long-term- Competition between project teams

- Deadlines may force to cut corners

- Prolonged absence from function can dilute specialisation

Matrix structure (internal, Non-executive)

Blend of mechanistic/ repititive (pure functional) and research/ innovative (project)

Very popular for organisations undertaking projects

Generally restricted to large organisations with constant/ predictable workload

Main characteristics

- Functional (vertical) boundaries

- Power/status (horizontal) boundaries

- Organisational islands

- Project sponsorAdjudicate disputesAllocate resources

Make executive decisions- PM chair

Four legs: PM, sponsor, functional manager, teamThree interfaces for PM Three levels of control (subordinate, peer, superior)

- Interfaces

- Bidding

- Time-recording and cost-centre charging

Most internal structures make at least some use of external resources

2. The Project External to the Existing Organisation

Project team may comprise

All internal resources managed by external PM

All external consultants managed by consultant PM

Mixture of internal and external resources

Surrogacyextent to which client wishes to delegate control/authorityRisk transfernormally cover non-performance/ negligence but not supplier breaches

External (Executive) PMmeans PM has full authority (does not need to negotiate over resources)

Distinctive characteristics

Multidisciplinary nature / shared loyalty Open and competitive fee structures

- Fee bid package

- Paid in TranchesPre-contract worksPost-contract worksFinal account

- Percentages based on measured works totals or final account total


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External contractual linkages

- Primary typesCompletion contractsTerm contracts (long-term agreements)Service-level agreements

- Competitive contracts (tender) versus negotiated contracts

- Pricing forms Fixed-pricelowest clients risk

Cost/cost-plusgreatest clients risk Reimbursement + a fee Target-price + a fee

- Forms Standard form (clear terms and conditions)Professional services (implied terms) Supply contracts (supply of goods)Subcontract agreements

o Domestic subcontractor (free choice by contractor)o Nominated subcontractor (stipulated by client)

- Pro-forma contractsnear/ monopoly- Links

Client to PM and design teamprofessional service contractsClient to main contractorClient to service authoritiesgas/ electricity/ water pro-forma contracts Client to nominated subcontractors and suppliersClient to local authority

External non-contractual linkages

- Authority linksclassic agency arrangement, contractual risk of consultants borne by client - Communication linkscreeping scope = uncontrolled changes,

is the classic tendency for poorly controlled projects to gradually increase in size and content

Advantages of external PM

Flexible, responsive

New ideas/approaches

Outsource where no internal expertise

Quick ramp-up / easy disbanding Internal risks (resources) avoided

Disadvantages

Expensive

Lack of loyalty

Difficult recourse over poor performance

New administrative and control system

More stringent communication and coordination systems

Risk profile changes

Arbitration and litigation possibility

Complexity for PM

3. Criteria for Selecting the Organisational Structure

Authority (project has shorter accountability lines)

Communication (matrix reduces barriers)

Knowledge transfer (e.g. between function and project)

Loyalty

Technology/ Innovation

Cost (pure project has lower running costs, function has large fixed costs)

Coordination(function has formal reporting, therefore low coordination requirement)

Support functions(pure project requires less)


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Function Matrix Pure project

Workload Constant Variable Significant variance

Project Frequency Infrequent Frequent Frequent / dominant

Focus Functional objectives P secondary, though of significant importance Project focus

Informal Communications Not required Acceptable

R&D / Innovation Some High

Centralised support Required Present Little or none

Clear authority Required Split authority ok Devolved to PM

Change propensity Unlikely Some HighSize Small Small to medium Large, resource intensive

Response time Not fast Fast not generally required Fast

Project Management Standards

For any given industry/ profession there are three standards:

IPMA guidelines for UK APM BoKUS PMI BoK: = standards and areas of responsibilities for PMgrs BS6079(UK)ISO10006(EU) - - - Working guidelines for PM practice, such as SPP Industry-specific (e.g. PRINCE2)- - - PRoject management IN a Controlled Environment (IT industry)

