CHAPTER |
2 |
BASIC CONCEPTS OF PROJECT CONTROLS
2.1 Review of Existing Research Work
Because time-cost optimization is an emerging field of study, not a lot of research work has been conducted on the subject. However, the following research papers related to this subject were studied. Their abstracts, which form the basis of this research, are provided below.
“Project Time–Cost Analysis Under Generalized Precedence Relations” by S. Sakellaropoulos & A. P. Chassiakos, 2004
The aim of this research paper is to develop a method that considers realistic project characteristics such as generalized activity precedence relations for particular activities. Existing methods for dealing with the time-cost trade-off problem have concentrated on the solution to basic problems that do not adequately represent real-life engineering scenarios. The proposed method in this paper is formulated as a linear program and provides the optimal project time-cost curve and the minimum cost schedule.
“Project Management with Time, Cost, and Quality Considerations” by A.J.G. Babu & N. Suresh, 1996
In this research, quantitative models were developed for project crashing to determine the appropriate activities for crashing at minimal cost. The authors suggested that project quality may be affected by project crashing and developed linear programming models to study the trade-offs that exist among time, cost, and quality. Each of the three models developed in this study optimizes one of these variables by making the other two constant. The computational study includes tabulation of the interrelationships among time, cost, and quality.
“Time, Cost and Quality Trade-Off in Project Management: A Case Study” by D. B. Khang & Y. M. Myint, 1999
In this research, time, cost, and quality trade-offs were studied using three interrelated linear programming models. The authors described an attempt to apply the method to an actual cement factory construction project. The purpose was to evaluate the practical application of the method by highlighting the management insights gained, and to point out key problems and difficulties. As an objective outcome, the paper helps give practicing engineers realistic expectations.
“The Discrete Time-Cost Trade-Off Problem Revisited” by P. De, E. J. Dunne, J. B. Ghosh, & C. E. Wells, 1995
In the management of a project, the project's duration can often be compressed by accelerating some of its activities at an additional expense. As mentioned before, this is the so-called time-cost trade-off problem, which has been studied extensively in the project management literature. However, the discrete version of the problem, encountered frequently in practice and also useful in modeling general time-cost relationships, has received only scant and sporadic attention. Prompted by the present emphasis on time-based competition and recent developments concerning problem complexity and solution, this important problem is reexamined in this paper. First, the authors formally described the problem and discussed the difficulties associated with its solution. They provided an overview of past solution approaches and identified their shortcomings, and also provided a new approach. Network decomposition/reduction was assumed as a convenient basis for solving the problem and analyzing its difficulty. Finally, the authors pointed out new directions for future research and discussed the need to develop and evaluate effective procedures for solving time-cost trade-off problems.
Although the existing research is helpful, it did not address the following points, which formed the objective and basis of the research presented in this study:
- What is the impact of accelerating or delaying the project's schedule (time) on the cost under “dynamic” conditions, that is, at multiple stages with forecasting techniques?
- The existing research suggests that the established proportionality relationship between time and cost is such that any effort to reduce time will result in increase of cost; in other words, the relationship between the two factors is indirectly proportional. The objective of this study is to examine how the relationship between the two factors might be made directly proportional, that is, in such a way that any attempt to decrease the time can also decrease the cost under controlled conditions at the project's completion.
This study focuses primarily on projects, project management, and controls. Before proceeding with a detailed analysis, it is pertinent to discuss and elaborate upon the prevalent theories and terminologies in the field in order to refresh our basic understanding of the subject matter at hand.
2.2 What is a Project?
A project is a temporary venture undertaken to achieve a predefined output within a particular time and cost and utilizing particular resources. Another important characteristic of a project is that it is unique and has defined start and end dates. Figure 2.1 depicts the Project Management Triangle, which is derived from the definition of a project.
2.3 What are Project Controls?
Project controls are what we do to control the project. That is, project controls measure how well the project is doing in terms of time/schedules, cost/budget, and scope/work. They also allow us to forecast or estimate how and when the project will be completed based on current performance and report any needed mitigation techniques. Project controls are a part of project management.
2.4 What is Project Management?
Project management is the art and science of utilizing tools and techniques to lead a project to achieve its predefined objectives.
