EBS MBA Project Managment

Project Management Professor Alexander Roberts PhD, MBA, FCCA, FCIS, MCIBS. Director, Centre for Strategy Development and Implementation Professor Roberts is Professorial Fellow of Edinburgh Business School (EBS), the Graduate School of Business at Heriot-Watt University. Professor Roberts lectures, researches and consults for major organisations on strategy development and implementation. The practical relevance of his work is underpinned by 15 years in senior management, including 10 years at executive director level within multinational subsidiaries of American and European based businesses. He gained his PhD at London Business School in 1997. He has extensive executive and postgraduate management development experience. Professor Roberts founded and leads the new Centre for Strategy Development and Implementation (CSDI) at Edinburgh Business School. The centre provides executive courses, research and consulting services to assist organisations develop appropriate strategic directions and put them into action effectively. Professor Roberts also founded and heads the Doctorate in Business Administration (DBA) in Strategic Focus programme. Professor Roberts is an executive director of EBS. He is also chairman of the EBS CSDI DBA research committee, steering group and various specific course development steering committees. He is also author of the forthcoming MBA/DBA distance learning text in Making Strategies Work and is joint author of the texts in Project Management, Strategic Risk Management and Mergers and Acquisitions. Dr William Wallace BSc (Hons), MSc, PhD, MCIOB, MAPM. Senior Teaching Fellow, Centre for Strategy Development and Implementation. Dr Wallace is Senior Teaching Fellow of Edinburgh Business School (EBS), the Graduate School of Business at Heriot-Watt University. Dr Wallace chairs the MBA/DBA courses in Project Management and Strategic Risk Management and assists Professor Roberts in the development of the EBS CSDI and EBS CSDI DBA programme. Dr Wallace has an extensive range of academic and industrial experience. The work for both his first degree and masters degree (Loughborough 1983) established a broad project management academic framework. He subsequently developed and refined this framework through research as a Heriot-Watt scholarship doctoral student. This research led to the award of his PhD in design project management (Heriot-Watt 1987). Dr Wallace subsequently worked as a professional project manager with private and public sector employers before returning to academia in 1995, where he led the HeriotWatt MSc in Construction Project Management programme from 1995 until 2001. Dr Wallace served as a member of the Heriot-Watt Faculty Board of Engineering from 1997 to 2001 and on the University External Studies Committee 1998 to 2001. With Professor Roberts and others, Dr Wallace is joint author of the EBS texts in Project Management, Strategic Risk Management, and Mergers and Acquisitions.

Release PR-A1.2.1

ISBN 0 273 66140 X

HERIOT-WATT UNIVERSITY

Project Management Professor Alexander Roberts Dr William Wallace

Edinburgh Gate, Harlow, Essex CM20 2JE, United Kingdom Tel: +44 (0) 1279 623 623 Fax: +44 (0) 1279 431 059 Pearson Education website:

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Release PR-A1.2.1 First published in Great Britain in 2002 c Roberts, Wallace 2002, 2003, 2004

The right of Professor Alexander Roberts and Dr William Wallace to be identified as Authors of this Work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. ISBN 0 273 66140 X British Library Cataloguing in Publication Data A CIP catalogue record for this book can be obtained from the British Library. All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publishers. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior consent of the Publishers. Typesetting and SGML/XML source management by CAPDM Ltd. Printed and bound in Great Britain.

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The publisher’s policy is to use paper manufactured from sustainable forests.

Contents 7 9

Preface List of Abbreviations

Module 1

Introduction 1.1 1.2 1.3 1.4 1.5 1.6

Module 2

Individual and Team Issues 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9

Module 3

Introduction Organisational Theory and Structures Examples of Organisational Structures Project Management Standards

Project Time Planning and Control 5.1 5.2 5.3 5.4 5.5 5.6

Project Management

Introduction Background to Risk Risk Handling Types of Risk Risk Conditions and Decision making The Concept of Risk Management Risk, Contracts and Procurement

Project Management Organisational Structures and Standards 4.1 4.2 4.3 4.4

Module 5

Introduction The Project Manager The Project Team Project Team Staffing Profile and Operation Project Team Evolution Project Team Motivation Project Team Communications Project Team Stress Conflict Identification and Resolution

Project Risk Management 3.1 3.2 3.3 3.4 3.5 3.6 3.7

Module 4

What Is a Project? What Is Project Management? Characteristics of Project Management Potential Benefits and Challenges of Project Management The History of Project Management Project Management Today

The Concept of Project Time Planning and Control The Process of Project Time Planning Project Replanning Trade-off Analysis Resource Scheduling Project Planning Software

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Contents

Module 6

Project Cost Planning and Control 6.1 6.2 6.3

Module 7

Project Quality Management 7.1 7.2 7.3 7.4 7.5 7.6 7.7

Module 8

Introduction Project Cost Planning and Control Systems The Project Cost Control System

Introduction Quality Management as a Concept The Quality Gurus The Quality Management ‘Six Pack’ Total Quality Management Configuration Management Concurrent Engineering and Time-Based Competition

Case Study 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10

Aims and Objectives of the Case Study Introduction (Module 1) Individual and Team Issues (Module 2) Risk Management (Module 3) Case Study First Supplement Organisational Structures (Module 4) Case Study Second Supplement Time Planning and Control (Module 5) Cost Planning and Control (Module 6) Quality Management (Module 7)

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Appendix 1

Answers to Review Questions

A1/1

Appendix 2

Practice Final Examinations

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Preface Project management has come a long way from its origins in engineering and construction. It is now used for a wide range of applications and is one of the most highly valued management tools. A review of job advertisements in the press reveals that project managers are amongst the most highly paid. By the end of this Preface you will gain some idea of why they should be so highly valued. In a world of rapid change, organisations that can identify the need for change, design the changes needed, and implement these more effectively and efficiently than others are more likely to survive and prosper. Those that cannot do this are likely to perish. The Centre for Strategy Development and Implementation (CSDI) at Edinburgh Business School, Heriot-Watt University, came into being to address these issues. The core of the Centre’s work lies in four interrelated areas as shown in The Strategic Focus WheelTM .

Strategic Planning

Strategy Focus Wheel 

Strategic Risk Management

Making Strategies Work

Project Management of Change

The Strategic Focus WheelTM TM

A. Roberts and A. MacLennon 2002

The wheel is used to focus the efforts and resources of organisations on delivering their intended strategic objectives and has four core elements. •

•

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Strategic Planning concerns identifying the options available to an organisation and selecting the most appropriate. If strategic planning is done poorly, then even the best implementation capability is unlikely to compensate for this. Making Strategies Work is a process for connecting the high-level strategic plan to the day-to-day activities that are critical to its delivery. Edinburgh Business School

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•

•

Project Management of Change ensures completeness and control over physical realisation of the chosen strategy. Project management is the subject of this text. Strategic Risk Management (SRM) identifies, monitors and manages the risk profile of the organisation. Major changes in this profile can result in the need to revise or change the elements above and, in particular, to devise new strategic plans. Alternatively, the changes may be due to the implementation of a new strategy. SRM covers three areas: strategic risk, the possibility of ending up in a position that was not intended, or of ending up in the position that was intended but that is no longer a desirable position because the strategy should have been changed; change risk, dealing with the risks associated with projects required to change the organisation in pursuit of a new strategic thrust (where project management is one tool for managing such risks); and, last but not least, operational risk, covering the risks inherent in the day-to-day operation of the organisation.

We chose project management as the key tool for managing change and associated risks because of its proven usefulness in a vast range of change situations. This is equally true whether designing and erecting a new building (changing materials, labour and other resources into a finished building), designing and implementing new systems (such as human resource management or financial systems), or designing and implementing a new strategy for a whole organisation. However, project management can do more than just act as a stage in the strategic focus cycle. It can also be used as a tool for managing each of the individual stages. In practice, the strategic planning process can itself be run as a project. The process can be broken down into a series of elements or work packages that must be completed. For example, internal and external environmental analysis might form two work packages. In total, the packages form what is called a work breakdown structure, i.e. an ordered description of the work that must be done. Responsibilities are then assigned to the people who will carry out the work on each package, and the relevant working relationships between the people are established. This is the function of an organisational breakdown structure. The execution of the elements will need to be sequenced because some elements will depend on others being completed first. This is the function of scheduling, and PERT and Gantt charts become critical. Other elements in the process can also be covered by project management techniques. These techniques can be similarly applied to making strategies work and strategic risk management. Project management has come a long way from its origins in engineering and construction. It has become indispensable. Project managers now work in all industries and in all functions within organisations. For example, some of the most highly paid project managers now work in IT-related work in financial services, a long way from project management’s building and construction origins.