APM and APM Body of Knowledge

AMP Objectives:

1st point of contact (national authority on PM)

Lead professional development

Champion interest representation

Standardise qualifications

Develop national branch network

Establish practice and procedures for training

APM BoK Profile4 primary areas (UK and US)

1. Project Management Project life cycles, Project strategy, Project environments2. Organisation and people Leadership, communication and team building

3. Techniques and procedures Planning, estimating, control, monitoring

4. General management Finance, law

BS6079

Focus is standardizationE.g. different methods of planning and control measurement

Most important section is standard strategic project plan (SPP)

1. Preliminaries Title page, project description, contents list, introduction, names

Control reference, Security levels for different team members

2. Project aims and objectives Time, cost, qualityhealth and safety, environmental

3. Subject-specific sections BS6079 proposes standard numbering Scheduling, cost control, project history, project policy, certification procedures

Acts as both a document and benchmarkClients may use SPP (up to baseline stage) as basis for competitive bids


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PRINCE2

PRoject management IN a Controlled Environment version 2Alternative to BS6079developed by Central Computer Telecommunications Agency (CCTA) in 1989 for IT PM in UK government

Based on process model of a project

Project breakdown into processes with key inputs/ outputs and aims/ objectives

Driven by project business case

Advantages

Standard project structurestart, middle, end Regular detailed reviewsmeasured against business case and planned progress Flexible decision points

Automatic control of deviations

Optimises involvement of stakeholders

Encourages communications

For bureaucratique and IT-driven project


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Module 5 - Project Time Planning and Control

5.1 The Concept of Project Time Planning and Control

Time-planning intrinsically linked to life cycle (separate from implementation) Not staticreplanning in parallel with implementation Variancecomparison of actual with planned performancebasis of management reporting Also feedback for future projects Extrapolation allows prediction of future performancepredictive/ proactive analysis

Aims and Objectives of the Planning Process

Plot course from current position to end position

Establish variance limits

Allow contingencies and resources for divergences

Ensure correction for divergences

More specifically

Consider strategic objectives

Establish project objectives

Compartmentalise work

Determine interdependencies Determine resources

Determine cost/duration/sequence of packages

Establish communications system

Define responsibilities, deadlines

Set up organisational structure

Identify critical activities

Motivation

Produce Strategic Project Plan

Project Time Planning and Control and the Generic Project Plan

SPP includes time, cost, quality and planning for:

Organisational and authority Risk management

Communications system

Finance

Conflict and stress management

Authorisation and compliance

Health and safety

Change management

Project Time Planning involves identifying, sequencing and scheduling activities and resources.

Project Time Planning and the Project Life Cycle

Continuous planning/ replanning throughout the life cycle but intensity varies

Most intense in early stages

Critical changes increase replanning

Replanning process critical in large projects

Becomes more complex as project progresses

Examples of replanning reasons:

Internal (optional) changeclient-initiated External (imposed) changee.g. supplier/subcontractor fails Sequential disruptionresource reallocation (within project) Miscalculation


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5.2 The Process of Project Time Planning

Factors Affecting the Time Planning Process

Sources of time planning data

Knowledge, experience, environmental conditions, form of contract

Project uniqueness

Extent of knowledge transfer Geographical location

Objectives

Availability of contractors, suppliers

Contractual conditions

Client characteristics

Time of year

Local conditions, government regulations, environment

People issues

Stakeholder buy-in

View as fair, reasonable and achievable

ComplexityAnalyze components for Position in sequence

Importance of package

Criticality of package

Acceptable time/cost overrun

Resources required

Uncertainty & Change

Not possible to eliminate risks completely

Not cost-effective to eliminate some risks

Eliminating some risks may give rise to others

Difficult to assess some risks

Relative importance may change over time

Accuracy & Reliability

Unfamiliarity with software

Misguided assumptions

Insufficient data

Incomplete understanding of implications and linkages

Communication

Software promotes tendency to issue too much information

The Planning Process

1. Statement of Work (SOW)2. Work breakdown structure (WBS)3. Project Logic Evaluation (PLE)4. Separate time, cost, quality planning5. Network analysis (CPM, PERT)to generate DMS6. Trade-off analysis to replan7. Project Master Schedule (PMS)