2.5 Project Management Processes
As per PMI's A Guide to the Project Management Body of Knowledge (PMBOK® Guide), project management is subdivided into the following five process groups:
The above are related to one another, as shown in Figure 2.2.
The above processes can be briefly described as follows:
2.5.1 Initiation
This is the process in which the initial, brief, and very high-level planning is done by the client stakeholders.
2.5.2 Planning
After initiation, the project is planned into its various details. It is pertinent to mention that planning does not just mean coming up with a schedule. A schedule is only one part of the overall plan of an ideally managed project, which also includes a scope management plan (including work breakdown structures, design drawings, and bill of quantities), cost estimates, communication plan, quality plan, procurement plan, and risk management plan.
2.5.3 Executing
After planning, this is the stage where we execute what we planned. This process is iterative with planning. That is, there may come a time in the execution process when what was planned might seem unreasonable and unrealistic in the face of the reality you know as facts now. Thus, from execution you may need to go to re-planning the works via monitoring and controlling.
2.5.4 Monitoring and Controlling
Monitoring and controlling goes side by side with execution. It measures what is actually being done and controls against what should have been done. A key output here is validated deliverables.
2.5.5 Closing
This is the final process of the project management cycle. Here, we deliver what the client wants.
2.6 Time Aspect/Scheduling
A schedule is a listing of a project's activities, milestones, and deliverables with intended start and finish dates interlinked by relationship dependencies and associated with resources allocation and estimated durations. The schedule is closely shaped according to the developed work breakdown structure.
To develop and maintain a schedule on any project, the following basic process should be followed after the work breakdown structure has been prepared:
- Create activities
- Sequence activities
- Estimate and assign activity resources
- Estimate duration based upon scope and resources
- Develop the schedule based upon the above
- Update and control the schedule
2.6.1 Activity Interdependency Relationships
Basically, the following four relationships may exist among the project's various activities:
- Finish to Start Relationship
- Start to Start Relationship
- Finish to Finish Relationship
- Start to Finish Relationship
2.6.1.1 Finish to Start Relationship (FS)
An activity must finish before the successor activity can start. This is the most commonly used relationship.
2.6.1.2 Start to Start Relationship (SS)
An activity must start before the successor can start.
2.6.1.3 Finish to Finish Relationship (FF)
An activity must finish before the successor can finish.
2.6.1.4 Start to Finish Relationship (SF)
An activity must start before the successor can finish. This is the least commonly used type of relationship.
These are shown graphically in Figure 2.3.
2.6.2 Activity Resources
Activity resources include manpower, material, and equipment. This aspect of a project needs to be properly planned so as to avoid the issues of mismanagement and material shortage and any delays that may be encountered as a result of such problems.
2.6.3 Estimate Activity Duration
The activity durations need to be properly estimated by keeping in view the sequence of activities, resource availability, external (climate, government regulations, etc.) and internal (skill level, equipment types, etc.) factors, and historical records regarding the performance of similar projects.
There are various techniques for estimating activity duration. Each has its own merits, demerits, and professionalism. The techniques include the following:
- One-point estimate
- Analogous estimation (top-down approach)
- Parametric estimation
- Three-point estimation (PERT, or Program Evaluation and Review Technique method)
Each method is discussed below.
2.6.3.1 One-point Estimate
The one-point estimate is a top-down approach and is the most commonly known as well as the least preferred method because of its lack of credibility. Here, a person makes a guess based upon past history of his or her experience with similar work and says that the activity may take “x” amount of time. To reduce the risk of underestimating, the person may add a little extra bit of padding. The problem with this method is that we do not actually know the exact amount of time it may take to perform the activity in question.
2.6.3.2 Analogous Estimation
Analogous estimation is another top-down approach. It is the third least preferred and third most commonly used method. In analogous estimation, one takes historical records for the past three to five similar projects and uses them to come up with an expert judgment as to how long the activities will likely take. This method is expected to yield results better than the one-point estimate method, however, there is a risk of incorrect estimation because data from previous similar projects may not necessarily be applicable to the current project; by definition, each project is unique.