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List of Abbreviations

ABC ACWP ADR AGAP ANSI APM ATWP BAC BC BCWP BCWS CAC CAD CAVN CCRB CCTA CD CDES CFM CMS CPM CSAR CSDI CCS CV CVI DAM DBA DMS EAC ECTC EEC EET EFT EMV ERE ERP EST ETC EVA Project Management

activity-based costing actual cost of the works performed alternative dispute resolution all goes according to plan American National Standards Institute Association for Project Management actual time for work performed budget at completion budgeted cost budgeted cost of the works performed budgeted cost of the works specified or scheduled cost accounting code computer-assisted design cost account variation notice change control and review board Central Computer Telecommunications Agency compact disc computerised database estimating system cross-functional management configuration management system critical path method configuration status accounting and reporting Centre for Strategy Development and Implementation change control section cost variance cost variance index daily application management Doctorate in Business Administration draft master schedule estimate at completion estimated cost to complete estimated effect at completion earliest event time earliest finish time expected monetary value effective risk exploitation enterprise resource planning earliest start time estimate to complete earned value analysis

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List of Abbreviations

GERT HSE IBS ILS IMCS IMS IPMA ISO IT JCT JIT LAI LCC LET MBR MFR MRP NPZ OBS PC PCCS PCS PERT PLE PMI PMS POER PRINCE2 PSR PVAR PWO QAP QAR QBS QSR RFD RICS SLA SMM SOW SPP SSR STWP SV

10

graphical evaluation and review technique Health and Safety Executive information breakdown structure integrated logistics support implementation monitoring and control system interface management system International Project Management Association International Organisation for Standardisation information technology Joint Contracts Tribunal just-in-time local authority inspector life cycle costing latest event time market business risk market financial risk material requirements planning no-problem zone organisational breakdown structure personal computer project cost and control system project central server program evaluation and review technique project logic evaluation Project Management Institute project master schedule post-occupancy evaluation and review PRoject management IN a Controlled Environment, version 2 programme status report project variance analysis reporting project works order quality assurance plan quality assurance review quality breakdown structure quality status report resource fluctuation driver Royal Institute of Chartered Surveyors service-level agreement standard method of measurement statement of work strategic project plan safety status report scheduled time for work performed schedule variance

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List of Abbreviations

SVI SWOT TBC TDS TOC TQM TRM TSRM VAC VO WBS WHIF WP WS

Project Management

schedule variance index strengths, weaknesses, opportunities and threats time-based competition top-down strategy train operating company total quality management task responsibility matrix total strategic risk management variance at completion variation order work breakdown structure what if works performed works scheduled

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Module 1

Introduction Contents 1/2 1/2 1/3 1/5

1.1 1.1.1 1.1.2 1.1.3

What Is a Project? Introduction Projects and Other Production Systems Characteristics of Projects

1.2 1.2.1 1.2.2 1.2.3

What Is Project Management? Introduction Definition of Project Management The Basic Project Management Structures

1/8 1/8 1/8 1/11

1.3 1.3.1 1.3.2 1.3.3 1.3.4 1.3.5 1.3.6 1.3.7

Characteristics of Project Management Introduction Multiple Objectives International Co-operation and Standards Multi-Industry/Multidisciplinary Practitioners Generic Benchmarks Specific Provisions Project Life Cycle

1/16 1/16 1/16 1/19 1/20 1/20 1/20 1/21

1.4 1.4.1 1.4.2 1.4.3

Potential Benefits and Challenges of Project Management Introduction Potential Benefits of Project Management Potential Challenges to Project Management

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1.5

The History of Project Management

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1.6

Project Management Today

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Learning Summary

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Review Questions

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Learning Objectives This module introduces the main concepts and philosophies of project management. These areas are then explored in greater depth, and additional ideas introduced, in the remaining modules. By the time you have finished this module you should be familiar with: • •

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the concept of project management; how project management differs from traditional management and the different organisation structures employed; Edinburgh Business School

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• •

the potential benefits and challenges of using a project management approach; the history and origins of project management.

A project is a one-off process with a single definable end-result or product. Some examples include building a house, introducing new human resources practices, and developing new IT systems. It is difficult to provide an example of a ‘typical’ project because project management techniques are now applied so widely that listing their possible applications would take a volume as large as this text! In addition, new uses are being found regularly. One reason for this growth in popularity is that project management is a very practical tool when used for change management purposes. The ever-increasing rate of change in the environments in which organisations operate requires them to transform themselves regularly if they are to survive and have the possibility of prosperity. Hence the continued growth in interest in project management. Much of project management is concerned with planning and controlling the three key variables associated with projects. These variables are time, cost, and quality. They are interrelated and a change in any single variable frequently has a significant impact on the others. Since project management is concerned with managing change, within the constraints of the three key variables of time, cost and quality, organisational structures for managing projects can be expected to differ from traditional organisational structures, which were developed to help managers manage in more stable environments. Organisation structures for managing projects are examined and contrasted with more traditional management organisation structures. Projects have a finite life cycle, i.e. definite starting and completion points, and it follows that any project team or organisation structure set up to manage a project will have a finite life cycle. Project management is a truly unique international and multidisciplinary profession. This characteristic has led to the development of international generic standards and is managed by a new kind of professional who operates in a different way from traditional functional managers. After studying this module, you should be able to define those main differences and understand their advantages and disadvantages compared with traditional approaches. The module also gives a brief review of how project management evolved from more traditional management structures in response to changing industrial and economic conditions. A major influence has been the tendency for projects to become larger and more complex. As a result, the penalties for failure and the rewards for success have changed significantly.

1.1 1.1.1

What Is a Project? Introduction The first stage in developing an understanding of project management is to define what a project is and, by contrasting with other production systems, what a project is not.

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At any moment in time organisations will be attempting to achieve a wide range of goals and objectives – for example, the sale of goods and services, improving customer relationships, improving staff motivation, or developing new products. The range of categories for which goals and objectives may be set is infinite. In order to achieve these, some form of production system must be employed. A production system takes resource inputs and passes them through a transformation process that changes them into the desired outputs. For example, consider a simplified manufacturing organisation. The resource inputs consist of materials, labour, equipment, services and so on. The production process then transforms these into outputs of goods and services that the end customer or client buys. This general production system model of inputs, transformation and outputs is true whether the end product/service is packaged food, motor cars, consulting reports, a new building, employee training programmes, or many other things. 1.1.2

Projects and Other Production Systems Production systems can be classified into three broad categories based on their main method of production, as follows: • • •

mass production; batch production; project (non-repetitive) production.

Some industries, such as construction and defence, are dominated by the project form. Other industries, such as chemical production and production of consumer goods, use mainly mass or batch production methods. However, even businesses where the norm is mass or batch production will use projects for certain activities. This concept will be covered later in the module. Mass production systems are based around the production of large numbers of repetitive items. A typical example would be a production line for the manufacture of vehicles. The process runs continually. All the operatives and their tools are arranged within the production system and the whole process is carefully researched and developed to operate at maximum efficiency. The primary characteristics of such a system are that it is capital-intensive and highly mechanistic, and relatively little active management intervention or control is needed once the system is set up and operating satisfactorily. This system is clearly most appropriate for the large scale production of repetitive units, where there is little chance of change to the input requirements and where consumer demand for the end product is likely to be relatively constant. By way of contrast, batch production is used where there is unlikely to be continual high demand for a given product and where some modifications will be needed at intervals. A typical example is a wallpaper factory, where production runs of certain types and patterns of wallpaper are produced sufficient to supply all distribution outlets for some months ahead. At that point, the system is shut down, re-tooled and reconfigured, and the process started up again to produce the next batch. The characteristics of a batch system are that it is less Project Management

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mechanistic than a mass production system and the need for management intervention and control is greater. As a result, batch systems tend to be organised around functional groupings. The wallpaper factory might have a colour mixing section, a processing section, a quality-control section, a packaging section, etc. Each section tools up and operates its part of the operation in essentially the same way for each batch run, but the individual manufacturing requirements differ slightly. Project production is used for one-off, non-repetitive items. As a result of this, there is no previous learning curve on which to rely; and high levels of complex management planning and control may be required. ♦ Time Out Think about it: combined batch, mass and project production systems. One example would be a small company that makes paint for a major retailer. At present, it makes the paint on a batch basis. As it receives an order from the retailer, it makes up so many thousands of litres of paint and transports them to the retailer. What if the retailer expands and suddenly wants more paint? The small paint company might see an opportunity and decide to invest in a new mass-production system that will produce paint continuously (although at variable rates) in order to meet the new increased demand from the retailer. This represents a strategic switch from batch to mass production. In this case, the original production system was based on batch manufacturing. As demand increases, a decision is made to switch to mass production. As far as the company is concerned, the switch from batch to mass requires the installation of new equipment and processes. The design, procurement and installation of this new equipment and the associated processes would be managed as a project. The company will appoint or commission a manager – the project manager – to be responsible for the project. Questions: • Can you identify another example of a system that has mass, batch and project phases or characteristics? • What would be an example of a system that only ever has a project phase?