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Statement of Workdefines overall content and limits of work; all required information for tender/bid Signature block, project title

Terms and scope

Information/ facilities provided by client

Approval requirements

Payment terms

Working drawings

Specification, schedules

General and specific conditions Variations procedures

Dispute resolution

Bonds/ insurance

Work Breakdown Structure

Purpose

- Improve accuracy of estimates

- Define baseline for performance measurement and control

- Identify tasks and responsibilities

Levels of definition (typically six)

Logical numbering system

- Align with Cost Accounting Codes (CAC) in use

- Typically generated by Computerised Database Estimating System (CDES)

Dividing the WBS

- Work type

- Responsibility

- Location

Project Logic Evaluation (PLE)

Define sequence of individual packages

- Resource driven

- Logic driven Sequential, parallel

- Precedence diagrams with resource sheet

Draft Master Schedule (DMS)

Purposes & uses

- Project completion date

- Supply order/delivery dates

- Subcontractor notification dates

- Milestones for progress planning

- Risk management system

- Logic incompatibilities

- Contractual compatibilities

- Basis for Replanning & trade-off analysis, Resource levelling , Earned value analysis

Critical Path Method (CPM)deterministic Program Evaluation and Review Technique (PERT)probabilistic Gantt Charts Network Diagrams (precedence diagram with activity durations)

- Activity on arc (AOA)Activities shown as arcs Events shown as nodes (circles) with duration Dummy activities required represent dependencies (shown as broken line)

- Activity on node (AON)Activities as nodes (boxes) Temporal relationship dependent on placement of arrow end-points

Finish to start (most common, simplest)

Finish to finish


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Start to start

Start to finish

Critical Path Method (CPM)DuPont 1960- Assign durations for each activity

Modular technique (decompose activities) Benchmark technique (recorded time for similar works) Modelling technique (generate formula/model from previous activities) Computerised Database Estimating System (CDES) technique Parametric technique (dependent/independent variables e.g. time& length of digging tunn

- Identify start & finish window for each activity Forward pass: Identify Earliest Event Times (EET)

Earliest Start time (EST)

Earliest Finish time (EFT) Backward pass: Identify Latest Event time (LET)

- Critical path (no float window i.e. EET=LET)

- Replan/ Rationalise resources Import new activities Decrease work (cut corners) Reshuffle resources Re-evaluate sequence Increase workload Overlap phases Speed up approvals Smooth resource utilisation Prioritise activities (allocate resources to critical path)

- Form Draft Master Schedule (DMS)

- Refine into Project Master Schedule (PMS)

Program Evaluation and Review Technique (PERT)

- Assign three durations to each activityoptimistic, most likely, pessimistic

- Calculate mean duration and standard deviation for each activity (Beta distribution)

Activity Duration (Beta Average): T = (a + 4m + b) a = optimistic time

6 m = most likely time

Activity Standard Deviation: s = (b a) b = pessimistic time

6

- Forward/ Backward pass, CP

- Calculate project mean duration and standard deviation

Project Mean Duration: TCPProject Standard Deviation: (SCP)2

- Identify target completion date and calculate variance about target (Normal distribution)

Nb. of standard deviations between Project Mean Duration and Target Duration (client-reques

Project Mean Difference = PMDTarget Project Duration

Standardised Mean Difference = PMDiffPSD

Event within 1 standard deviation of the Mean ~ 68% of meeting deadlineEvent within 1 standard deviation above Average mean ~ 84% (50%+68% of 50%)

Event within 1 standard deviation bellow Average mean ~ 16% (50% 68% of 50%)

Event within 2 standard deviation ~ 95%Event within 3 standard deviation ~ 99%

- Replan/ Rationalise resources


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- DMS

- PMS


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5.3 Project Replanning

Quality = performance in following sections. Elsewhere it may refer to specific measurable aspect of quality

Crash analysishow much can project be accelerated and at what cost?

