Today we finished off Project Time Management and covered Chapter 7 - Project Cost Management and Chapter 10 - Project Communication Management of the
A Guide to the Project Management Body of Knowledge (PMBOK Guide)
Chapter 7 - Project Cost Management
This is section is a bit heavy-going especially if you don't have much experience or real-world practical, day-to-day hands-on as part of your normal job function. In my case, being a Software Development Project Manager, and a somewhat internally focused with 20-30% external customer facing activity, not to mention my company's organisational structure - prevents me from doing any Project Cost Analysis, Measurement and Control. It is very interesting that PMI mandates that this is indeed within the remit of every project manager, surprisingly in my company being pretty large with 5000 people, all the PMs in the training, including senior managers at director level, had little or no visibility of this rather fundamental part of the Project Management Knowledge Area. But in order to pass the PMP exam, one has to master this area and add it to your PM toolbox, even though I personally will not be using most of this in my current company, but nevertheless will stand me in good regard, when applying for positions outside.
So what is Project Cost Management in a nutshell?? Basically, just as we have to manage the schedule/time throughout the Planning & Control Process groups, we need to ensure that project costs and budget is managed in a similar way. After-all, doing work does cost money. The pot is not bottomless. So the project manager must estimate at the outset the costs likely to incur, and ensure that a budget is allocated that is realistic enough that at the time of execution we are reasonably confident that we'd planned and accounted for the likely costs, and also accounted for contingency, a reserve buffer just in case some unforeseen situations need to be dealt with. And throughout the Monitor & Control Process group, we have to measure the planned versus the actual costs, and use that to predict the end result. And in this measurement, make decisions along the way that could steer the success of the project.
In order to do this, there are some definitions, mathematical formulas and graphs that you need to learn, master and apply.
There are three processes to Project Cost Management:
1. Estimate Costs - Done at Planning
2. Determine Budget - Done at Planning
3. Control Costs - Monitor & Control
Important term for Exam: LCC Life Cycle Cost Aggregates the total costs through all the phases of the product life cycle.
How do we typically calculate Profit and Loss - P&L?
We start with
Revenues (amount of money you're going to make)
Minus/Less
Cost of Sales (direct costs incurred as result of supporting this sale)
Equals
Gross Profit
Minus/Less
Overheads (indirect costs - rent, lights, telephone, travel, etc)
General Admin
Legal
Equals
Operational Profit (or EBIDTA - Earnings Before Interest Depreciate Tax)
Minus/Less
Tax
Depreciation
Interest Rates
Equals
NET PROFIT (money in the bank)
How do we estimate Cost?
We use the following as inputs to the costing exercise: Scope Baseline (SOW), Project Schedule (Timeline), Human Resource Plan (Resource Estimates at planning), Risk Register (table of scenarios likely to upset the outcome of the project), Enterprise Environmental Factors (Regulation, laws, etc), Organisational Process Assets (list of assets required to help project).
Tools and techniques to cost estimating similar to Time estimating:
1. Expert Judgement - a.k.a. Delphi technique - go ask independent experts
2. Analogous Estimating - use past project experience, hunch-base, gut instincts
3. Parametric Estimating - a multi linear polynomial function linear regression - basically a model
4. Bottom-up Estimating - working from the WBS upwards, aggregate costs
5. Three-point Estimates - use the PERT model formula: Best case, Worst case, Most Likely
6. Reserve Analysis - allocate a buffer - cost of taking care of risks
7. Cost of Quality - if you have a measurable way of determining quality and the costs associated
8. PM Estimating Software - computer-aided tool
9. Vendor bid analysis - compare costs with alternatives, e.g. outsource versus in-house
Exam: How Accurate does PMI expect the Cost Estimation to be?
There are three levels to the cost estimate. Example, say the actual cost is £100k.
During the initiating phase, the rough order of magnitude estimate should be: -50% to +100%. (£50k to £200k)
During the planning phase, the budget estimate can be: -10% to +25% (£90k to £125k)
During the execution phase, we should be converging on a definite estimate: -10% to +15% (£90k to £115k)
Once you've estimated the costs, you then use this information to determine the budget. The tools and techniques for determining the budget:
1. Cost Aggregation - add up all the costs
2. Reserve analysis - estimate a buffer to deal with unexpected situations
3. Expert Judgement - again, Delphi technique
4. Historical relationships - past data
5. Funding limit reconciliation - be aware of the limits. E.g. You budget £500k, your boss says £300k. What do you do?
Exam: Terminology to memorise
Capital/Depreciation - two forms
1. Straight line - value depreciates linearly and can be predicted over time quite easily (straight line graph - think of PCs)
2. Accelerated - non-linear, immediate depreciation followed by some asymptotic levelling out. Think of a car's value over time. Learning curve. Two Types mentioned in exam: Sum-of-the-Years-Digits and Double Declining Balance
BCR - Benefit Cost Ratio
Compares the benefits with the costs. BCR > 1 means the benefits are greater than the costs
Opportunity Cost
The opportunity given up by selecting one project over another
Fringe Benefits
The "standard" benefits formally given to all employees such as education benefits, insurance, profit sharing
Other terms also include PERK, benefit, bonus
Discounting
Discounting - the time value of money, might need to follow-up more here
Net Present Value (NPV)
Value in terms of time zero - what is the value that you would have today, given the interest rate for the period. If you are paying upfront for a cost, and then being guaranteed a rate of return over a period, the NPV must be greater than zero to be a worthwhile investment. To calculate NPV, this is the opposite of calculating compound interest. In the exam, tables will be provided, like here
Internal Rate of Return (IRR)
Average rate of return earned over the life of the project. No need to learn formula for exam. IRR must be bigger than bank rate in order to invest.
