Project Management - Lecture 7 PDF

Project Management Project Cost & Risk Management By:Eng. Mohammed Osamah Supervised: Dr. Nasser Almufa 1 Project Cost & Risk Management 2  Risk and Cost Risk Basics Project managem...

Project Management Project Cost & Risk Management By:Eng. Mohammed Osamah Supervised: Dr. Nasser Almufa 1 Project Cost & Risk Management 2  Risk and Cost Risk Basics Project management is to some extent risk management which tries to systematically manage uncertainty in order to increase the likelihood of meeting project objectives. Risk management deals with uncertainty, which comes in two flavors: Known unknowns: Identified potential problems. One doesn’t know exactly what will happen, but one is aware of the risks and their potential to damage the project, One can prepare for these risks. Unknown unknowns: These relate to problems that arrive unexpectedly and cannot be anticipated. However, good project managers still expect 3 these to happen  Risk and Cost Risk Basics All project management activities can be considered as managing risk, but the risk management process is a specific set of activities performed consciously to identify and manage risks on the project. There is a difference between project risk and business risk: Business risk relates to creating the right project output. Business risk is seldom the responsibility of the project manager, but rather of the project owner. Project risk relates to making sure the project produces the promised results within budget and on time. This is the 4 responsibility of the project manager.  Risk and Cost Risk Basics Risk management is one of the most critical success factors. Steps: Identify risk Evaluate probability Evaluate Impact Document For medium and high risks define action plan with dates For high risks define contingency plan Mange actions Evaluate results 5 Repeat at weekly project meeting  Risk and Cost Risk Management Framework A possible risk management framework consists of 5 main steps: Identify Risks: Find all the factors that threaten project objectives. Analyze and prioritize: Assess each risk in terms of its possible damage and likelihood of occurrence. Develop a response: Create strategies for reducing the possible damage and/or probability the risk will occur. Establish reserves: Set aside additional funding for the project that will be used for known risks and unknown risks. Continuous risk management: Implement strategies and monitor the effects of these changes on the project. 6  Risk and Cost Risk Management Strategy 7  Risk and Cost Project Cost Management Cost is a resource sacrificed or foregone to achieve a specific objective or something given up in exchange. Project cost management includes the processes required to ensure that the project is completed within an approved budget. Project Cost Management is important to make sure that the 8 project performance s meeting project budget goals.  Risk and Cost Project Cost Management Processes 9  Risk and Cost Project Cost Management Processes 10  Risk and Cost Project Cost Management Processes 11  Risk and Cost Basic Principles of Cost Management Most members of an executive board better understand and are more interested in financial terms, so project managers must speak their language: Profits are revenues minus expenditures. Profit margin is the ratio of revenues to profits. Life cycle costing considers the total cost of ownership, or development plus support costs, for a project. Cash flow analysis determines the estimated annual costs and benefits for a project and the resulting annual cash flow. 12  Risk and Cost Types of Costs and Benefits Tangible costs or benefits are those costs or benefits that an organization can easily measure in dollars. Intangible costs or benefits are costs or benefits that are difficult to measure in monetary terms. Direct costs are costs that can be directly related to producing the products and services of the project. Indirect costs are costs that are not directly related to the products or services of the project, but are indirectly related to performing the project. Sunk cost is money that has been spent in the past; when deciding what projects to invest in or continue, you should not include sunk 13 costs.  Risk and Cost Planning Cost Management The project team uses expert judgment, analytical techniques, and meetings to develop the cost management plan. A cost management plan includes: Level of accuracy and units of measure Organizational procedure links Control thresholds Rules of performance measurement Reporting formats 14 Process descriptions  Risk and Cost Estimating Costs Project managers must take cost estimates seriously if they want to complete projects within budget constraints. It’s important to know the types of cost estimates, how to prepare cost estimates, and typical problems associated with project cost estimates. 