Crash Analysis

Trade-off between time and cost. Assumes Quality is fixed.

Process:1. Define project logic2. Add duration to each activity3. Establish critical path4. Calculate crash cost per activity5. Calculate crash cost per unit time6. Determine most cost-effective crash sequence7. Check critical path8. Crash network to limit

- Optimum cost point (starting point) --- additional time beyond this will accrue fixed overhead

- First crash point (using cheapest critical path component to crash)

- Maximum crash point

5.4 Trade-off Analysis

Methodology for Trade-off Analysis

1. Identify the reason for the problem2. Reevaluate the project objectives3. Allow for any other relevant factors4. Assemble a shortlist of solutions scenarios5. Select and test the best (or approved) alternative6. Implement the best alternative

1. Identify reason for problem Pre-execution trade-offs (during DMS)

- Change in client requirements; strategic objectives

- Design incompatibilities

- Subcontractors/ suppliers/ external consultants changes

- Misunderstandings/ miscommunications

Execution trade-offs

- Client requirements

- Human error

- Execution problems

- Emerging risk

- Project-specific

2. Re-evaluate project objectives Competitor behaviour, customer demand, economy, technology, legislation

3. Allow for other relevant factors

Strategic and/or operational

4. Shortlist solutions

5. Select and test the best alternative

6. Implement


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Trade-off Classification

Type 1: Time is fixedType 2: Cost is fixedType 3: Performance is fixed

Type 4: Time & Cost are fixed

Type 5: Time & Performance are fixedType 6: Cost & Performance are fixed

Type 7: Everything is fixed

- Unusual; typically in small, simple projects

- Unlikely change

Type 8: Nothing is fixed

- Also unusual

- Emergency works

- Stop-lossing (fulfill contractual obligations as soon as possible)

-

5.5 Resource Scheduling

Seven types of resources:1. People

2. Materials3. Equipment4. Funds5. Information6. Technology7. Space

Considerations:

Resource productivityProject productivity not a simple sum of individual productivity Resource availability

Resource Aggregationis a way of estimating the total resource requirements on an ongoing basis throughout the life cycle of the project

Large variations may lead to periodic idle time if resources cannot be easily redeployed

Resource Utilisation (Efficiency)

Resource Utilisation = # of person days worked on project t# of person days available for project


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Resource Levelling (or Resource Smoothing)

Levelling out peaks and troughs in resource demand so that utilisation approaches an average

Depends on:

Flexibility of completion date

Availability of resources

Benefits:

Reduced peaks in demand means fewer people on project at any one time reduces coordination and control Individuals work for longer period of timeBenefits in team dvpt & learning curve Reduced float times lead to greater continuity

Reduce overall time subcontractors are required

5.6 Project Planning Software

Advantages of Computer-based Project Planning and Control

Speed

Cost

Capacity

Reliability

Combined analysis (e.g. simultaneous planning for time and cost)

Disadvantages of Computer-Based Project Planning and Control

Relianceprotected and backup Over-emphasis on time-consuming detail

Information dump

Potential misdirectionExcessive trust in well-presented material if based on erroneous data

General Factors for Consideration

Lead-in timeimplementation time of the software Transition

Training Software Updates

Networking CMS, security and access implications Wider compatibilityin linking the configuration management system to external consultants/ contractors/ suppliers

Critical success factors

Usableuser-friendly Familiar displays

CMS compatibility

Extendable

General Features of Project Planning and Control Software Systems

Project planningAutomaticGantt charts, network diagrams, critical path analysis Resource managementresource loading, conflicts, costs, budgets, forecasts Tracking and monitoringcompared to baseline Report generationstatus, budget, cash flow, resources, schedules Analysis and decision aidingwhat-if analysis, at least straightforward analysis


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Common Commercial Project Planning and Control Software

