SRINIVASAN IYER explains how it pays to orient your project managers in project cost management
f you thought controlling project costs is simply about being efficient during the project, think again. Sound financial management of projects and achieving a better bottom-line is more than just being efficient. Companies like Voltas, Ion Exchange, Thermax, TCE Consulting Engineers and L&T regularly coach their project managers on how to estimate and manage project costs. How does the company benefit? These companies save significant money by preventing project overruns, which is manifold the investment in coaching the employees.
The workshops on project costs begin with orienting the managers with an in-depth understanding of the main drivers of project costs. It moves on to aligning the project spending plans with the overall business strategy. How to make optimum use of the project resources effectively and efficiently and how to track the return on investment are other key workshop focus areas.
Machinery and equipment costs in infrastructure projects and system establishment costs in IT projects are the heavy baseline costs. You cannot do away with these costs as they are required to stay in the business. All you can do is grin and bear it. However, since baseline costs constitute a major chunk of the project costs managers need to exercise their discretion judiciously while deciding on such investments. The workshops focus on techniques on controlling baseline costs.
The best antidote is to manage the project assets effectively and ensure that you practice good resource management. But you can go beyond resource management and re-negotiate vendor contracts. It pays to sit with your vendors and understand the cost break-up and also re-examine the service level agreements. Reining baseline costs helps you improve the project bottom-line and minimize the opportunity loss.
How does one go about estimating costs? Let’s face it. Most project overruns boil down to poor project scoping. If your project costs estimate is at best a guesstimate, you are way off the mark. Bottom-up estimation is a detailed pricing technique which involves working out the cost estimates for various project elements and then summing it up into the project total costs. Though this method is laborious and requires considerable time, it is popularly used in bidding for projects where there is a clear understanding of the project scope.
Most project managers would agree that it is not practically possible always to assimilate all the data needed for bottom-up project estimation. Hence, project managers also need to be coached on the rules of thumb while adopting the top-down approach. Coaching on the top-down approach cannot be complete without lessons on how to work-out a order of magnitude or ‘ballpark’ estimate, analogous estimates based on previous project experience and parametric estimates based on statistical projections of historical data.
What do you do when you have budget constraints and you need to fit your project costs within the budget? These workshops advise managers to first have a re-think on the project and it’s feasibility given the cost constraints. It may so happen that you may need to adjust the project scope to make the project viable. The design-to-cost approach and working backwards from the fixed budget through an intense process of prioritizing the costs are some techniques that help in working out a project scope that can fit into a pre-decided project costs envelope.
Project costs risks need to be factored in. These provide for uncertainties and contingencies like changes in project scope at future date, technical snags, price escalations in material and labour costs, opportunity loss of unused assets and the inevitable ‘circumstances beyond control’. Project managers need to understand how to mitigate the project risks and factor in markups to minimize project costs.
You have won half the battle if you estimate the project costs well. However the proof of the pudding is in effectively completing the project within the costs. Despite your best planning efforts, you can still face problems that can lead your project estimations astray. Hence, it’s quite important to have a project team meeting immediately after the completion of the project.
The purpose of this meeting is discuss threadbare as to what went right and what went wrong and what factors led to these. Some of the focus areas you would like to delve into may include possibilities of re-mobilization, decline in productivity, overtime costs, improper equipment scheduling, rentals on unused tools and equipments or simple errors of omission like failure to check invoices and deliveries and accounting errors.
What do you do when your project exceeds its budget due to additional request by clients which were not originally in the scope of work? What if the client frequently fails to fulfill his part of agreed commitments? Project managers need to be oriented on the nuances of Field Orders and Change Orders.
Project costs control workshops have a strong message for the project managers – if your costs are spiraling, go back to the basics. It’s important to work out baseline plan with clearly defined project standards, milestones, costs forecast, procurement strategies and project success indicators. It’s also important to closely monitor critical project resources viz. people, equipments and methods. Periodical review and analysis in the execution phase is highly critical. It is important to monitor the progress vs. the plan. Are the actual costs in-line with the projected trends and productivity forecasts? If the actual project costs have over shot the budget, you may need to re-visit and maybe re-forecast the cost estimate schedule and even the project scope. It is common in projects that the project scope itself changes and your reference baselines do not count anymore. It is important that every time this happens, you need to change your baseline plan.
Project managers also learn the earned value technique of monitoring on-going projects. Earned Value Analysis (EVA) and cost management tools like Net Present Value, Internal Rate of Return, Payback Period and Cost Benefit Ratio help to plan and manage the project cash flow. Plotting the Actual Cost of Work Performed (ACWP), comparing it with the Budgeted Costs of Work Schedule (BCWS) and initiating timely corrective actions are other key focus areas of the workshop. Project managers also learn that the Estimate At Completion (EAC) is only constant in a moving project.
If you want your project cost estimate to be more than a guesstimate and you are tired of frequent profit killing cost shocks, it’s time you coach your project managers on the art and science of project cost control. Even the best of workshops may not prepare a project manager for the reality bumps of project cost management. However, orienting your project managers in project cost management can prevent your projects from chocking to death due to cost overruns.