repm fundamental rules · vs quantity/time/quality! the more material produced, the less costly...

REPM Fundamental Rules

ARCH 738: REAL ESTATE PROJECT MANAGEMENT

Morgan State University

Jason E. Charalambides, PhD, MASCE, AIA, ENV_SP

(This material has been prepared for educational purposes)

2

Introduction

3

Introduction! Construction Project Management:

" The Neanderthal contractor once rolled a rock to the entrance of his cave and created the first “building” space, providing a natural enclosure that came with other attributes such as warmth, security, protection from the elements, exclusiveness etc.

" By that first move, human successfully interfaced land with artifact, i.e. the rock was the first door, to serve an unmet need of a space consumer (a market).

" Eventually this development of the cave evolved as the construction industry, managed by Construction Project Managers

4

Introduction! Compare to Pure Project Management:

" Creation of the Universe / Big Bang (whichever way you wanna go with) was the first project (!) big as it was.

" The second big project that can come to our minds may be Noah's Arc. Noah was a brilliant project manager.! The project was on time,! It met the specifications,! And it was within budget!

" Going by the trends of the times, the project was also sustainable, presented a high level of resiliency, and local materials were used.

5

Introduction! Main Reasons for Failure:

" Lack of Thorough upfront feasibility studies,! Most project/product wealth is created/destroyed up-front

" Lack of meaningful Statement of Work (SOW) and Scope definition (design changes and scope creep)

" Clients/Owners know what they “want” but not what they need.

" Specifications are incomplete" Change orders causing contract conflicts. Owners hate

them / Contractors and Lawyers love them!

6

Introduction! Main Reasons for Failure:

" Technological and functional needs render project useless.! Adaptability, Resilience, and Longevity are not well

engrained in the character of the built." Fragmentation of Responsibilities

! Always do a RACI diagram" Managing the wrong critical path

! Consider sub-critical paths with greater risk" Lack of Understanding among stakeholders

! Essentially, poorly set scope" Unbalanced resources – Resources in disharmony with

requirements

7

Fundamental Rule #1

8

Fundamental Rule #1

! Risk Return Relationships

Every investment or new venture is Always a

Risk/Return trade off

9

! Definition of Risk:" Risk is a condition that is based on uncertainty with

potentially undesirable results." When there is certainty about a future event, there is no risk." The level of uncertainty makes a project interesting

! literally there is monetary interest in there!" That is because every stakeholder requires an extra

monetary cushion just in case risk leads to failure." Therefore the stakeholder that has the best odds, i.e. the

one who is closest to certainty, wins by being compensated for work plus an extra bonus! If you apply any fundamental knowledge of statistics you will never

step play in a casino.

Fundamental Rule #1Risk/Return Relationships

10

! Levels of Risk:" Assumed Certainty (consider the abscissa for the life of a project and the

ordinates to represent the value of probability with respect to time)

" In case of certainty there is no real graph line. It all comes to a point with a known value! Take the seven years as a standard for anticipated results


11

! Levels of Risk:" Risk (again consider the abscissa for the life of a project and the ordinates

to represent the value of probability with respect to time)

" In the case of risk with some indications of possibilities there normal distribution curve allows stakeholders to predict the possibilities. Therefore that gives no certain result but possibilities


12

! Levels of Risk:" Uncertainty (again consider the abscissa for the life of a project and the

ordinates to represent the value of probability with respect to time)

" In the case of total uncertainty the result is totally unpredictable, so a number of distributions may be generated. The less data, the more uncertain the results will be.


13

! Methods of evaluating Risk:" As long as specific distributions of odds can be generated, one can

predict (based on the odds) the likely outcome of a risky event." Again, the more data is available, the more certain the result." One very effective method of generating an analysis of risk is the Decision

tree.


14

! Methods of evaluating Risk cont:" A Decision tree allows a user to determine the possibility of an outcome

by taking each step and evaluating the possibility for it." Placing those on a “tree” formation allows users to determine the potential

outcomes of every scenario.


15

! Methods of evaluating Risk cont:" But what happens if there are steps that are perfectly unpredictable?

! An example would be the case of “uniform distribution” where many possible scenarios have equal chance and it is impossible to predict. E.g. the throw of a dice. We know all six faces have equal chance but it all depends on how the user hods the die, with how much momentum it is cast, the distance it will travel, and the elastic/plastic qualities of the surfaces when they will have impacts and rotations until the die comes to rest

" That is where a Monte-Carlo simulation is applied. Today there are a few commercial programs that can perform that simulation to thousands of rounds to form a distribution


16

! Human behavior to risk" Humans can be impulsive … better not in this type of business!!! Ore

else, ...you are about to experience something much worse than what happens in a casino.

" Are you Risk prone or risk avert?" Pick your favorite project!


17

! Human behavior to risk" One of the two projects is a better deal than the other

! ...depending on whether you have the capital to invest to begin with.


OutcomeScenarioA=0.48×$3000=$144

OutcomeScenarioB=0.77×$2000=$154

18

! Risk prone vs Risk avert" Risk Avert - No risk for high $ if (especially if) return is low." Risk Prone – Taking risk for even minimal return


19

! Phases of Uncertainty during project


20

! Risk and Uncertainties with respect to project phase


21

! The level of uncertainty and risk diminishes as the project progresses! However, in terms of prediction, the further we distance from present, the

higher the level of the uncertainty.


