Yarmouk University

Hijjawi Faculty For Engineering Tech

Project Management and

Quality Control
Cost Analysis and Risk
Management
Dr. Mwaffaq Otoom
mof.otoom@yu.edu.jo
Fall 2012
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Overview
Cost Budgeting
Risk Analysis

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Cost Overruns on Projects

Cost overrun %

300

200

100

-100
1910

1930
1920

1950
1940

1970
1960

1990
1980

2000

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
At project
initiation

Cumulative cost

Regions of timecost uncertainty

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At project
execution

At project
definition

Contingency
fund

Cost
estimate

Time

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System Life Cycle Costs

Life cycle costs (LCC)
All costs of a system throughout its full
cradle-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 of the
end-item system
To establish target costs for operating,
maintaining, and disposing of the end-item
system.
To design the 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, or

promise.

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Estimating Process
Accuracy versus Precision

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Estimating Process
Estimating Methods
1.
2.
3.

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Expert opinion
Analogy + compensation for differences
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
Procedure for larger projects

1.
WBS
information

2.

Project Management
(PM)

Functional Management
(FM)

3.
Work Team Leads
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Estimation Process
Project Management
6.

Functional Management

Labor and cost

estimates

4., 5.

Work team
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Estimation Process
Project Management 7., 8.
WBS
information

Functional Management

Work team
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Estimating Process (contd)

Project Management

7., 8..

WBS
information

Procedure for larger projects, steps 7-8

Functional Management

7. PM: Adds in contingency amounts.

Two possible contingencies
Work team
1. Base estimate = (WP estimates + WP contingency)
(to handle known-unknowns)
2. Final estimate = Base estimate + overheads + project
contingency
(to handle unknown unknowns; PM controls this)
8. PM: Compares bottom-up estimates to top-down targets or goals.
Attempt to reconcile differences.
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Elements of Typical Budget

I. Direct Costs

Direct Labor (DL)

Charges for labor working directly on project
Direct Overhead on Labor (% of DL)
Labor support: benefits, etc.

E.g., 40%

50,000.00
20,000.00

Direct Nonlabor and 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
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100,000.00
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Project budget subdivided into control

accounts
ROSEBUD

Project Budget $ 356,755

Project
management
$ 12,550

Cost
Accounts

Basic
design

Hardware

Software

J $31,362

$179,868

$122,228

Materials

M $138,571

Installation

Y $20,352
Assembly

V
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$20,945
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Procedures

Q $100,846
Specifications

L $21,272

Final
Tests

$10,857
User
Test

X $6,622
System
Test
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W $4,235

Performance Analysis
BCWS - Budgeted Cost of the Work Scheduled
PV = Hourly Rate * Total
(Planned Value or PV)
Hours Planned
ACWP - Actual Cost of the Work Performed
AC= Hourly Rate * Total
(Actual Cost or AC)
Hours Spent
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
EV = Baseline Cost * (% of
Complete Actual)
(% Complete Actual) = AC /EAC
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Performance Analysis

Over budget ?

How much of
project was done?

Under budget ?

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Performance Analysis

22

Performance Analysis

23

Performance Analysis

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Example
Parmete Co. is to remove 1,000 parking meters
and replacing them with new ones for which
they 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, but
rather that the project is 2 days behind schedule
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Example (cont.)
Scheduled Project Costs
200,000

150,000

Costs

BCWS
100,000

BCWP

50,000

0
0

10

20

30

40

Time

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Variances
Accounting Variance

AV = BCWS - ACWP
Schedule Variance
SV = BCWP - BCWS
Time Variance
TV = SD - BCSP

SD :- Status Date
BCSP :- date when BCWS = BCWP

Cost Variance
CV = BCWP - ACWP
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Logon Project (Week 20)

Logon Project Status
600

AV

Cost ($1,000)