High-end

Power Project Professional

Primavera Project Planner

Artemis Views

Open Plan

Cobra

Enterprise PM Micro Planner X-Pert

Mid-range(up to 2000 tasks)

Microsoft Project

Micro-Planner Manager

Primavera Suretrak

Low-end (less than 100)

Milestone Simplicity

Project Vision

Quick Gantt


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Module 6 - Project Cost Planning and Control

6.2 Project Cost Planning and Control Systems

Cost planning Breaking down project into elements WBS, assigning realistic estimate of cost and rolling up costsStrategic, establishes aims & objectives before

Cost control Ensuring adherence to cost limits set by cost planningTactical, reactive

Monitoring expenditures Identifying variances Determining reasons for variance Corrective action Monitoring to ensure resolution Taking further corrective action if necessary

Cost Planning and Control as a Concept

Target costs identified by account code systemNo direct time measurement but time does affect costCost variances from internal sources easier to control than from external sources

General requirements

Project schedule must be accurate

Estimating system must be reliableTypically electronic estimating system, some still use price books

Clear project scopeunambiguous, non-overlapping tasks

Realistic budgetfair and reasonable

Clear authorisation systemmulti-layer approvals filter

Flexible and responsive system variation orders (EU) = change notices (US)

Reliable approach to tracking varianceCDES

Time-dependent variance sensitivitydiminishes over time

Flexible use of reserves and contingencies

Types of Control System: 1. Cybernetic 2. Analogue 3. Feedback

Cybernetic

Most common approach Automatic response mechanism= its key feature

Used by animals and some plants to make decisions

Set of inputs establish context

Outputs subject to monitoring system

Bounded rationality(see page 17)approach to information processing i.e. analysis

Multi-level cybernetic control

- Low-level: e.g. shower control with temperature sensor, instrument controls, animals Most cost-control systems Detecting time and cost variances Adjusting likely final time/cost estimates Re-programming schedule change

- Mid-level: greater flexibility, complexity; automobile engine management Adjusting estimates for individual cost rates Establishing cost of change notices Releasing contingency sums

- High-level: introduces intelligence, memory, experience, original thought Tactical solutions to programming problems Updating risk profile Developing negotiation strategy For controlling overall project performance

- Human mind operates at all three levels


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Analogue

Appropriate for smaller elements/packages

Series of yes/no questions elimination process

- Basis of human reasoning process

- Eliminate unfeasible solutions and break feasible solutions into subsections

Every aspectdetermine if preconditions met For rigid time, cost, performance limits

Feedback control Post-project evaluation and feedback to future projects

Cybernetic are automatic and therefore continuous; Analogue are invoked as neededCybernetic and analogue for ongoing use. Feedback applied after project completion

Costs and Allowances

Classification:

Fixed and variable costsdepends on the level of project activity

Direct and indirect costs

Factory coststotal fixed/variable costs without any mark-up for profit Measured worksindividual and unit prices

Contingencies and reserveempirically calculated, 10% or more

Fluctuationsinflation

Prime cost(pass-through)and provisional sums(foreseen but undefined work)

Direct payments(local authorities or utilities)

Bonds and warranties

Exchange rates and currency fluctuations

Insurance

Life Cycle Costs

Life-cycle costing (LCC)

Considers long-term implications of early design decisions

Typical Life-Cycle Phases

- Inception

- Feasibility

- Detailed development

- Production

- Project termination, system operation, maintenance

- System divestment

Additional (optional) phases and costs

- Research and development

- Prototype

- Design

- Production

- Commissioning

- Operation

- Maintenance

- Decommissioningrunning the project down prior to recycling

- Product retirement, phase-outdemolition, dismantling, decontamination, recycling


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LCC Process

- Establish life-cycle characteristics

- Build process cost model

- Calibrate model (benchmark with standard)accurately measuring what is supposed to be measured