15  Risk and Cost Types of Cost Estimates 16  Risk and Cost Cost Estimation Tools and Techniques Basic tools and techniques for cost estimates: Analogous or top-down estimates: use the actual cost of a previous, similar project as the basis for estimating the cost of the current project. Bottom-up estimates: involve estimating individual work items or activities and summing them to get a project total. Parametric modeling: uses project characteristics (parameters) in a mathematical model to estimate project costs. 17  Risk and Cost Determining the Budget Cost budgeting involves allocating the project cost estimate to individual work items over time. The WBS is a required input to the cost budgeting process since it defines the work items. Important goal is to produce a cost baseline: a time-phased budget that project managers use to measure 18 and monitor cost performance.  Risk and Cost Cost Control Project cost control includes: Monitoring cost performance Ensuring that only appropriate project changes are included in a revised cost baseline. Informing project stakeholders of authorized changes to the project that will affect costs. Many organizations around the globe have problems with cost control. 19 Work Performance Measurement helps.  Risk and Cost Cost Control Earned Value is: A method for measuring project performance. The budgeted cost of work performed for an activity or group of activities. Compares the planned amount of work with the accomplished amount of work to determine if cost and scheduled performance is 20 as planned  Risk and Cost Performance Measurement Analysis Earned Value Management (EVM) Given a baseline (original plan plus approved changes), you can determine how well the project is meeting its goals. You must enter actual information periodically to use EVM. Performance Analysis is based on: Planned value (PV) Actual cost (AC) Earned value (EV) 21  Risk and Cost Earned Value Management Terms The planned value (PV), formerly called the budgeted cost of work scheduled (BCWS), also called the budget, is that portion of the approved total cost estimate planned to be spent on an activity during a given period. Actual cost (AC), formerly called actual cost of work performed (ACWP), is the total of direct and indirect costs incurred in accomplishing work on an activity during a given period. The earned value (EV), formerly called the budgeted cost of work performed (BCWP), is an estimate of the value of the physical work actually completed. EV is based on the original planned costs for the project or activity and the rate at which the team is completing work on the project or 22 activity to date.  Risk and Cost Performance Indices Cost performance index (CPI) A CPI value less than 1.0 indicates a cost overrun of the estimates. A CPI value greater than 1.0 indicates a cost under run of the estimates. CPI is the most commonly used cost-efficiency indicator. Formula: CPI = EV/AC Schedule performance index (SPI) The SPI is used, in addition to the schedule status , to predict the completion date and is sometimes used in conjunction with the CPI to forecast the project completion estimates. SPI equals the ratio of the EV to the PV. Formula: SPI = EV/PV 23  Risk and Cost Performance Indices Estimate At Completion EAC: EAC = BAC/CPI EAC = AC+ETC EAC = AC+) BAC-EV) EAC = AC+[) BAC-EV)/ (CPI*SPI)] Estimate to Complete ETC: 24 ETC equals the revised estimate for the work remaining.  Risk and Cost The Earned Value Management The earned value technique in its various forms is a commonly used method of performance measurement. It integrates project scope, cost (or resource) and schedule measures to help the project management team assess project performance. 25  Risk and Cost The Earned Value Management Earned Value Calculations for One Activity After Week One 26  Risk and Cost The Earned Value Management 27  Risk and Cost Rules of Thumb for EV Numbers Negative numbers for cost and schedule variance indicate problems in those areas. CPI and SPI less than 100% indicate problems Problems mean the project is costing more than planned (over budget) or taking longer than planned (behind schedule). The CPI can be used to calculate the estimate at completion (EAC)—an estimate of what it will cost to complete the project based on performance to date. 28 The budget at completion (BAC) is the original total budget for the project  Risk and Cost Rules of Thumb for EV Numbers 29  Risk and Cost Example You are a PM constructing a 16-mile road Completion time: 12 weeks Approved budget (BAC): $600,000 At the end of 4 weeks, $125,000 has been spent and 4 miles of road is complete. 30