2.6.3.3 Parametric Estimate
This is a bottom-up approach. Parametric estimating looks at the relationships between variables on an activity in order to calculate estimates. An authority or organization can develop a chart based upon experts’ observations of three to five similar projects, looking at the duration of time particular activities took with so much of a particular resource available. The data can come from historical records from previous projects, industry requirements, standard metrics, or other sources. This is the second most preferred and second most commonly used method. Because the estimation data come from statistics that have been accumulated over a series of previous projects by professional organizations, this method is expected to yield broadly acceptable results; however, it is not always accurate because it fails to consider internal factors such as staff productivity, competence, and so forth, employed at a particular project.
2.6.3.4 Three-Point Estimate (PERT Method)
This is the most realistic and professional method of estimating activity duration for a project. After all, a planned duration is simply a “planned duration”—there is no certainty that the activity will actually take the estimated amount of time. This method makes a mathematical estimate based upon a three-point range. The three points are “pessimistic,” “most probable,” and “optimistic.” By using an average of these three duration ranges per activity, the shortcoming in the previous method is overcome.
Mathematically,
Duration = (P + 4M + O)/6
Where,
In this method, like the others, all three estimates still come from historical records and expert judgment based upon similar activities done on similar projects. Nonetheless, this method is clearly more scientific and exact. It also takes the longest amount of time.
There are other concepts of scheduling that are relevant to understand at this point. These will be discussed before we move on to the next chapter of our study.
2.6.4 Total Float
In simple terms, total float is the cushion available in an activity, that is, how long an activity can be delayed without delaying the overall project. Total float is an outcome of the assignment of relationship and duration activity.
Mathematically,
Total Float = Late Start – Early Start
Or
Total Float = Late Finish – Early Finish
2.6.5 Critical Path
A critical path is the longest path of interrelated activities existing in the schedule. It is also a set of interrelated activities from the start to the end of the project with a total float of zero.
Thus, it can also be indirectly stated that critical path is the shortest time required to complete the project.
This is the most important aspect of the schedule. Any delay in critical path activity will make the completion of the project late by the amount of time of the delay. In the professional world, this factor is managed by critical path analysis. In Figure 2.4, an example of a critical path is shown. The letters indicate example interrelated activities and the numbers indicate each activity's duration.
2.6.6 Schedule Compression
When a project has suffered a delay either because of an unrealistic plan or mismanagement during execution, the schedule may be possibly compressed in order to realign with the deadlines.
This can be achieved in one of the two following ways:
- Fast tracking
- Crashing
2.6.6.1 Fast Tracking
Fast tracking involves performing critical path activities in parallel that were originally planned in a series. Fast tracking often results in rework of activities, usually increases risk, and requires more attention to communication among activity stakeholders.
2.6.6.2 Crashing
Crashing is indirectly trading time for money. This technique involves making cost and schedule trade-offs to determine how to compress the schedule the most for the least cost while still maintaining the scope of the project.
Suppose 10 workers working 8 hours a day can complete the work in 8 days for a total cost of US$12,800. To shorten the duration, we may increase the working hours in a day by allowing overtime. Thus, 10 workers working 12 hours a day could complete the work in 5 to 6 days, but at a higher cost of US$14,400, because we now have to pay the workers overtime.
2.7 Cost Aspect/Earned Value Management
This management tool and technique is utilized to measure uniform progress objectively and to forecast time and cost restraints.
By uniform measurement, we mean that the entire project scope, in terms of engineering, procurement, and construction, needs to be broken down into hours and/or costs.
The following are the various concepts involved in earned value management that are relevant to this study.
The basic concepts are planned value, earned value, and actual cost. Remember that at any point the cost can be substituted for hours as long we do this uniformly for all the variables under consideration. From these three basic variables, we can calculate other, more advanced variables, which we will discuss later in the chapter.
2.7.1 Planned Value (PV)
Planned value is the value of the work that we plan to do over the course of a particular duration. For example, let's say we want to build a brick wall in 10 days and it will cost US$10,000, that is, at the rate of US$1,000 per day. The planned value at day 5 is:
PV= 10,000 × 50% = 5,000
(as half the time has passed)
2.7.2 Earned Value (EV)
Earned value is the subjective value of the work accomplished with respect to the percentage of the planned work that has been completed. Taking the same example as above, suppose that on day 5, we have actually accomplished only 30% of the work in terms of the quantities installed and how much of the work is done.