- Input relevant data

- Generate LCC and define strategybalance between long-term and project ramp-up

LCC Advantages

- Long-range considerations

- Life-cycle viability

- Strategic decision making

- Future awareness

- Market position

- Compliance/ regulation

LCC Disadvantages

- Prediction accuracyinvalid assumptions

- CostFull LCC is expensive

- Sensitivityto change may produce inaccuracy

- Competitionin case of unbalanced analysis

- Riskimplications of inaccuracy

6.3 The Project Cost Control System

Two cycles1. Cost planning cycle - Phase 12. Cost control cycle

- Phase 2: Work initiation

- Phase 3: Cost data collection

- Phase 4: Variance generation

- Phase 5: Cost reporting

The PCCS Planning Cycle

Estimating procedure Professional estimator

- Trained, experienced, unbiased, no loyalty

Project team

- Estimators are responsible

- on the ground, best knowledge of resources and requirements - Aware of system limitations

- Can confer, negotiate on resources

- May cost low to win or high to succeed

- Greater risk making mistake or over-optimistic estimates

Other considerations

- Project success criteria consistent with estimating assumptions

- Project linkagessynergies

- Standardised approachleverage central data and systems

- Feedback

Estimating elements

Labour

Materials

Plant

Also many others, e.g.

Fuel

Maintenance

waste

= Operating Cycle


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Additional considerations for materials and equipment

Packaging and shipping costs (also insurance, duties) Availability (may need to pre-order or find alternate source)

Detailed specifications may not be available on first issue of estimate

Data gathering

Standard tables

Company-specific tables

Previous project data Estimator skill and knowledge; estimator categories (increasingly dangerous):

- Accurate

- Pessimistic

- Optimistic

- Inconsistent

Presenting the Estimate

The order-of-magnitude estimate feasibility assessment

Indicative estimate based on known information and published data

Definitive estimate

Project Estimating

Top-down- Strategic alignment

- More stable/static

- Less local influence and bias

- Executive commitmentBut:

- Senior management disconnect from operational costs

- Team may feel budget is unrealistic => reduced motivation

- Politics

Bottom-up

- More team commitment if people own decisionBut:

- Less status

- Difficult to adapt to strategic changes

- Easily overridden by senior management

- Tendency to over-estimate

Iterative [based on negotiation](interactive between task managers [operational]and senior managers [strategic])

- Prepared by operational manager

- Aligned to strategic objectives

- Maintains market influenceBut:

- Timely and costly negotiation

- Requires control procedures

- Dependency on negotiation skill of operational manager (more important than estimating skill)

Bidding strategy and Estimate reporting1. Formulate estimating strategy2. ROM estimates3. Carry out preliminary refinement4. Indicative estimate5. Add for profit and risk6. Compare to cost limit7. Subjective evaluation of bid success probability8. Final/definitive estimatefinal or baseline budget plan

Consider difference between type x acquisitions (one-off with no follow-on) and type y acquisitions (follow-on likely)


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Computerised Database Estimating System (CDES)

Scan or digitise quantity information directly from drawings

Description librarycollection of standard descriptions (arranged in same format as WBS) Price codes and unit rates

Other database elements

- Digitised drawings

- Bill preparation systems Bill with tender, bill with estimated prices budget plan

Project Budget Plan

Perceived as the most important performance indicator

Standard Method of Measurement (SMM)standard form to measure and quantify costs- How to measure work

- What descriptions to use

- What to include/exclude

- Units of measurement

- Assembly into bill of quantities for tenderer

Role of project budget

Forecast costs to particular project tasks

Budget baseline

Projected cost curves (for each element) Reference for variance analysis

Moderation of spending

Data for trade-off analysis

Estimate effects of change notices

Psychological effects (motivation, demotivation)

Budget Development and Layout

Objectives and activities measurable outputs

Financial resources allocated

Start/finish points of each activity

Facility to compare actual and planned performance

Preliminary items general project overheads

Prime cost sumswork is sublet to nominated subcontractor

Provisional sumsexact extend of works in not known (e.g. excavation)

Direct Paymentspayments made through project but not to project team

Dayworksunforeseen and unmeasurable works (e.g. specialist to debug software)