♦ A project is an instrument for achieving one-off changes. For example, a project to build a house by changing the various resource inputs (bricks, cement, labourers skills, etc.) into a house. When the house is complete, the project is complete. Another example is a training project to enhance people’s skills. In both cases, the changes are intended to be permanent. This one-off nature is the most prominent feature of a project. Typical projects that can be found in mass or batch-production-dominated organisations are usually targeted at improving the organisation’s competitive position by improving its effectiveness or efficiency. For example, the end result of a project to develop a new product should increase the effectiveness of sales and marketing efforts. Projects such as changing the layout of manufacturing or other facilities, or improving the skills of people, should lead to permanent increases in the productivity or efficiency of these resources. 1/4

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1.1.2.1

Projects Versus Programmes Before considering what a project is in more detail, it is useful to contrast a ‘project’ with a ‘programme’. Frequently, the terms ‘programme management’ and ‘project management’ are used interchangeably. Technically, a programme is a set of identifiable projects aimed at achieving some goal or objective. Typically, a programme will be of longer duration than any individual project within it. Some programmes might not have any specified end date and will run until a decision is taken to stop or replace them – for example, a government programme to reduce pollution in the environment. Over several years, various projects will be undertaken, completed and evaluated; the government will learn from these and new projects will be initiated. This practice will continue until – if ever – the government’s goals and objectives are achieved. Each of the specific projects will be undertaken under the overall umbrella of the pollution reduction programme. Another example is a customer service improvement programme, which would also contain several projects within it.

1.1.3

Characteristics of Projects A project can generally be defined by its characteristics where the following apply. •

•

•

•

•

•

Project Management

It involves a single, definable purpose, product or result. An example is a project to repair impact damage to an aircraft. Once the impact damage is repaired, the project is complete. It usually has defined constraints or targets in terms of cost, schedule (time), and performance requirements. An example is a time limit. The aircraft with the impact damage might have to be repaired within a specific time frame or lose several hours in its flying schedule. If at all possible, the repair should be completed within this time frame. It uses skills and talents from multiple professions and organisations. Projects often involve advanced technology and rely on task interdependencies that may introduce new and unique problems. Task and skill requirements vary from project to project. Repairing aircraft damage might involve mechanical engineers, aeronautical engineers, safety inspectors, and representatives from the aircraft manufacturer. These people may work together on the repair as a multidisciplinary team. It is unique. A project is generally a one-off activity that is never repeated exactly. Generally, one piece of impact damage will be unique. The extent of the damage will depend on what hit, where it hit, how it hit, how fast it was going, and so on. It is somewhat unfamiliar. It may encompass new technology and hence possess significant elements of uncertainty and risk. Failure of the project might jeopardise the organisation or its goals. It is a temporary activity. It is undertaken to accomplish a goal within a given period of time; once the goal is achieved, the project ceases to exist. This applies to the organisational structure created to deliver it, as well as to the project itself. Once the aircraft repair is complete, the repair team goes Edinburgh Business School

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•

•

•

•

back to the terminal buildings and either remains on duty or goes home. Next time the team is needed, it could consist of different people working on a different aircraft under different conditions. It is part of the process involved in working to achieve a goal. During the process, a project passes through several distinct phases; as a result, tasks, people, organisational structure; and resources change as the project moves from one phase to the next. Projects usually have clear start and finish points. In the case of the aircraft repair, there will be an inspection, an appraisal, a solution, implementation, finalisation and testing. It is part of an interlinked process. Projects are very rarely carried out in isolation. There is usually some interlinking between different projects that are being run by any particular organisation. It is generally of secondary importance to the organisation. Projects are generally not the primary objective of the organisation. There are exceptions such as pure research and development organisations and companies that are established purely to plan and execute a single project. Generally the organisation is concerned with defined functional objectives and the project is subsidiary to these. It is relatively complex. Projects involve multidisciplinary teams and have defined aims and objectives. In organisational terms they therefore tend to be relatively complex as compared to the standard functional processes that operate within the organisation.

♦ Time Out Think about it: project characteristics when installing a new server. The installation of a new server for the IT requirements in an office is one example of a project. It involves a single, definable purpose, which is to set up a new serverbased network for the office. It uses the skills of a number of different people, from individual company users to external specialist IT consultants. Different people will write the software, configure the hardware, install the system, and test and commission it. As with many projects, the team itself is multidisciplinary. Installing the server and commissioning it is a unique process for the IT consultants, in that every office is different and the demands of any particular client will be specific to that client. The project will always be somewhat unfamiliar because new hardware and software are coming on to the market all the time, and hence the resulting system requirements will be constantly changing. The installation team is also temporary. It works together on the server installation. As soon as the installation is complete and the system is commissioned, the team ceases to exist and each individual either moves on to new installation projects or moves back into his or her standard functional role. The installation may be interlinked in that it may take place in conjunction with hardware or software upgrades. Most IT managers would take advantage of a server upgrade to carry out other network improvement works such as replacing PCs or upgrading software. Questions:

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Where might the installation of a new server not be regarded as a project?

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•

How could project objectives (installation of the new server) be accurately co-ordinated with organisational objectives (general software and hardware upgrade)?

♦ From the project characteristics highlighted above, it is clear that projects require a unique form of management. Hence the concept of project management evolved in order to plan, co-ordinate and control the many complex and often diverse activities involved in projects. Until recently, projects and project management were considered to be limited to the construction and engineering industries. Today project management is being applied across all industry sectors. Organisations in the banking sector are as likely to be running a programme of interlinked projects as an organisation building power stations, and the recruitment adverts for project management posts are more likely to be looking for IT specialists than engineers. The growing popularity of project management tools and techniques is, in part, attributable to the development of easy-to-use computer-based project management tools. Project management is, in essence, the general management of an organisation. Good project management therefore requires the effective application of a wide range of general management skills in order to achieve the desired goals. Skills that senior corporate executives use daily in directing whole organisations are equally relevant to project management, and include: • • • • • •

financial awareness; marketing appreciation; technical knowledge; planning skills; strategic awareness; quality management.

Project management covers the whole range of functional management areas. Skills are often required in all of these areas to secure project success. Almost universally, the traditional organisation has been structured as a pyramidal hierarchy with vertical manager–subordinate relationships and departments along functional, geographic or product lines. Authority and formal communication flow down from the top. Departments tend to be highly specialised and operate independently. Traditional organisations become very efficient in what they do and are well suited to a stable environment. They are fairly rigid and therefore less suitable to the unstable and dynamic environments that characterise project situations. Project teams are set up to undertake projects of every type. They may deal with single projects where all resources are dedicated to achieving the objective of that project, or they may be responsible for multiple projects where resources have to be managed across projects. Projects can be of many sizes, ranging from large multinational projects such as building the Channel Tunnel connecting the UK to France and requiring Project Management

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millions of person hours to complete, down to more simple projects such as organising a social event or company newspaper. Projects may be external, where they are carried out for a client outside the organisation. These are normally defined by a binding contract and are usually a main revenue source for the organisation. Projects may also be internal, where they are generally set up to improve the operations of the organisation and the client would be an internal project sponsor. Finally, projects are either undertaken to deliver hardware or software. Hardware projects are those where there is a tangible physical result, such as a new building. Software projects are those where the end result is a system or process, rather than a physical item. An example is a new operational or administrative system for an office.