22

! The value of money with respect to time is modified by the following formula:

where:" Pv= Present Value" Fv = Future Value" R = Rate of Return" n = years

" Any “x” amount of wealth one year becomes worth less the next year depending on the above mentioned formula.


Pv= Fv(1+R)n

23

! Example:" What would be the value of $1,673.73 in 7.5 years if an

interest rate of 3.75% is applied?

" Transforming the formula:

" More on this subject will be covered in the module of “Project Feasibility”


Pv= Fv(1+R)n

→ Fv=Pv∗(1+R)n

→ Fv=$1,673.73∗(1+3.75)7.5=$2,205.95

24

Fundamental Rule #2

25

Fundamental Rule #2! Cost Benefit Relationships

Every investment or new venture (New Project / Product Decision) is Always a Benefit / Cost trade off

– Y' know, I've god some news for you. I had my accountant run a Cost/Benefit analysis on you. Are you ready to hear it?

26

! The cost/benefit ratio is the division of the sum of present value in benefits over the sum of the present value of costs

! The Net Present Value (NPV) is the subtraction of the sum of Present costs out of the sum of Present benefits, and it should equal higher than zero.

" More on this subject will be covered in the module of “Project Feasibility”

Fundamental Rule #2Cost/Benefit Relationships

BC

=∑ PvBenefits∑ PvCosts

≥1

NPV=∑ PvBenefits−∑ PvCosts≥0

27

! Value Analysis/Engineering

" Value:

" In order to create “wealth” it is imperative that the following is attained:


FUNCTIONCOST

≈WORTHCOST

≈ PERFORMANCECOST

MAXIMUM REQUIRED PERFORMANCE (Pmax)MINIMUM COST (Cmin)

≈ SOME INPUT /OUTPUT RELATIONSHIPCOST

28

! Nearly everything we do in Project Management goes through the following Cost/Worth functional analysis

" What is the item?" What does it do?" What must it do?" What is the cost?" What is the value?" What alternative would do the job" Repeat procedure for next alternative" Determine best Cost/Value ratio (Wealth maximization)

! This analysis can be virtually used in any situation where a decision has to be made regarding the construction/Purchase of any commodity/product/item


29

! A relationship of cost vs quantity/time/quality

! The more material produced, the less costly each item becomes, the less time it takes to produce it, the better the quality of the end product, the more value for the investment.


30

! A view on Constructability / Value engineering


31

! In Architecture we love to make a splash! Yes, we are ready to overpass Montgomery and reach Messina a few hours ahead of him. But a prima-donna attitude is not always necessary

" What is the item?" What does it do?" What must it do?" What is the cost?" What is the value?" What alternative would do the job" Repeat procedure for next alternative" Determine best Cost/Value ratio (Wealth maximization)

! This analysis can be virtually used in any situation where a decision has to be made regarding the construction/Purchase of any commodity/product/item


32

! In Architecture we love to make a splash! Yes, we are ready to overpass Montgomery and reach Messina a few hours ahead of him. But a prima-donna attitude is not always necessary.

Vs

" And you can always make a splash with simple forms


33

! You can evan make a very big splash with simple forms and geometries that make sense.

! Keep in mind: Maximize the performance and minimize the cost.– Nobody would visit an uninteresting building or rent a building that is not

functional. However, if ornamentation and aesthetics yield no benefit, but just maintenance costs, the project will lead to losses or bankruptcy.


34

! The KISS Approach:

" Keep It Simple and Straight" Keep it Same Size" Keep It Square and Squatty" Keep It Spec simple" Keep it Standard Size" Keep it Support Simple" Keep it Standards Simple" Keep it Schedule Sacred" Keep it Site Standard

Walter J. Boyce


35

Life Cycle Allocation

36

! Diagramming the Life Cycle of a project:


37

! What is a building?

" Most of us would suggest that it is a structure providing a specific type of accommodation, use, or “shelter”.

" Lately more and more are saying it is actually “a business or information processing unit”, actually a so-called “system” as such.

" Others say that in essence it is “an enterprise resource transformation unit or workstation”.

" If you were to do a total life cycle cost (LCC) analysis of an average high rise office block, you will most likely find that on a LCC basis that:! ±92% of the costs are “people costs” (salaries, environment,

processing, maintenance and upkeep to keep the people using the space “happy”), and,...

! ±8% of the total LCC represent the original construction and development costs


38

! Savings potential with respect to phases of a project's Life Cycle


39

! Resources and Effort with respect to project Life Cycle phases

"


40

! Relative ability to influence cost

"


41

! Integrated project information generated

"


42

! Diagnosing that a project is unsuccessful may not necessarily suggest that it is better to cancel just at any time. As time passes, the commitment grows and at the “Point of no return” it costs more to cancel than to continue!

"


43

Summary & Conclusion

44

Summary & Conclusion! Timing and Specifications are key to a successful project! A clear scope definition will guide the project! The more certainty in the project, the less the risk, the better

chances for success" Higher risk may yield better profits if the project is successful. If you are

more certain than competitors you have an edge.! Monetary value is dependent on time and rate of return! The total benefit should exceed the total cost! Simplify a project to minimize costs due to uncertainties.

" When someone says “it is kind of complicated” it means “I do not understand it” and if there is lack of understanding, action will be delayed, or results will not be satisfactory, and there will be losses.

repm fundamental rules · vs quantity/time/quality! the more material produced, the less costly...

Documents