Measured worksphysically measured from specifications

Contingencies, fees and taxes

Budget changes

Transparency importantvisibility of original budget, all changes, current budget

Change control system (CCS)monitors all changes and predicts implications before authorising

Cost account variation notice (CAVN) formalised process using CMS (for large projects)


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The PCCS Operating Cycle= cost & control system

Phase 2: Work initiationPhase 3: Cost data collectionPhase 4: Variance generationPhase 5: Cost reporting

Phase 2: Work initiation

Controlled release of work: Project works order (PWO)

Variation Order (VO)

Describe work, standards, cost-centre to charge

Phase 3: Cost data collection

Earned Value analysis (EVA) required by APM, PMI, ISO10006, BS6079

End result is generation of cost variance and schedule variance

- Basis for evaluating performance and, if necessary, corrective action

Milestone monitoring

- Milestonedefinitive stage in the project, appropriate point to measure performance

- Most suitable when plans not very detailed

- Disadvantages Reaction time lagintervals too great Residual accumulated overspendin case of late detection Replanning issuesmilestones rescheduled easily Time scale issues do not allow for work in progress

- Earned Value Analysis (EVA) Dynamic Combined time/performance assessment Frequent reporting Demonstrates value as well as cost Accurate assessment of cost implications of delays Easier trade-off analysis

Earned Value Analysis

Earned Value = cost of work originally estimated

Cost variance = difference between budgeted cost and actual cost of works

- Measurable effortseparate elements within defined schedule with tangible results- Support effortproject actions difficult to quantify (Project support, administrative services)

Variance analysis

- Identify / validate variance

- Quantify variance

- Determine source

- Determine impact on project

- Determine impact on other elements

- Determine extent of ongoing tactical response

- Determine range of possible outcomes of corrective actions

= Operating Cycle


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Earned Value Analysis variables

- Actual Cost of Works Performed (ACWP)

- Budgeted Cost of Works Performed (BCWP) = Actual earned value

- Budgeted Cost of Works Scheduled (BCWS) = Planned earned value

- Scheduled Time for Work Performed (STWP)

- Actual Time for Work Performed (ATWP)

- Cost Variance (CV) CV = BCWPACWP

- Schedule Variance (SV) SV = BCWPBCWS

- Time Variance (TV) TV = STWPATWP

- Budget At Completion (BAC) BAC = BCWS = project baseline

- Estimate To Complete (ETC)

- Estimate At Completion (EAC) EAC = ACWP + ETC = planned estimate approach

EAC =BACCV

EAC = x BAC = current estimate approach

- Variance At Completion (VAC) VAC = BACEAC

- Cost Variance Index CVI =

- Schedule Variance Index SVI =

- Time Variance Index TVI =

Multi-level Earned Value Analysis

- Allows roll-up analysis

- Diagnostic analysis

Phase 4: Generation of Variances

Variance and Variance envelope

Earned Value AnalysisEarned Valuecost of work originally estimated

Alarm system:

Critical Ratio = x = x

Zone A: take no action eg. 0.901.00

Zone B: record and monitor eg. 0.750.90

Zone C: Act immediately eg. 0.600.75

Zone D: Emergency response required eg. 0.500.60

Zone A1: Observe and note eg. 1.001.25

Zone A2: Investigate and correct(excessively pessimistic estimating or other errors)

BCWP

ACWP

BCWP

BCWS

STWP

ATWP

ACWP

BCWP

actual progress

scheduled progress

budget cost

actual cost

AP

SP

BC

AC


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Phase 5: Cost reporting

Report guidelines

- Punctual reporting

- Include only relevant information

- Highlight important information

- Allow interrelationships

- Honest and accurate

- Issued to everybody involved

- Where appropriate Propose solutions Clarify responsibilities & time scales

Basic report types

- Routine reports Cost, schedule, quality, risk

- Development review reports Common for R&D Assessment of progress in relation to success criteria