1.2 1.2.1

What Is Project Management? Introduction This section considers project management as a discipline, and it develops an appreciation of how project management can exist in basic internal and external forms.

1.2.2

Definition of Project Management The characteristics of a project have been considered above. It is now possible to develop a definition for project management. Given the relative youth of project management as a discipline, it is not surprising to find that project management has numerous definitions. Typical examples are: The process of planning and executing a piece of work from inception to completion to achieve safe achievement of objectives on time, within cost limits and to the specified standards of quality. And: The organising, planning, directing, co-ordinating and controlling of all project resources from inception to completion to achieve project objectives on time, within cost, and to required quality standards. Most authors agree that project management is about achieving time, cost and quality targets, within the context of overall strategic and tactical client requirements, by using project resources. There is also general agreement that project management is concerned with the life cycle of the project: planning and controlling the project from inception to completion. Project resources are resources that are wholly or partly allocated to the project and under the control of the project manager. They are allocated for a specific time, usually from within the standard functional structures that make up the organisation. Traditional planning and control techniques consider time, cost, and quality planning and control. However, traditional approaches often consider them as

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separate entities that are planned and monitored using different systems. For example, traditional cost planning and reporting systems do not necessarily link directly into the relevant resource scheduling systems. In addition, reports have traditionally been prepared by different consultants, who are responsible for different aspects of project delivery. Project Management seeks to address these problems by integrating the individual areas under the overall control of the project manager. Monitoring and reporting activities are spread out among different specialists with different and often conflicting viewpoints that give rise to confusion among those responsible for delivering the project. Another facet of project management involves choosing the optimum position in relation to the success criteria. This concept is shown diagrammatically in Figure 1.1.

Cost increase B1

Time increase B

Cost Time

A

Quality Quality increase

Figure 1.1

The typical project-management time–cost–quality continuum

Generally the facets of time, cost and quality can be represented as a three-way continuum. For example, position A Figure 1.1 might represent a low-quality, low-time, low-cost option. This option could be the preferred project success criterion of the client at the start of the project. As the project develops, the client might want to increase quality – perhaps because of the number of delays that are being caused by defective works or abortive design. There may be several ways by which this can be achieved. More time can be spent on design and this will increase cost; or more resources can be employed, with a resulting increase in costs but maintenance of the time schedule. There will always be some kind of link between quality and cost, and quality and time, so a change in the position of the project on the quality axis will also reposition it along the cost and time axes. The point that represents the project success criterion will Project Management

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therefore move along all three axes relative to each other, not simply along one axis. In Figure 1.1, the required increase in quality is leading to increases in the time required and in the overall cost. This is represented by the move from A to B. If a project has cost as its priority – for example, building to a fixed price – cost objectives would take precedence over quality and time objectives. It is important at the start of the project to prioritise between cost, time and quality and to specify where each sits in relation to the others. By doing this, it will be easier and quicker to make the difficult decisions that may be required during the pressure of the project execution phase. The need for integrated planning and control procedures, together with a recent corresponding success of project management, is caused by the changing nature of industrial projects over the past fifty years. Generally, as industry has evolved, it has become more complex. Technological processes have become more complex and this has been coupled with more and more complicated organisational and administrative procedures. Technology and organisational processes, like plants and animals, tend to evolve over time into ever more complex and sophisticated structures. This effect is further enhanced by the increasing rate of technological evolution. Technology is determined by human invention, and it can therefore evolve as rapidly as the human thought process. It is not limited to physiological evolution or to the metaphysical interactions and developments that necessitate a finite rate of development. The result has been an explosion in technological innovation and an increasing use of more and more complex and sophisticated technology. Increasing technological complexity demands increasingly complex support, administration, organisational and control techniques. Moreover, as societies become ever more sophisticated and complex, the links and interdependencies between different sections of industry and commerce become more pronounced. Expansion and evolution in one area produces a demand for corresponding expansion and development in other sectors. For example, an expansion in the commercial sector generates a demand for expansion in the communications sector, as commerce depends on communications. This increase in complexity and multiple objectives has been a driving force behind the development of project management. The project manager is concerned with time, cost and quality variables, but he or she also has to be able to view these within the context of the whole operating system. Today, projects come in all shapes and sizes, from high-capital-expenditure large construction projects to lower-cost cultural change management projects within companies. They come in many different degrees of complexity, from launching a space mission to designing and printing a company newsletter, and across all projects they require the commitment of a wide range of resources and the application of a wide and varied range of skills by the project manager. Project management is therefore about deciding the various success and failure criteria of a project and then organising and running the project as a single entity so that all the success criteria are met. This process involves setting up and managing a project team that may consist of a number of different individuals with different specialisations. The project manager must weld this group of 1/10

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individuals into a team and then drive the team to perform successfully. The team itself, like the project, will only last a certain time. Once the project is completed the project team will probably be disbanded or be moved on to the next project. ♦ Time Out Think about it: the development of system complexity and resulting need for effective project management telephone systems. Only forty years ago, telephone systems comprised a national network of exchanges linked by metal connecting wires. This system was based on the telephone networks that were first developed in the late nineteenth and early twentieth centuries. The telephone exchanges were manned by operators who directed calls manually. As society developed and commercial and industrial demands on the system escalated, the telephone system was forced into a process of evolution. This evolution was assisted to some extent by a corresponding development in new technology in radio and other communication media. Commercial radio telephones appeared in the 1960s, followed by mass networks involving electronically controlled exchanges. The first mobile handsets appeared in the 1980s, although these still required large batteries. Today, there is a multiplicity of different telecommunication options. Users can still use cable-linked systems, but these tend to use high-capacity optical fibre rather than metallic conductors. Increasingly, telephone calls are transmitted by radio. International calls can be made by satellite. Most people in the developed world now have mobile phones that are operated through a series of competing cellular networks. There are large-scale commercial battles and take-overs involving large telephone companies, and the major players have become corporate giants. The whole telephone system is infinitely more complex than the 1960s system. It is also far more powerful and flexible. These remarkable changes have all been market-driven. Companies have invested in them because the potential benefits have been clearly demonstrable. Market-driven forces for change require multiple time, cost and quality objectives to change. Users want better handsets at reasonable prices, delivered more quickly than the opposition. This in turn generates a need for advanced project-management practice in the rapidly expanding telephone and communications markets. Today, the largest single membership of the Association for Project Management is Information Technology, and the telephone network and equipment companies use some of the most advanced project-management techniques in the world.

♦

1.2.3

The Basic Project Management Structures Although numerous different organisational structures are possible, usually occurring because of particular project characteristics such as size and complexity, a useful distinction can be made between internal and external projectmanagement structures.

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1.2.3.1

Internal Project Management The most common form of project management is the formation of a project team operating within an existing organisational structure. This format is commonly known as internal, or non-executive, project management. The various organisational forms for project management are considered in more detail in Module 5. This section introduces the idea of project teams operating within functional units in advance of the main discussion in that module. Most firms are organised around functional groups that specialise in particular areas. A typical structure would have separate sections such as sales and marketing, finance and accounting, and operations. Each section or group makes a specialised contribution to the whole. A typical functional structure is shown in Figure 1.2. This kind of structure can be found in large functionally driven organisations, such as universities, government departments, local authorities, large companies and the military.

Board of directors

Managing Director

HR Director

Figure 1.2

Marketing Director

Financial Director

IT Director

Sales

Salaries

Support

Advertising

Payments

Updates

Packaging

Invoicing

Promotions

Cost control

Operations Director

Typical functional arrangement

Note: some sections omitted for clarity.

