Managing cost models, baseline budgets and actual costs to deliver successful projects, 4 April 2017

+44 (0)1225 [email protected]

Welcome to clear thinking

Managing cost models, baseline budgets and actual costs to deliver successful projects

Ewan Glen & Dr Paul Wood4 April 2017

+44 (0)1225 820980 www.bmt-hqs.com [email protected] ©BMT Hi-Q Sigma Ltd

Aims of the presentation

The presentation is aimed at providing the audience with a greater appreciation of the links between the initial cost model estimates against which a project business case is derived and approval achieved, and the subsequent baseline budget / actual costs against which it is managed to achieve successful delivery.

The presentation will take the audience on a journey through understanding what the project is expected to cost, and the factors that influence this, to the budget that is set and funds that are committed to deliver within. It will consider how the information developed is used through the life of the project, the challenges that are often encountered and how we might ensure that the final product / service delivered can be consider a success.

It will also consider scenarios where the product or service is associated with more than one project through life and how these can be related back to the original through life cost model


Context Relationship between Product and Project Lifecycle

Role of the Cost Model in the Product Lifecycle Characteristics, process, challenges

Role of Performance Measurement Baseline in the Project Lifecycle Characteristics, process, challenges

Bringing it together Benefits

Making it stick

Summary

Agenda


Context - Relationship between the Lifecycles

Example Product LifecycleDefinition Realisation Service Dispose

Example Project LifecycleDefine Design Implement Close

Project Project Project

Moving from idea to reality

Delivering benefit (revenue or other) Close-

down

Bound-aries

Exper-ience

Improving (e.g. functionality)


Context – example

London – Olympic StadiumProject 1 – c.£430M build

Conversion to West Ham StadiumProject 2 – c.£200M conversion

Role of the Cost Model

in the Product Lifecycle

• Characteristics

• Process

• Challenges


The required inputs are: Parameters (parametric tools)

Data (parametric tools)

Costs (Uncertainty)

Schedule (when are you going to spend the money?)

Risks

Opportunities

The outputs are: Discounted cash flow

Outturn Costs

Cost Drivers

Probability Density Function

S-Curve

Confidence Limits

This list depends on what you need the cost model for

A cost model can take many forms, depending on the techniques used. Access database

Excel spreadsheet

Monte Carlo Simulation tool

Dedicated Parametric tool

What is a Cost Model?


Before committing to high levels of capital spend, companies normally undertake a(n): Investment Appraisal

Cost Benefit Analysis

Business Case

Understand the required budget Especially in times of austerity

Analysis of cost drivers (sensitivity)

Prevents adverse headlines Scottish Parliament (£50M v £450M)

Today we will argue it is needed to inform the PMB

Why is a Cost Model needed?


Cost Model Process


Agree Assumptions

Identify Data Sources

Data Collection (incl. Risks)

Model Development

Model Verification and Validation

Report

Analysis

Enablers

Stakeholder Management

Risk Management

Assumptions Management

Requirements Management


Top Down Historical Trend Analysis

Cost Model Process

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Cost (£M)

Cost (£M)

Linear (Cost (£M))


Top Down Historical Trend Analysis

Analogy (“It is like one of these”)

Parametric (Pattern backed up by statistics)

Bottom Up Cost Breakdown Structure (CBS) – (could equal PBS?)

Weight Groups – NES 163, Brown Book and ANEP 42

Expert Opinion

Extrapolation (closer to Parametric (at the system level)) For example, the cost electrical wiring for a new school could be

extrapolated from a school that has been built previously based on number of pupils, number of rooms, volume of the school, etc

Cost Model Process


Cost10%-50%-90%Confidence levels

Schedule10%-50%-90%

Confidence levels

Simulation

Schedule3 Point Estimates

Cost3 Point Estimates

Simulation

ID Task Name MIN Duration Max Start Finish TotalSlack

1 Project Start 0 days 0 days 0 days 24/03/09 24/03/09 0 days

2 activity 1 4 days 5 days 6 days 24/03/09 30/03/09 0 days



5 sub-activity a 2 days 2 days 3 days 06/04/09 07/04/09 0 days

6 sub-activity b 3 days 4 days 6 days 08/04/09 13/04/09 0 days





11 activity 8 3 days 4 days 5 days 24/03/09 27/03/09 1 day



14 Project Complete 0 days 0 days 0 days 20/04/09 20/04/09 0 days

24/03

20/04

S M W F S T T S M W F S T T S M W F S T16 Mar '09 23 Mar '09 30 Mar '09 06 Apr '09 13 Apr '09 20 Apr '09 27 Apr '09

