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Yarmouk UniversityHijjawi Faculty For Engineering Tech
1
Project Management and
Quality Control
Dr. Mwaffaq [email protected]
Fall 2012
Cost Analysis and RiskManagement
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Overview
Cost Budgeting
Risk Analysis
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Cost Overruns on Projects
0
-100
100
200
300
19101920
19301940
19501960
19701980
19902000
Costoverrun%
Year of decision to build
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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
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Cost Estimating and the Systems
Development Life Cycle
Costestimate
Contingencyfund
Cumulativeco
st
Time
Regions of time-cost uncertainty
At projectinitiation
At project
definitionAt projectexecution
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System Life Cycle Costs
Life cycle costs(LCC)
Allcosts of a system throughout its fullcradle-to-grave life cycle, i.e.:
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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.
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Estimating Process
Estimate versus Target or Goal Estimate: a realistic assessment
Target or goal: a desired outcome, commitment, orpromise.
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Estimating Process
Accuracy versus Precision
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Estimating Process
Estimating Methods1. Expert opinion
2. Analogy + compensation for differences
3. Parametric: Formula or Cost Function, e.g.,
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Estimating Methods (cont.)
4. Cost engineering
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Cost Engineering Example
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Cost Engineering Example
(Cont.)
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Estimation Process
Functional Management(FM)
Work Team Leads
Project Management(PM)
WBSinformation
2.
3.
1.
Procedure for larger projects
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Estimation Process
Functional Management
Work team
Project Management
Labor and costestimates
4., 5.
6.
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Estimation Process
Functional Management
Work team
Project Management 7., 8.
WBSinformation
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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.
Functional Management
Work team
Project Management
WBS
information
7., 8..
Procedure for larger projects, steps 7-8
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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
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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
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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
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PV = Hourly Rate * TotalHours Planned
AC= Hourly Rate * TotalHours Spent
EV = Baseline Cost * (% ofComplete Actual)
(% Complete Actual) = AC /EAC
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Performance Analysis
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Over budget ?
Under budget ?
How much of
project was done?
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Performance Analysis
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Performance Analysis
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Performance Analysis
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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
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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
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Example (cont.)
Scheduled Project Costs
0
50,000
100,000
150,000
200,000
0 10 20 30 40
Time
Costs
BCWS
BCWP
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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
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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
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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
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Logon Project (Week 20)
SPI = BCWP/BCWS
= 432/512 = .84
CPI = BCWP/ACWP
= 432/560 = .77
Project is behind scheduleWith budget overrun
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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
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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)
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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
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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
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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
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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
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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.
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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
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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
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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
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Risk Identification
Risk tolerance is a function of experience
Risk of Failure
Risk of Opportunity
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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
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Sources of Risk
Any factor of uncertain Probability which canaffect the Outcome is of a Project is a:
Risk Source
Risk Hazard
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Sources of Risk (Cont.)
Internal Risks
Market Risk
Technical Risks
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Sources of Risk (Cont.)
External Risks
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Identification techniques
Analogy
Checklist
WBS Analysis
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Cause and Effect Diagram
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Risk Assessment
Risk Likelihood
Qualitative Rating
Composite Likelihood Factor (CLF)
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Sources of Failure and Likelihood
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Influence Diagram
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Risk Assessment (Cont.)
Risk ImpactWhat happens if a Risk Hazard Materialized
Specified in Terms of
Time Cost
Performance Measure
Qualitative
High Medium
Low
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Risk Assessment (Cont.)
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
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I t V l f T h i l C t
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Impact Values for Technical, Cost,
and Time
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Risk Assessment (Cont.)
Risk Consequence
Function of Likelihood and Impact
Risk Consequence Rating (RCR)
RCR = CLF + CIFCLF (CIF)
Risk Consequence = (Impact) * (Likelihood)
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Ri k R Pl i H t
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Risk Response PlanningHow to
Deal with the Problem
Transfer the Risk
Avoid Risk
Reduce Risk
Contingency Planning
Accept Risk (Do Nothing)
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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)
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Avoid Risk
Alter the Initial Project Concept
Change Contractors
Incorporate Redundancies
Change Safety Procedures
Better to Reduce Risk to Acceptable Level ThanEliminate Payoff Opportunity
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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
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Reduce Risk Technical Performance
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Reduce Risk Technical Performance
(Cont.)
Reduce System Complexity to a Minimum
Recognize Tasks
End Item Design
Decouple Activities
Use Design Margins
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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
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Reduce Risks Meeting Schedules
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Reduce RisksMeeting Schedules
(Cont.)
Incentive for OT
Do High Risk Activities in the Project Networkin Parallel
Organize Project Early with Adequate Staff
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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
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Reduce RiskMeeting Project Cost
Systems Engineering
Build Test Models to Verify Design
Focus on Meeting the Minimum Requirementsand Nothing More
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Contingency Planning
The Get-Well-Plan
Form
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Accept Risk (Do Nothing)
Not All Risks are Severe or Fatal
Cost Benefit Analysis
Not for Risks which are Potentially Severe
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Risk Management is Project
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Risk Management is Project
Management
Another Tool for PM Supplements
Requirements Definition
Task DefinitionScheduling
Budgeting
Configuration ManagementChange Control
Performance Tracking and Control
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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
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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
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Risk Analysis Methods
Expected Value
Decision Trees
Uncertainty and Payoff Tables
Simulations
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Questions