The disadvantage of this structure is that people tend to become compartmentalised and work rigidly on functional tasks. In order to make more efficient use of resources, project teams can be set up to operate across these functional boundaries. A typical project team operating across functional boundaries is shown in Figure 1.3. In this structure, the project manager takes (or is allocated) individuals from their normal functional units and reallocates them to one or more projects. Each person therefore, now has functional and project responsibilities. One example is an IT specialist working on a project to ensure common standards 1/12

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Board of directors

Managing Director

Program Manager

Marketing Director

Operations Director

Financial Director

IT Director

Project manager

Marketing input

Operations input

Financial input

IT input

Project manager

Marketing input

Operations input

Financial input

IT input

Figure 1.3

Typical project team operating across functional boundaries

Note: some sections omitted for clarity.

are applied throughout all of the organisation’s IT systems. The specialist might work normally for the IT section but, for part of the time, also be responsible for working with the standards manager to make sure that all systems are covered within the time available. Projects operating across functional structures offer good flexibility in the use of people. Staff are primarily employed to perform a functional task but are temporarily assigned to projects that require their particular expertise. In addition, individual experts can be effectively used across a number of projects. If there is a broad base of expertise within a functional department, it can be employed on different projects with relative ease. The internal system also has the advantage that specialist knowledge can easily be built up and shared within the function. Continuity of expertise, procedures and administration is maintained within the function despite any personnel changes that may occur. The main characteristics of the system are as follows: • • • •

•

Project Management

A single designated person, namely the project manager, is responsible for managing the project organisation. The project manager acts (to some extent) independently and outside the normal functional authority structure. The project manager has equal authority to the functional managers over shared (project and functional) resources. The project manager acts as a single leader and brings together the efforts of the various functional and project resources in order to achieve the project objectives. Projects generally require a number of different functional specialists to work together. The work is therefore often carried out by a range of different functional specialists working as a multidisciplinary group under the leadership of the project manager. Edinburgh Business School

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• •

•

•

• •

•

•

The project manager is responsible for integrating this multidisciplinary group into a multidisciplinary project team. The project manager has to negotiate with individual functional managers for the use of shared project-functional resources. Functional resources often remain under the direct control of the functional manager. The project focuses on delivering the project objectives in relation to time, cost and quality. The functional managers have to concentrate on maintaining an ongoing pool of functional resources to support the primary goals of the organisation. As a result there is the potential for conflict between functional and project managers over shared resources. This arises particularly in terms of the quality of people that functional managers will release onto projects and the time for which they are required by the project. A project may be subject to two lines of authority. A project individual may report directly to both the project manager and the relevant functional manager. Decision making, accountability, rewards and potential benefits are shared among the members of the project team and the functional units. The project structure is temporary and lasts only until the project is completed. The functional units are generally permanent. Project team members generally return to their respective functional units once the project is complete. Projects can originate from any level within the organisation. The marketing department might initiate a product development project while the IT department might initiate a systems upgrade project. Project structures generally require the assistance of the standard support functions such as human resources, finance and IT. They do not generally operate as entirely self contained sections.

Since projects involve the efforts of different units from within and outside the organisation, reliance on the functional chain of command for authority and communication is inefficient and causes disruption and delay of work. To get the job done efficiently, managers and workers in different units and at different levels need to associate directly with each other. Even in traditional organisations, the formal lines of authority are frequently bypassed by informal lines, which cut through the formal rules and procedures to expedite work more effectively. In project organisations, the virtue of these informal lines is recognised and formalised through the creation of a horizontal hierarchy to augment the vertical hierarchy. This hybrid organisation enables people in different functional areas to be formed into highly integrated project teams. Given their temporary nature, an organisation working on projects must be flexible, so that it can alter structure and resources to meet the shifting requirements of different projects.

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♦ Time Out Think about it: using existing university functional specialisations to develop a new course in Marine Resource Project Management. A university might have courses already running both in Marine Resource Management and in Project Management. University market researchers might find that there is significant demand for a new course that combines the two existing courses into Marine Resource Project Management. The existing departments of Project Management and Offshore Engineering could combine to develop the new course. The existing heads of department are functional managers, and the project team members will be specialist lecturers from these departments. The Project Manager is the new course leader for the course, reporting directly to senior university management, probably at faculty board level. The staff costs would be charged to the project cost centre. Any time working for the functional departments would be charged to the functional cost centre. Once in operation, the system would effectively operate as a batch production system. Questions:

•

What would be the obvious advantages and disadvantages of such an arrangement?

•

What would be the potential dangers to the functional departments under such an arrangement?

•

How could these dangers be mitigated from an organisational viewpoint?

♦ In the role of project manager, a single person is given project responsibility and is held accountable for project success. This emphasis on project goals versus functional goals is a major feature distinguishing project and functional management roles. Project managers often depend on people who report directly to other managers on an ongoing basis but are assigned to them as required. Thus the task of project management is more complicated and diverse than in other management areas.

1.2.3.2

External Project Management External project management is where an external project manager is appointed on a consultancy basis and acts as an external agent on behalf of the client. The external project manager appoints other external consultants to form an external project team. The team then works under the control of the external project manager to deliver the project within the success criteria as defined by the client. This arrangement is shown in Figure 1.4. The main characteristics of an external project management structure are the following: • •

Project Management

The external project manager acts as an agent on behalf of the client. The consultancy contract is a form of agency agreement. The external system is more flexible than the internal system. External consultants can be hired as required as a function of workload demand. Edinburgh Business School

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•

•

•

• •

•

Instructions and communications between the external consultants and the client have to cross the organisational boundary. This boundary acts as an interface and represents a barrier to effective communication. Team allegiance tends to be lower in external structures. The objectives of the external consultants do not correspond to the objectives of the client, and the external consultants owe no allegiance to the client organisation. The external project manager has direct control over the project team. For this reason, external arrangements are sometimes referred to as external project management. In an external structure, the functional structure of the organisation has no direct relevance to or impact on the project. Because of the greater proportion of external organisations, there is a greater requirement for risk transfer and contractual control in an external project management structure. There is no in-built knowledge of the firm. This can sometimes be a disadvantage. Internal and external systems are considered in more detail in Module 4.

1.3 1.3.1

Characteristics of Project Management Introduction Modern project management has a number of characteristics that differentiate it from traditional management approaches. It is international in that there are standards that are set by an international agency. Project management has relevance and applicability across most industries. Project management is unique in that it uses both international and industry-specific benchmarks. It is also unique in that project management professionals provide advice in relation to the full life cycle of a project, from inception to completion. Some important elements are examined under the headings of: • • • • • •

1.3.2

multiple objectives; international co-operation and standards; multi-industry/multi-disciplinary practitioners; generic benchmarks; specific provisions; project life cycles.

Multiple Objectives Project management is concerned with several objectives at once. The objectives typically fall under the headings of time, cost and quality. Project management decisions that affect any one of these variables will usually impact on the others. Project success and failure criteria are usually set by the client or executives of

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Senior management

Interface manager

Functional manager

Functional manager

Resource

Resource

Resource

Resource

Functional team

External project manager

External suppliers

Figure 1.4

Functional team

External consultants

External contractors

External subcontractors

Typical external project management arrangement

the parent organisation at the outset. Some projects may have to be built as quickly as possible; some may have to be completed as cheaply as possible, or others to a particular minimum quality standard. In altering any one of these, the project manager will affect the other two. Project management decisions are therefore generally made under conditions of direct functionality. The relative importance of each of the project success and failure criteria will determine the required levels of performance for each variable over the course of the project. This consideration can apply in both a tactical and in a strategic sense. For example the various cost and quality options can be generated for a company that manufactures TV sets. These options can be represented as a cost quality function. This function is usually known as a cost–quality curve because of the distinctive shape of diagrams that map quality–cost relationships. An example is shown in Figure 1.5. There may be several different options for cost and quality, such as manufacturing a TV set for £250 with a maximum of 3 per cent defects, at £400 with a Project Management

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Defect-free rate

99% 98% 97%

£250

£400

£500

Manufacturing cost per unit

Figure 1.5

Typical cost–quality curve

maximum of 2 per cent defects, or £500 with a maximum of 1 per cent defects. The point on the curve where the manufacturer wishes to be, will depend on a number of factors, including: • • • •

market price of TVs; guarantees and warranties in place; cost of replacements; true cost of defective workmanship.