INP

UTS

MO

DEL

LIN

GO

UTP

UTS

Risk Register3 Point Estimates

Don’t underestimate the effort required to

carry out an effective analysis


Simulation deals with uncertainty, without needing complex mathematical techniques

If you toss a 2 pence coin, what is the chance of getting a head? ½, 0.5, 50%

If someone else tosses a 2 pence coin, what is the chance of them getting a head? ½, 0.5, 50%

What is the chance of 2 people tossing a coin and both getting a head? ¼, 0.25, 25%

Pretty obvious – lets test this

Simulation

X XX


If we flip a coin 10 times, the results may look like this:

TAILSHEADS

Simulation

The result could have been another combination, such as 8 heads and 2 tails.


If we flip a coin 1,000 times, the results may look like this:

The more we increase the number of simulations, the closer you get to the expected statistical value.

Simulation

TAILSHEADS


Min Max

Uniform

Min Max

Triangular

ML

Beta

Min MaxML

Discrete20 30 40 50 60 70

Distribution Shapes

Mean

Normal


Min M/L Max Triangular Probability Bernoulli T x B

1

2

3

4

5

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8

9

10

200

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100% TRUE

100% TRUE

100% TRUE

100% TRUE

100% TRUE

100% TRUE

100% TRUE

100% TRUE

100% TRUE

100% TRUE

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2053

What happens during Monte Carlo simulation


Min M/L Max Triangular Probability Bernoulli T x B

1

2

3

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9

10

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100% TRUE

100% TRUE

100% TRUE

100% TRUE

100% TRUE

100% TRUE

100% TRUE

100% TRUE

100% TRUE

100% TRUE

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2053

Arithmetic 1000 2000 3000

10% 50% 90%

Monte Carlo 1841 1996 2161

What happens during Monte Carlo simulation


A

B

C

D

Interpreting the results


What confidence limit does your company use from the Schedule?

What confidence limit does your company use from the Cost?

50%?

50%?

Think on our previous discussion about tossing a coin, does this

sound sensible?

10% 50% 90%

Confidence Limits


In the uncorrelated case:

Cost x Schedule

50% x 50% = 25%

71% x 71% = 50%

50% Confidence Limits?


In any project there are likely to be tasks that are related to each other. i.e have a measure of correlation

If any two variables are considered to be dependent on each other then they are said to be either positively or negatively correlated.

Positive correlation tends to widen the output distribution.

Negative correlation tends to narrow the output distribution.

Correlation


Correlation examples Examples of Positive Correlation:

Umbrella sales and rainy weather

Tax rises and months until election

Smoking and health

Examples of Negative Correlation:

Ice-cream sales and umbrella sales

Bike rental and fireplace sales

Be wary when 2 things are not correlated, but appear to be:

‘Parents who drink bottled water have healthier children’

Correlation

X


Collection of good data

Risks are bolted on at

the end of the process

Estimates based on estimates (increases

errors)

Schedule is determined

later

Lack of three point

estimates

Costs in wrong year creates

NPV/Inflation errors

Min and Max added and

called ‘10%’ and ‘90%’

Changes mean the cost model

no longer reflects the

schedule


Challenges in establishing cost model

Role of Performance

Measurement Baseline

in the Project Lifecycle

• Characteristics

• Process

• Challenges

• Working against it


Characteristics

Project lifecycle focussed (some or all)

Authorised scope, broken out by WBS

Single point budget for each WBS element

Time-phased schedule

Performance Measurement Baseline

The time-phased budget plan against which [project] performance is measured

APM EVM Guidelines

What is the Performance Measurement Baseline

Understanding of risk (management reserve)

Alignment to funds / cash-flow

Often created bottom up

Underpinned by assumptions


High level overview of the process

Define Scope & Structures

High Level Plan

Establish Responsibility

Develop Estimates

Develop Logic Network

Analyse and optimise

Review & commit

Authorise

Enablers

Communicate!!!