Thus,
EV = 10,000 × 30% = 3,000
So, on day 5, PV = 5,000; however, EV = 3,000
2.7.3 Actual Cost (AC)
This is the actual cost incurred during the period under consideration. That is, suppose the actual cost incurred up to day 5 to complete 30% of the work was US$4,000 or 40% of the total estimated cost.
Thus,
AC = 4,000; however, EV = 3,000 and PV = 5,000.
We will discuss what the above example figures mean later in this chapter.
2.7.4 Budget at Completion (BAC)
This is the estimated budget we had at the planning stage. We could also define it as the planned value at the completion of the job. Using the same example, at day 10 the planned value is US$10,000. Thus, BAC = 10,000.
2.7.5 Schedule Performance Index (SPI)
This index is used to monitor and report how the project is performing in terms of time.
Mathematically, it is defined as follows:
SPI = EV/PV
From our example:
SPI = 3,000/5,000 = 0.6 (behind schedule)
So, we can see that the higher the index, the better. If EV is equal to PV, then SPI would be equal to 1 and that means that the project is on schedule. At more than 1, the project is ahead of schedule, and less than 1 means that it is behind schedule.
2.7.6 Cost Performance Index (CPI)
Cost performance index (CPI) was developed to monitor and report how the project is performing cost-wise.
It is mathematically defined as follows:
CPI = EV/AC
Again, we can see that the higher the index, the better. If EV is equal to AC, then CPI would be equal to 1, and that means that the project is on budget. If the index value is more than 1, the project is under budget. If the value is less than 1, the project is going over budget.
From our example:
CPI = 3,000/4,000 = 0.75 (over budget)
A CPI of 0.75 can also be represented in such a way that for every dollar we spend, we are getting back only 75 cents. No company owner would tolerate such a situation and mitigation would be ordered.
The schedule performance index and cost performance index can be graphically represented in Table 2.1.
Analysis of Quadrants:
Quadrant 1: Project is going according to plan in an efficient manner with respect to both time and cost.
Quadrant 2: This may indicate that the project is under resourced, leading to less expenditure and slower progress.
Quadrant 3: This may indicate that the project is not being executed according to plan or there may be incompetency issues.
Quadrant 4: This may indicate “crashing the schedule,” that is, employing additional resources to complete the project more quickly.
2.7.7 Estimate at Completion (EAC)
Estimate at completion (EAC) forecasts the value at which the project will be completed.
Mathematically, there are two different ways to calculate this, which give two different types of results:
- EAC = BAC/CPI: Assuming that the remaining project will progress at the current rate
- ETC = AC + (BAC – EV): Assuming that the remainder of the project will be completed according to the budgeted rate of cost and time
For our example, consider the following:
EAC (1) = BAC/CPI = 10,000/0.75 = 13,333. That is, the project will go over budget by 3,333 if it continues at the current rate and in the same manner of management.
EAC (2) = AC + (BAC – EV) = 4,000 + (10,000 – 3,000) = 11,000. Here, the project will go over budget by US$1,000 if we improve the project at this stage to follow the initial plan for the remainder of the work. Thus, this method is a more conservative approach.
2.7.8 Estimate to Complete (ETC)
This forecasts how much more it would cost over what has already been spent in order to complete the project.
Mathematically, ETC = EAC – AC
The purpose of these forecasting techniques is to report to management for better understanding and so that any necessary corrective action may be taken.
2.8 S-Curve
An S-curve is a graphical representation of the performance of the project with respect to time. It is pertinent to mention that although we may know today what the project's progress is, it is important to record and analyze progress along the life cycle of the project. This is a standard requirement for measuring progress for all international-level projects. Figure 2.5 shows a sample S-curve.
2.9 Work Breakdown Structure (WBS)
A work breakdown structure is a graphical representation of the scope of work to be done on a project in an organized and hierarchical manner.
The smallest or last level of a work breakdown structure is called a work package. Thus, the WBS at its last division has many work packages during execution.
The scope of work is broken down and subdivided into the required level of detail for the following:
- A better understanding of the scope
- Better management of the work package
- Better assignment of responsibilities
- Better control of the project
Following is a WBS that the author has prepared for a personal project, rather than one studied for the purpose of this research.