The company might choose to manufacture TV sets with a maximum of 3 per cent defects. This accepted level of defects may allow them to sell at a very competitive unit price. However, the sets might have a higher level of defects, and this characteristic can have a number of consequences. It may be possible to indemnify the purchaser by issuing a guarantee or warranty with each set. However, this procedure may have a high eventual cost because a large number of guarantees will be exercised. Additionally, there may be a high true cost in that the reputation of the company may suffer and future sales may be lost. Thus, the true cost may be far higher than the additional cost of reducing the level of defects during production. Project management is concerned with ensuring that the chosen project-success criteria are met within the changing constraints of the three way time–cost– quality continuum. Project management recognises that there is more than one success criterion. There is no point in completing on time and on cost if the quality of the finished product is lower than specified by the client; for example, there is little point in building a house to cost and on time if it is so poorly built that it will fall down shortly afterwards. For each of the variables of time, cost and quality, there should be a minimum acceptable condition. Project Management is concerned with meeting these minimum criteria. In most projects, there will be changes as the project progresses. This will impact on one or more of the variables, and trade-offs might need to be made 1/18

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between them. For example, if the quality criterion is increased, either the time required and/or the cost will change. ♦ Time Out Think about it: varying cost and quality for a new football grandstand. A football club might decide to employ a contractor to build a new grandstand. The club might initially state that the stand must cost no more than £3 million, and commission designers and employ contractors on that basis. At this point, cost might be the most important success criterion. Other events might then occur that change the relative importance of cost in relation to other project success criteria. There may be very bad weather conditions that delay the construction of the stand itself by three months. At some point the club might realise that the bad weather has caused such delays that it will no longer be able to open the stand by the start of the next football season. This delayed opening could have significant effects, well beyond the immediate cost viability of the new stand. For example, a delay might result in the loss of ticket sales over the first five home games of the next season. This could amount to £1 million. Under these circumstances, it might be worth spending an extra £0.3 million to speed up the construction process in order to avoid losing the £1 million. In this case, capital cost was the initial success criterion. However, a change in a time-based variable subsequently promoted time to being the primary success criterion because of the linked effects of a time extension on other (environmental) variables. These environmental variables relate to the financial performance of the club as a whole. They are outside the project environment but nevertheless affect it directly. Questions:

•

In what type of projects might weather be a determining factor on whether or not the project is completed on time?

•

What other examples are there of wholly external factors that can determine whether or not the project is completed on time, yet are wholly outside the control of the project manager?

♦

1.3.3

International Co-operation and Standards Project Management is international. As a profession, it is unique in that its codes of practice and body of knowledge are based on international rather than national practice. This approach is in contrast to most other types of professional service. The legal systems in any two countries are likely to be very different and it is unlikely that a lawyer who is qualified to practise in one country would be able to practise successfully in another country, even if the various legal governing bodies were to permit this. Similar restrictions apply in other professions, including banking and most forms of engineering. Project management is different in that a global approach has been established and is governed by an international standards association. This international professional body is the International Project Management Association (IPMA).

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This body administers an international approach to project management and co-ordinates the activities of specific international professional associations, such as the Association for Project Management (APM) in the UK and the Project Management Institute (PMI) in the USA. The IPMA ensures that the codes of practice and bodies of knowledge of the various national project management associations adhere to one standard as closely as possible, allowing only for essential cultural and economic differences. Specific country standards are therefore controlled, to some extent, by international standards that are set and regulated by the global body. 1.3.4

Multi-Industry/Multidisciplinary Practitioners The concepts and practices of project management are not specific to any one industry. The time, cost and quality planning-and-control techniques used in project management are as applicable to agriculture as to process engineering. In addition, a wide range of disciplines uses project management. The three largest membership groups within the APM are information technology (IT) followed by process engineering and then construction. It is very unusual for any professional body to be made up of individual members from such a wide range of professional backgrounds.

1.3.5

Generic Benchmarks Traditionally, there was no standardisation of practice for professional project management consultants. There have been the professional bodies and their codes of conduct, but there was never any real attempt to standardise how projects are set up and managed, what cost control systems should be used, and so on. This changed significantly during the last ten years of the 20th century. For example, British Standard BS6079 is the current UK standard for project management practice. It is generic and is applicable across all industries. ISO10006 is the European code of practice for project management of the design process. It is again generic and is applicable across all industries. There are a number of industry-specific standards for project management practice. For example, PRINCE2 is an attempt at producing standardised project management practice within controlled environment industries and UK government. Sometimes large companies have combined to develop industry specific responses to the various generic standards. On other occasions, very large companies have developed company-specific responses. Examples would be the British Telecom and Construction Industry Council codes of practice. While these specific codes are less general than the generic codes, they are consistent with them.

1.3.6

Specific Provisions Many organisations use fully trained project management professionals to run projects, rather than designers or others acting as managers. Project Management specialists provide combined time, cost and quality control, using national and international standards of professional practice.

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Traditionally, project managers were selected from functional specialists within an organisation. The project manager could have been a specialist designer (as in the case of engineers or architects) or a specialist cost consultant (as in the case of accountants or surveyors). In many cases, the people leading and managing projects were designers or other types of specialist who assumed the role of manager for the duration of the project. The modern concept of project management includes the professional project manager. Increasingly, this type of professional person is a specialist manager who is educated and trained in project management and who has relevant industrial experience in project management rather than in design or in some other specialisation. This transition has been matched by a worldwide proliferation of project management courses offered by universities, and in specialist short courses offered by specialist management-training and consultancy firms. 1.3.7

Project Life Cycle Traditionally, consultants advised on, and managed, only one or two sections of an overall project life cycle. As a result, there was a lack of co-ordination between the different life cycle phases. This is important because decisions in earlier stages of the project life cycle impact on the choices available at later stages. For example, decisions taken in the design phases have a direct effect on decisions that can be made in the operational phase. Similarly, decisions on material choice affect choices on disposal in the decommissioning or recycling phases. Another example is the choice of materials for items such as car bodies. Aluminium might be a lot more expensive than steel in terms of capital cost, but in terms of maintenance costs it could be far more cost-effective because it does not rust. Depending on the design and assembly of the other car components, the use of aluminium for the body might significantly extend the life span of the car. In general, there are a number of recognised life cycle phases for projects. The project manager is responsible for giving clients advice that covers the complete life cycle. For example, the project manager should give professional advice on both capital costs and ongoing costs relating to any decision on choices of material. Traditional approaches have used consultants to give advice on design and/or manufacture only, with no significant consideration of longer-term cost implications. Project management as a discipline attempts to correct this by giving professional advice based on the whole picture. Typical life cycle phases include the following: •

•

Project Management

Inception. In the inception phase, the client decides to develop a project. The inception phase could have been developed years earlier as part of the overall corporate strategic plan of the particular company concerned; alternatively, it could be a new requirement based on changes such as consumer demand or technology. In the inception phase, the client assembles a basic proposal for the work that is required. Feasibility. In the feasibility stage, the project team seeks to establish the validity of the proposal from all relevant perspectives. These perspectives Edinburgh Business School

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•

•

•

•

•

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can be financial, time-dependent, technological and, in some cases, political. The feasibility phase may include extensive market research, in order to evaluate likely consumer or market demand for the end product and/or service. The end result of the feasibility phase is a statement of the viability of the proposal in relation to the variables that have been evaluated. Prototype. In some industries, it is common to develop some kind of prototype that can be fully tested and evaluated prior to full production. The prototype could be tested and refined for significant periods of time before the final design is put into full production. An obvious example would be the design of a new aeroplane, where significant and lengthy prototype evaluation is often necessary before the design can be converted into full production. Full design development. Once a prototype (if appropriate) has been adjusted and all feedback has been put back into the design system, full production design can commence. In most cases, this involves developing detailed production information. This typically involves the preparation of full production drawings that show all aspects of the design, together with a full specification that defines the required standards of manufacture and assembly for each component. Tendering and contractual arrangements. Some organisations manufacture all aspects in house. More commonly, manufacturers have their own production facilities but buy in a lot of manufactured components from external suppliers. An example of this would be Ford cars. Ford employs its own designers and assemblers and puts the cars together on its own production lines, but a significant proportion of the components are bought directly from external suppliers. Other organisations award the whole manufacturing process to external companies and organise things through external consultants. A typical example of this would be the award of a contract for the manufacture of a new ship for the British Royal Navy. The Navy would award a contract to an external naval architect to design it, and another to an external shipbuilder to build it. External works are usually secured through some kind of competitive tender. A tender is a price given by a contractor in return for doing a piece of work that is clearly detailed and described. The tendering process is usually competitive in that several contractors are invited to submit competitive and confidential tenders for the same piece of work. Generally, the lowest-priced tender that meets the specification wins the contract. Manufacturing. The product is assembled during the manufacturing process. This phase could, for instance, be a single one-off process for a building, or a repetitive process for manufactured components. Commissioning. The commissioning phase involves all aspects of switching the system on. This act may be simple in some systems, and far more complex in others. It may take several months to commission a new submarine fully. This may involve weeks of power trials while the boat is in dock, followed by extensive surface and dive trials. Each stage may involve many manoeuvres and simulations, followed by numerous calculations and adjustments. The submarine would only be accepted by the Navy once the Edinburgh Business School