Stakeholder Management

Risk Management

Assumptions Management

Requirements Management



The Performance Measurement Baseline


Challenges in setting the PMB


Realism

Critical resources

Stakeholder expectations

Risk appetite

Agile

Funds / cash-flow

Project inter-dependencies

Supplier interfacesProduct v

project risk

Quality of estimates


The Performance Measurement Baseline


Managing against the PMB

Scope

Schedule

Status Data (progress & forecasts)

Risk & Opportunity

Costs

Data “engine”

Analysis

ReportingChange

Baseline changesBooking

Codes

Structures (WBS, OBS)

Scope

Baseline,Progress Measures

Progress

Time phased budget

Actual Costs (hours/£)

Cumulative & current period

data

Analysed performance data &

management options

Change requests

Risks, issues and opportunities

Actions (incl. budget)

Earned Value, Forecasts

Learning from experience

Business case / benefit confirmation


Learning from the project

Updated Cost Model

Investment decision

Project PMB

Whole Life Cost Model

Project PMB

Project PMB

Actual cost / out-turn data to update cost model, inform decisions

Investment Decisions based on Business Case, approving funds

Actual cost

Bringing it together

• Benefits

• Considerations


Better stakeholder

understanding

Cost model resource

elements feed schedule

Improved communication

Reduced planning overhead

Changes culture – one

goal

Learning for future projects

Reduced stakeholder engagement

time

Single database of

estimate data


Benefits of working together


Bringing the processes together

Project boundaries

Same sources?

Shared meetings?

Analysis

Shared report?

Define Scope & Structures

High Level Plan

Establish Responsibility

Develop Estimates

Develop Logic Network

Analyse and optimise

Review & commit

Authorise

Communicate!!!

Agree Assumptions

Identify Data Sources

Data Collection (incl. Risks)

Model Development

Model Verification and Validation

Report

Analysis

Aligned structures?



Things change! (scope, environment,

risk impact,…)

Divergence of Schedule and Costs



Aligned schedule


Misaligned schedule

Work together to understand and manage the impact



People

Poor Communication

Egos

Personality Differences

Lack of Training

Lack of Urgency

Lack of Focus

Changed Capability Requirements

Accountancy Adjustments

Technical

Specification Changes

Changes in Associated Projects

Procurement Processes


Success is often delivered through a Culture Change rather than process & tools

Technical v Cultural changes


Technical v Cultural changes

Risk

Schedule

EVMCost


Benefits

Safely delivering required scope within agreed quality, cost and time boundaries

Success?

Updated Cost Model

Investment decision

Project PMB

Whole Life Cost Model

Project PMB

Project PMB

Actual cost / out-turn data to update cost model

Investment Decisions based on Business Case, approving funds


Context Relationship between Product and Project Lifecycle

Role of the Cost Model in the Product Lifecycle Characteristics, process, challenges

Role of Performance Measurement Baseline in the Project Lifecycle Characteristics, process, challenges

Bringing it together Benefits

Making it stick

Summary

Thank you


BMT Hi-Q Sigma LtdBerkeley House, The SquareLower Bristol RoadBath, BA2 3BHUnited Kingdom

www.bmt-hqs.com

Tel: +44 (0) 1225 820980Fax: +44 (0) 1225 820981Mob: +44 (0)

BMT Hi-Q Sigma LtdBerkeley House, The SquareLower Bristol RoadBath, BA2 3BHUnited Kingdom

www.bmt-hqs.com

Tel: +44 (0) 1225 820980Fax: +44 (0) 1225 820981Mob: +44 (0)

Ewan Glen, Capability Manager Dr Paul Wood, Portfolio Manager

[email protected] [email protected]

7747 011703 7786 731166

Questions?

Education

Managing cost models, baseline budgets and actual costs to deliver successful projects, 4 April 2017