Sunk Cost
Sunk Cost - Amount already invested; irrelevant for future decisions.
Profit
Profit - Operating income or fee, the amount the organisation may earn for its work over and above the cost of performance
Margin
Profit or fee as a percentage of the cost of performance
Payback Period
Payback Period - Amount of time that revenue exceeds the costs, also known as break-even point
Controlling Costs - more equations
Now that you've estimated the costs and come up with a budget from the planning phase, now you enter the project execution phase and you need to monitor and control the beast. What tools and techniques do you use:
1. Earned Value Measurement - measure planned versus actual
2. Forecasting - using the earned value, predict the future
3. Cost Performance index - how well are the costs measuring up against actual performance
4. Performance reviews - are we working the way we should?
5. Variance analysis - analyse the reasons why we're slipping
6. PM Software - use some computer based tool to help
Earned Value Measurement (EVM)
The Earned Value (EV) approach ascribes monetary values to the work contents
Planned Value (PV) or (BCWS Budgeted Cost of Work Scheduled)
The value of work scheduled to be accomplished
Actual Cost (AC) or (ACWP Actual Cost of Work Performed)
The cost actually incurred in accomplishing the work performed
Earned Value (EV) or (BCWP Budgeted Cost of Work Performed)
The monetary value of the work actually accomplished
Earned Value Measures of Performance
Scheduled Variance (SV)
SV = EV - PV
Cost Variance (CV)
CV = EV - AC
Schedule Performance Index (SPI)
SPI = EV / PV
SPI = 1 on schedule, SPI > 1 ahead of schedule, SPI < 1 behind schedule
Cost Performance Index
CPI = EV / AC
CPI = 1 on budget, CPI > 1 good saving money, CPI < 1 costly wasting money
Earned Value Completion Estimates
Budget at Completion (BAC)
The total budget based on the original work plan
Work Remaining (WR)
Budget cost of work yet to be completed: WR = BAC - EV
Estimate to Complete (ETC)
Updated estimate cost of work remaining (WR)
Estimate at Completion (EAC)
Updated total cost of the entire project. Two approaches: Original Estimate and Revised Estimate
Original Estimate Approach
Based on the assumption that the original estimate of the cost of remaining work is valid
EAC = AC + ETC
Revised Estimate Approach
The data collected during the past performance can be used to improve the estimates
EAC = BAC / CPI
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Chapter 10 Project Communication Management
All project managers should already be familiar with the art of communication. Well, that's the hope anyway. It is surprising though that most companies don't know how to communicate, and misuse the tools of communication. As a project manager, communication is the most important skill to have in your toolbox. I'm going to quickly rush through this chapter, since much of this was old news - and focus on the stuff that'll be asked in the exam.
Communication Processes
As expected, Communication Management is expected in all the groups: Initiating, Planning, Executing, Monitoring & Control. I personally would also include it in the Closing group, but PMI doesn't. Five processes:
1. Identify Stakeholders - the PM needs to know who's on the project, his allies, etc
2. Communications Plan - document that describes the communication being used (meetings, whos' who, etc)
3. Distribute Information
4. Manage Stakeholder Expectations - private tool the PM should keep close at heart to know how to handle stakeholders
5. Report Performance - project must adopt a suitable method for reporting project performance
Exam - Communication time Breakdown
Project Manager should spend time as:
- 9% on Writing
- 16% on Reading
- 30% on Talking
- 45% on Listening
Exam - Communication Facts
We retain/absorb:
- 10% of what we read
- 20% of what we hear
- 30% of what we read and hear
- 50% of what we discuss with others
- 80% of what we experience
- 90% of what we teach to others
Communication retention:
- 50% now
- 25% in 2 days
- 10% after 7 days
Communication complexity:
The number of communication channels increases geometrically with the number of people involved
Between N persons there are N(N-1)/2 communication links
Active Listening - Facilitating Listening Behaviours
Verbal: Restate the main ideas expressed to show your interest. Verify you correctly understood what was meant.
Non-Verbal: Show Interest (nod, lead forward, maintain eye-to-eye contact). Be patient, accept moments of silence, be relaxed, show openness.
Good Communication Styles
- Authoritarian - gives expectations and guidance. "Guys, this is what I expect to do, and how we should go about it...."
- Promotional - cultivates team spirit. "People, we can do this if we work together, I know we can, I believe in you..."
- Facilitating - gives guidance as required. "In order to get this up an running, do this, that and...."
- Conciliatory - friendly and agreeable. "Jo, you know I got your back right? Just carry on doing this, you won't go wrong..."
- Judicial - uses sound judgement. "Guys, according to my opinion, it is best we proceed in this way..."
- Ethical - hones, fair, by-the-book. "Look guys, according to company rule book, we shouldn't be doing this...."
Bad (Not-so-good) Communication Styles
- Secretive - not open or outgoing. "Information is power, people must come to me..."
- Disruptive - breaks apart unity of group, agitator. "You will not believe what Paul said about Dave...."
- Intimidating - tough guy, can lower morale. "Do this now you idiot, or else I'll do it myself..."
- Combative - eager to fight or be disagreeable. "Don't even bother approaching John, he's always right..."
Clip 1 of the day: Communication Improve your English
Clip 2 of the day: The Italian man who went to Malta
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