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•

•

•

contractor has completed all the required commissioning trials. Operation. In the operational phase the system is actively used for the purpose for which it was originally intended. For some systems, this could be the longest part of the project life cycle, while for other systems this may not be the case. Examples of systems with a long operational life span would be new buildings. These may be designed with an operational life span of sixty years or more. At the other extreme, the Saturn V moon rockets were developed as one-shot systems; even though the design and construction process took years, the whole rocket and capsule was only used once and the operational life span was only a few days. Decommissioning. Decommissioning is the process by which a system is switched off. Again, this act can be simple in some cases and much more complex in others. An old car can be decommissioned at once simply by switching off the engine and leaving it with a recycler. Other systems, such as those that involve toxic processes or nuclear contamination, cannot simply be switched off. The very process of switching off might involve the long-term removal of fuel rods and maintenance of cooling systems for a considerable period of time. Even after the reactor is turned off, it is still radioactive; decommissioning the reactor and all the other contaminated systems may take many decades with current technology. Removal and recycling. The last phase is removal, and recycling. Legislation in many countries is becoming increasingly onerous in relation to the environmental impact of recycling. In future, legislation and environmental concerns will cause more and more products and systems to be designed for ease and completeness of recycling. Ever larger numbers of manufactured goods are being assembled with recycling and reclamation in mind. Increasingly, packaging is being manufactured from recycled materials and/or other materials that can be recycled.

Project management is concerned with advice on the above phases so that the client can make informed decisions during design and manufacture on matters that may incur a cost penalty in future. There seems little doubt that some of the older UK nuclear power plants would not have been designed as they were if full consideration of eventual decommissioning and recovery had taken place.

1.4 1.4.1

Potential Benefits and Challenges of Project Management Introduction Project management is a relatively new approach to managing projects. It is international, interdisciplinary and concerned with the whole life cycle of a project. It uses a trained management specialist to organise the time, cost and quality objectives of a project and to ensure that they are achieved. This section considers specific advantages and disadvantages associated with the project management approach.

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1.4.2

Potential Benefits of Project Management Many benefits have been claimed by organisations employing project management practices. These include: • • • • • • • • • • • • • •

1.4.3

increased concentration on a specific objective; more efficient use of company resources; increased accountability; potential for healthy competition between functional and project units; reduced disruption of functional operations; enhanced visibility of strategy implementation; consideration of life-cycle costs; increased product development and release speed; improved formal and informal communications; control of simultaneous multiple objectives; improved security of project related information; improved team spirit and cohesion; improved innovation through the use of multidisciplinary decision making; opportunities to develop in-house interdisciplinary and multidisciplinary teams, individual and management skills.

Potential Challenges to Project Management Organisations that are regularly involved in projects face some major challenges in relation to their people. Some of these are listed below. • • • • •

• •

•

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Key staff may be taken from the functional units. This may have a corresponding detrimental effect on functional performance. Project and functional managers may attempt to compete for resources and this can have detrimental effects on the company as a whole. Project team members may find themselves receiving conflicting orders from their functional and project managers. Powerful functional manager may be able to use their authority to deprive the project of necessary resources. In order to ensure parity of authority and control between functional and project managers, a need arises for an additional level of authority. The project sponsor ensures that the functional and project managers have equal authority over project team resources and that no destructive competition occurs. Functional managers may be less flexible than project managers and may feel pressurised as a result of project demands. Staff need to develop a different attitude. They have to develop a more flexible approach and become used to working in a multifunctional environment. Project staff who have been working on a project for a long period of time may have problems in re-adjusting to functional working.

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1.5

The History of Project Management No one individual or industry is responsible for the concept of project management. Often it is attributed to the early space programmes of the 1960s, but its origins go back much further. Elements of project management probably first came to light in the great construction works of history, such as the Pyramids, the Great Wall of China and the Roman roads and aqueducts. These techniques have been improved and developed over time. What is common to all construction works through history is that they all require special organisations, workforces, facilities and resources for the single purpose of completing the job or the project. Over the centuries, professionals generally bonded together to form groups and associations. This has traditionally been for the benefit and development of their profession or trade. In Europe, this tendency was characterised by the formation of associations called guilds and leagues in medieval times, leading up to the livery companies and other institutions in the nineteenth century. In all cases, the underlying motivation was that of protecting financial interests, although a by-product was the establishment of rules and standards for practice, qualifications and membership. The industrial revolution changed the requirements of industry. There was a switch away from a need for craftsmen towards a need for supervisors who could manage both the people and the new technologies. The old medieval institutions responded by establishing standards for their members conveying education, knowledge and competence. Governments and educational establishments also responded to this, so that formalised educational qualifications and standards began to appear. Later, the institutions and educational bodies began working more closely together in order to improve the relevance of the educational qualifications. What we call ‘traditional’ management practices evolved during the Industrial Revolution and beyond. They were found to work well for standard products in batch or mass production, but were less efficient in managing the production of non-standard products. In the early 1900s, manufacturing managers could see that some of the tools and techniques effectively used in the construction industry could be adapted to suit the planning and controlling demands of manufacturing industries, particularly in large-scale, product-development activities. At about the same time, planning techniques were developing and during the early 1900s the Gantt chart was introduced. Around 1950, the first network diagrams for industrial processes were introduced. These are two of the most widely used tools of project management today. Project management in its current form emanated from the atomic bomb development programme by the US military at Los Alamos, in the 1940s. This was the first really complex, high-technology project operated by mankind. The level of complexity and large number of activities involved created the requirement for new management and control practices if the project was to be completed on time and to the required standard. By the mid-1950s, the size and complexity of many projects had increased so much that the well developed techniques of the first half of the twentieth century were unable to cope. The US defence industry was finding it difficult to control

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the cost and time schedules of its large-scale weapons systems projects: some very large cost and time overruns occurred. To address these problems two new network-based systems were developed almost simultaneously, by the US Navy and the DuPont Corporation. In 1957, DuPont created the critical path method (CPM), and in 1958 the US Navy launched the program evaluation and review technique (PERT). Both methods originated exclusively for planning, scheduling and controlling large projects with numerous interrelated work activities. About ten years later, both methods were combined with computer simulation techniques into a method called graphical evaluation and review technique (GERT) to allow a more realistic analysis of schedules. By the mid 1960s, developments in computer technology provided improved capabilities for storing the vast amount of information generated on large projects. Network methods were improved to integrate project costing and project scheduling. These techniques became more widely used in the late 1960s when the federal government in the USA mandated the use of network scheduling/costing methods, first with the US Department of Defense and NASA contracts, then later with other large-scale projects such as nuclear power plants. The discipline of project management thrived in this environment and the Project Management Institute in the US and the Association for Project Management (APM) in the UK were formally instituted in the late 1960s. Throughout the 1960s, additional methods were developed to help project managers. Some enabled managers to specify the type and quantity of resources needed for each activity, and to plan for and allocate resources across a number of projects simultaneously. Although the concept had been around for a while, it was not until the 1970s that planning and costing based on an ‘earned value’ concept came into widespread use. This concept led to performance measurement systems that kept track not only of funds spent but also related these expenditures to the value of the work that was completed. This led to much more reliable forecasting of what a project would cost at completion and when it would be completed. The APM produced its Body of Knowledge in 1988, and assisted greatly in the preparation of British Standard BS6079 in 1996 and European International Standard ISO10006 in 1997. These documents are British and European standards for project management practice and in many ways mark the frontiers of the development of the discipline as a profession today. Prior to the 1980s, project planning and tracking systems were available only for large mainframe computers. Most of the systems were very expensive. The cost and organisation needed to operate the systems restricted their usage to only the largest projects. This changed in the 1980s with the advent of the relatively inexpensive microcomputer. Today, a wide variety of high-quality project management software programmes is readily available. Low-cost software has made it possible to apply sophisticated planning, scheduling, cost analysis, resource planning and performance analysis to projects of all sizes.