- Exception reports

Issued to highlight anomalies Initial report highlights exception Subsequent reports describe progress of corrective actions (audit trail)

- Subject-specific reports Monitor and control areas of concernhigh impact high probability risks (M3)

- Project variance and analysis reports (PVAR)

Project Variance Analysis Reporting (PVAR)

- Common reporting tool for EVA

- Shows variance (and all EVA metrics) for whole project and all 6 levels of WBS

- For each cost centre WBS identifiers CAC identifiers and budget limits Current metricsACWP, BCWP, BCWS, CV, SV, BAC, EAC, ETC and VAC figures Previous (Month) metrics YTD metrics Differences between current and previous metrics Summary of significant differences Current EAC, ETC, ECTC, ETTC May show graphic curves in appendix Can calculate

Earned value

Earned value hours

Anticipated final hours

Project efficiency

Project progress

Level 1: The programme2: The project3: The element4: The sub-elemen

5: The work packag6: The wp. compon


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Module 7 - Project Quality Management

Projects non-repetitive therefore standard sampling techniques for batch production are insufficient

7.2 Quality Management as a Concept

Through 1960s low-cost was the primary priority in protected economies1970s the Japanese entered market at higher-quality and equal or better costQuality control standards (BS5750, ISO9000, BS6079, ISO10006) give equal importance to quality as to time and cos

The Traditional Japanese View

Overall value of quality

- Curvilinear relationship to cost linear at some range but asymptotic at ultra-high-quality

- Must be balanced with cost of defects which can be also addressed through warranties Not always an option (high-speed tyre blow-out)

- Apparent value of quality what people will pay for a good-quality product- True value of quality also includes premium based on prestige/goodwill or reputation for reliability/quality

- Overall value = apparent value + true value

Overall cost of defects

- True cost of a defect greater than apparent cost of fixing it

- Loss of customers (churn)

- Bad reputation

- Overall cost = apparent cost + true cost

Quality dividends

- Employee motivation, company status and image

- Better productivity

- Industry respect/relations

- Prospects in M&A, partnerships and alliances

- Share price, risk profile- True payback = overall benefitimplementation costs

Involving people

- Japanese culture linked employee interest with company

- Motivated employees to proactively ensure quality without expensive quality control systems

Proactive planning

- Preventive rather than responsive action

- Cheaper and more effective quality systemsmove upstream/ more attention to pdt dvpt

- Difficult / expensive for Western companies to emulate

Involving whole organisation- Extended to non-production activities (sales, marketing, R&D)TQM

Educating customer to expect quality

- Differentiation in a competitive market

Quality Standards

2000 BCEgyptian quality control for funeral goods; imprint from government inspector1963: US Military standard MIL-Q-9858A

1974: UK standard BS5179BS5750 first major UK Quality Management standardNow superseded by ISO 9000**

ISO9000: Quality Management and Quality Assurance StandardsGuidelines for Selection and UseISO9001: Quality SystemsModel for Quality Assurance in Design, Development, Production, Installation and ServicingISO9002: Quality SystemsModel for Quality Assurance in Production and InstallationISO9003: Quality SystemsModel for Quality Assurance in Final Inspection and TestISO9004: Quality Management and Quality System ElementsGuidelines

Main drawbacks:

Bureaucratic

Measures performance at one point in time

Attempts generic measure across countries with different standards, process and cultures

*** Superseded by ISO 9001:2008


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ISO9000 Twenty main parts:1. Management responsibility and quality policy2. Quality system3. Contract review4. Design control5. Document control6. Purchasing7. Purchaser-supplied product

8. Product identification and traceability9. Process control10. Inspection and testing11. Inspection measuring and test equipment12. Inspection and test status13. Control of non-conforming products14. Corrective action15. Handling, storage, packing and delivery16. Quality records17. Internal quality audits18. Training19. Servicing20. Statistical techniques

7.3 The Quality Gurus

Common agreement:1. Quality pro

Documents

1.RMJJ ProjectManagementNotes June2010 59