500

SV

400

BCWS

300

BCWP
ACWP

200
100
0

10

15

20

25

Week

SV = BCWP - BCWS = -$80,000

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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
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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 schedule
With budget overrun
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Example
Assume a project that has exactly one task
The task was baselined at 8 hours, but 11 hours
have been spent and the estimate to complete is
1 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 = $100
PV 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<1]
CV = Earned Value (EV) - Actual Cost (AC)
CV = -$366 ($734 EV - $1100 AC)
(indicating a cost overrun)
CPI = Earned Value (EV) /Actual Cost (AC)
CPI = 0.66 ($734 EV / $1100 AC) [CPI < 1]
(indicating over budget)

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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
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= 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 current
trend, we expect to complete the project at cost remaining
of $724,675 for a final project cost of $1,283,333.
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Logon Example
Logon Status & Forecast
1400
FCAC
SD

1200

BCAC

Cost ($1,000's)

1000

BCWS

800

FBCWP
600

FACWP

400
200
0
0

10

20

30

40

50

Week

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Logon Example
Logon Status & Forecast
1400
FCAC
SD

1200

BCAC

Cost ($1,000's)

1000

BCWS

800

FBCWP
600

FACWP

400
200
0
0

10

20

30
Week

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40
50
Scheduled
Revised
Completion
Completion

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Risk Concepts
The likelihood that some problematical event will
occur
The impact of the event if it does occur
Risk = f (likelihood , impact)
Project is considered risky if at least one factor is
large

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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 risks
Chronology
Type of work

High Risks

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Approach is New/Unusual
Technology is New/Unusual
Staff needs training in new Tasks/Skills
Process using New Equipment, Systems or
Procedures
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Sources of Risk
Any factor of uncertain Probability which can
affect 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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Identification Techniques (Cont.)

Process Flowcharts
Brainstorming and Cause and Effect Diagrams

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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 Impact
What 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 from

Multiple Risk Sources, Simple Weighted Average
CIF = (W1)TI + (W2)CI + (W3)SI

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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 + CIF CLF (CIF)
Risk Consequence = (Impact) * (Likelihood)

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Risk Response Planning How to

Deal with the Problem

Transfer the Risk

Avoid Risk
Reduce Risk
Contingency Planning
Accept Risk (Do Nothing)

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Risk Likelihood, Risk Impact, and

Expected Value Consequences

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Transfer the Risk

Transfer Partly or Fully from Customer to
Contractor or Vice Versa
Use Contract Incentives

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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 Than
Eliminate Payoff Opportunity

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Reduce Risk Technical Performance

Best Technical Team
Perform Analysis of Key Technical Parameters
Models 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

(Cont.)
Reduce System Complexity to a Minimum

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Recognize Tasks
End Item Design
Decouple Activities
Use Design Margins

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Reduce Risks Meeting Schedules

Create Master Project Schedule
Schedule Risky Tasks Early to Allow Time to
Recover
Focus on Critical and Near-Critical Activities
Best People on Time-Critical Tasks

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Reduce Risks Meeting Schedules

(Cont.)
Incentive for OT
Do High Risk Activities in the Project Network
in Parallel
Organize Project Early with Adequate Staff

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Reduce Risk Meeting Project Cost

Identify and Monitor Cost Drivers
Perform Design Alternative Reviews and
Assessments
Validate System Design and Performance
Maximum Use of Proven Technology and
COTS

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Reduce Risk Meeting Project Cost

Systems Engineering
Build Test Models to Verify Design
Focus on Meeting the Minimum Requirements
and 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

Management
Another Tool for PM
Supplements

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Requirements Definition
Task Definition
Scheduling
Budgeting
Configuration Management
Change Control
Performance Tracking and Control
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Risk Management Principles

Create Risk Management Plan
Create a Risk Profile

Likelihood
CS Impact
Contingencies
Trigger Events

Risk Officer
Not the PM
Devils Advocate
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Risk Management Principles (Cont.)

Calculate a Risk Reserve
Risk Time RT
Risk Cost RC

Monitor Risk Continuously

Establish Communication Channels
Document Everything of any Value for Lesson
Learned

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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 is Never Appropriate

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Risk Analysis Methods

Expected Value
Decision Trees
Uncertainty and Payoff Tables
Simulations

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Questions

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