Cost Management and Cost ControlCost Control

Manuel Suarez

October 2011

Agenda

1. Introduction

2. Reasons for cost overruns in government ledjprojects

3 Project management techniques for cost3. Project management techniques for costmanagement and control

4. References

5. Questions

1. INTRODUCTION

• Australia: Problems with the installation of an ERP system atCrane Group Ltd. led to an estimated cost overrun of $11.5pmillion.*

• India: As many as 274 projects currently under implementationy p j y pin the Central sector are suffering serious cost and timeoverruns.**

• Pakistan: Pakistan has sustained a cost overrun of Rs 1.798billion (over $30 million U.S. dollars) in the execution of the66.5 megawatt Jagran Hydropower Project in the NeelumValley ***Valley.

• United States: Northern California lawmakers were outragedover Governor Arnold Schwarzenegger's announcement thatover Governor Arnold Schwarzenegger s announcement thatcommuters should have to pay construction costs on Bay Areabridges. Maybe it takes the Terminator to help controlcosts!****

*Songini, Marc L., “Australian Firm Wrestles With ERP Delays,” ComputerWorld (July 12, 2004).**Srinivasan, G., “274 Central sector projects suffer cost, time overruns,” The Hindu Business Line

(May 4, 2004).***Mustafa Khalid “Rs 1 8 billion cost overrun in Jagran hydropower project ” Daily Times***Mustafa, Khalid, Rs 1.8 billion cost overrun in Jagran hydropower project, Daily Times

(November 19, 2002).****Gannett Company, “Governor Refuses to Pay for Bay Bridge Cost Overruns,” News10 (August

17, 2004).

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTSGOVERNMENT PROJECTS

2 1 A bi P j t S /Obj ti2.1 Ambiguous Project Scope/Objectives

I d i d t ti f j j t• In design and construction of major projectsthere has been a trend toward starting fieldconstruction with a lower percentage ofconstruction with a lower percentage ofdesign definition

• A lot of government-led projects aredeveloped for political interest so there is notdeveloped for political interest so there is notenough engagement when defining thescopescope.

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTS

2 2 I ff ti d i i ki t

GOVERNMENT PROJECTS

2.2 Ineffective decision making system• In government-led project, bureaucracy is a

j i l di t j t d l dmajor issue leading to project delays andsubsequent cost overrunsLack of alignment between the project• Lack of alignment between the projectobjectives and stakeholders causes disputesleading to delaysleading to delays.

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTS

2.3 Poor cost estimation

GOVERNMENT PROJECTS

• There is little sharing of actual, reliable costd t ithi th t ti i d t M t

2.3 Poor cost estimation

data within the construction industry. Mostpublished cost data are viewed as lackingdibilit i th l ldcredibility in the real world.

Even within companies a feedback of actual• Even within companies, a feedback of actualcosts is not consistently used to review andadjust the basis for estimating future projectsadjust the basis for estimating future projects

• Lack of stakeholders (contractors vendors• Lack of stakeholders (contractors, vendors,suppliers) involvement when gathering costestimation dataestimation data.

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTS

2.3 Poor cost estimation

GOVERNMENT PROJECTS

2.3 Poor cost estimation

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTS

2 4 I d t it i d t l

GOVERNMENT PROJECTS

2.4 Inadequate monitoring and control

O i i i l d fi d l d• Omissions or improperly defined scopes leadto unreliable baselines so the monitoring andcontrol techniques cannot be implementedcontrol techniques cannot be implementedeffectively.

• PM tools and techniques for cost control areuseless if the data is not collected in a timelyuseless if the data is not collected in a timelyand accurate manner

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTS

2 4 Inadequate monitoring and control

GOVERNMENT PROJECTS

• In large projects, sometimes, the work

2.4 Inadequate monitoring and control

packages are too large to be managedeffectively so the data collection becomesdifficult leading to inaccurate reports.

f• No spelt out procedures for assessing andquantifying the amount of work done inl ti t th t f t trelation to the amount of money spent at

each stage of the project

2. REASONS FOR COST OVERRUNS IN GOVERNMENT PROJECTS

2 4 Inadequate monitoring and control

GOVERNMENT PROJECTS

2.4 Inadequate monitoring and control

3. PROJECT MANAGEMENT TECHNIQUES FOR COST CONTROLFOR COST CONTROL

• Current learning phase of a project can be used forfuture decision making thorough effective stage gatereviews.

• In order for stage gate reviews to be successful theymust be treated as corrective actions rather than justmust be treated as corrective actions rather than justsimple reports. Also, it is very important the engagementof all stakeholders because they need to understand theurgent of the situations.g

• Configuration management is a vital process in projectmanagement as every change during the project lifemanagement as every change during the project lifecycle will be documented and subsequently the cost ofany changes will be captured helping on the generationof robust cost data and updating the project budgetof robust cost data and updating the project budget.

3. PROJECT MANAGEMENT TECHNIQUES FOR COST CONTROLFOR COST CONTROL

• Lessons learnt can be used for cost estimating but mustbe analyzed carefully to identify what the relevantinformation is because all the projects are performed indiff i f l diff ldifferent environments, for example different personnel.

• Network analysis must be updated throughout the projectNetwork analysis must be updated throughout the projectlife cycle to identify the critical path and try to minimizefloats because they can cause risks.

• Updating Stakeholder analysis must be done throughoutthe project life cycle because interest fluctuates and itmust be determined how to maneuver the risks within themust be determined how to maneuver the risks within thestakeholders. Some has more interest and powerconsequently high attitude to accepting and mitigatingrisksrisks

3. PROJECT MANAGEMENT TECHNIQUES FOR COST CONTROLFOR COST CONTROL

• Earned-Value analysis is the best bridge between costreporting and cost control but its success depends on theexistence of effective framework of planning includingi l d ll i d i f dtimely and accurate collection and reporting of cost data

Issues with Earned-Value:Issues with Earned Value:

• Most of mega projects are divided into small sub-projectsso if the data for those sub projects are assessedso if the data for those sub-projects are assessedindependently, it will produce less accurate results thanwhen using the data for the whole project is usedtherefore it can cause severe errors in the futuretherefore it can cause severe errors in the futureestimates and forecasts.

4. REFERENCES

1. 1. Dennis Lock (2000). Project Management. 7th ed. Hampshire, England: Gower Publishing Limited. 557-Hampshire, England: Gower Publishing Limited. 557583.

2 2 Kerzner H (2009) Project Management : A Systems 2. 2. Kerzner .H (2009). Project Management : A Systems Approach To Planning, Scheduling, and Controlling. 10th ed. Hoboken New Jersey: John Wiley and Sons, Inc 629 - 676Inc. 629 - 676.

3. Gray .F, Larson .W (2006). Project Management : The M i l P 4th d N Y k M GManagerial Process. 4th ed. New York: McGraw-Hill/Irwin. 418.

5. QUESTIONS