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Project Management

Module 1 / Introduction

1.6

Project Management Today Project management is now used by numerous different disciplines and has evolved into an integral management component for a wide range of industries. Increasingly, large organisations are setting up their own project management development sections. This has been accompanied by a proliferation of professional project management consultancies. In many sectors, especially construction, the relative growth in the design professions such as architecture and structural engineering has been relatively static, while the popularity of construction project management has soared. Project management has evolved into a global generic profession. Provided that the correct international standards are observed, project managers all over the world speak the same project ‘language’. There is no reason why a project manager in charge of a forestry project in France should not be able to look at the contract documentation and project records of a UK construction project and be able to understand 90 per cent of the information that is presented there. Project management techniques today allow previously unheard-of opportunities for evaluation and comparison. For example, the use of a Strategic Project Plan (SPP) allows accurate and standard recording and reporting of all aspects of a project’s development. This practice of standardisation includes design, execution, implementation and use. This standardisation allows comparisons to be made that would not previously have been possible. For example, a good SPP allows immediate and direct comparison of the performance of design consultants. SPPs are increasingly being used as an assessment technique to assist in deciding which project management consultancy to employ. Project management as a profession is proving very successful. The UK and US professional bodies for project management are growing faster than any other comparable professional bodies in either country. Some of the more traditional professional bodies are recognising the impact of project management and are setting up their own divisions to offer specialisations in the subject. Hence we have the Royal Institute of Chartered Surveyors (RICS), which is concerned with training and standards for the professional surveyor, establishing a project management specialisation within one of its professional divisions. In doing so, the RICS has accepted that project management as a profession is infringing on the activities of its members to such an extent that the threat has to be addressed. The RICS has chosen to do this by setting up its own surveyors’ version of project management. A number of other professional bodies have done something similar.

Learning Summary What is a Project? • •

Project Management

Along with mass production and batch production, a project is one type of standard production system. Projects are characterised by having one-off and unique objectives and characteristics. Edinburgh Business School

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Module 1 / Introduction

What is Project Management? •

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•

• •

• •

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•

• • • •

•

•

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Project management involves devising, managing and controlling the process required to achieve safe completion of a project on time, within cost and to the required standards of quality. Traditional planning and control techniques consider time, cost and quality planning and control, but project management seeks to consider and evaluate each one concurrently. Generally, as industry has evolved, it has become more complex. This has resulted in more and more complex projects, which created a need for more effective ways to manage them. The project manager’s role has evolved to be able to view a project’s time, cost and quality variables within the context of the whole operating system. In most cases, the objective of the project team is to meet the success criteria for the project and then to disband. Few other aspects of enterprises have such requirements. Project management operates largely within existing organisations. Projects operating within functional structures offer good flexibility in the use of people. Staff are primarily employed to perform a functional task, but are temporarily assigned to a project that requires their particular expertise. In addition, individual experts can be used effectively on a number of projects. If there is a broad base of expertise within a functional department, it can be employed on different projects with relative ease. The ‘within function’ structure also has the advantage that specialist knowledge can be easily shared within the function and utilised effectively by the project team. Continuity of expertise, procedures and administration is maintained within the function, despite any personnel changes that might occur. The project manager heads the project organisation and operates independently of the normal chain of command. The project manager is the single focal point for bringing together all efforts in pursuit of the project objectives. The project manager is responsible for integrating people from different functional disciplines who are working on the project. The project manager negotiates directly with functional managers for support. Functional managers usually remain responsible for individual work tasks and personnel within the project, while the project manager is responsible for integrating and overseeing the start and completion of activities. The project focuses on delivering a particular product or service at a certain time and cost, and to a particular quality standard. In contrast, functional units must maintain an ongoing pool of resources to support their organisation’s goals. As a result, conflict may occur between functional and project interests. Decision making, accountability, outcomes and rewards are shared among members of the project team and the functional units. Edinburgh Business School

Project Management

Module 1 / Introduction

•

•

• •

•

•

•

•

•

•

•

Though the project organisation is temporary, the functional units from which it is formed may be permanent. When a project ends, the project organisation is disbanded and people return to their functional units or are assigned to new projects. Projects can originate at different places in the organisation. Product development and related projects tend to originate from marketing, whereas technology applications originate in research and development, and so on. Project management sets into motion numerous other support functions, such as personnel evaluation, accounting, and information systems. Given the temporary nature of a project, an organisation working on projects must be flexible so that it can alter structure and resources to meet the shifting requirements of different projects. In a project system, the product is a one-off non-repetitive element. As a result of this, there is no learning curve and high levels of complex management planning and control are required. The concept of project management has evolved in order to plan, co-ordinate and control the many complex and often diverse activities involved in modern-day commercial projects. Project management is principally the general management of an organisation within an organisation. Good project management requires the effective application of all the general manager’s skills to achieve the projects goals. Project management employs the whole range of functional management areas, and skills are often required in each of these areas in order to secure project success. Project teams are set up to undertake projects of every type. They may deal with single projects where all resources are dedicated to achieving the objective of that project, or they may be responsible for multiple projects where the resources have to be managed across projects. Projects can be external where they are carried out for a client outside the organisation. These are normally defined by a binding contract and are usually a main revenue source for the organisation. Projects can be internal where they are generally set up to improve the operations of the organisation and the client would be an internal client.

Characteristics of Project Management • •

•

Project Management

Project management is unique in that it uses both international and specific industry benchmarks. Project management is also unique in that it represents an entirely new profession that gives professional advice in relation to the full life cycle of a project, from inception to completion. Project management assumes responsibility for optimising time, cost and quality performance for a project. Under the project management philosophy, it is not acceptable to consider any of these variables in isolation, because each of them has a bearing on the eventual performance of the others. Edinburgh Business School

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Module 1 / Introduction

•

•

•

•

Project management is concerned with ensuring that the project success criteria are met. However, project management recognises that there is more than one success criterion. There is no point in completing on time and on cost if the quality of the finished product is lower than specified by the client. For each of the variables of time, cost and quality, there should be a minimum acceptable condition. Project management is concerned with meeting or exceeding these minimum criteria in all cases. Project management often involves using fully trained project management professionals to run projects, rather than designers or others acting as managers. The modern concept of project management includes the evolution of the professional project manager.

Potential Benefits and Challenges of Project Management •

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•

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• • •

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Some of the obvious benefits of using a project management approach are that it makes more efficient use of company resources, it offers reduced disruption of routine operational activities, and it offers greater motivation potential for people working in projects. Project management also offers greater visibility of strategies and concepts within the organisation as a whole, the promotion of healthy competition between organisation projects, and full life cycle cost consideration at each stage. Project management can provide clearer management, individual accountability and responsibility, a shorter time from development to market, clearer control of expenditure, and better use of resources. Project management can also provide clearer communication on progress and input to strategic plans, improved control and security of classified and sensitive information, and improved team building and team spirit. There are also challenges to using project management as an approach. In order for a project management system to work, key staff are taken from functional units for a proportion of their time. If not properly controlled, this could damage the performance of the functional unit. Projects will inevitably compete, at least to some extent, for limited and finite organisational resources. Functional managers tend to be less visible and flexible than project managers. Increased staff flexibility is also required. Staff have to be re-deployed when the project terminates. There may be problems with this if the functional staff have been working on the project to a large extent, and/or for a significant amount of time.

Edinburgh Business School

Project Management

Module 1 / Introduction

The History of Project Management •

•

•

•

•

Modern project management has evolved from the basic principles established during the development of the Los Alamos project in the USA in 1944. The atomic bomb project was the first really complex, high-technology project operated by mankind, and the need for a new management approach was identified. By the mid 1950s, the size and complexity of many projects had increased to such an extent that the well developed management techniques of the first half of the twentieth century were unable to cope. The US defence industry was finding it difficult to control the costs and time schedules of its large-scale weapons systems projects, and some very large cost and time overruns occurred. The solution was to further develop the Los Alamos principles into what we now call project management. The discipline was developed and led to the formation of the Project Management Institute in the USA and the Association for Project Management (APM) in the UK in the 1960s. Throughout the 1960s, additional methods emerged to help project managers; but the next real milestone was the development of cheap and reliable computers in the early 1980s. The APM produced its Body of Knowledge in 1988, and assisted greatly in the preparation of BS6079 in 1996 and ISO10006 in 1997. These reference works document British and European standards for project management practice and in many ways mark the frontiers of the development of the discipline as a profession today.

Project Management Today •

• •

Project management is now used by numerous different disciplines, and has evolved into an integral management component for a wide range of industries. Project managers are increasingly being accepted as fundamental contributors to the operational process. Project management today has evolved into an internationally important discipline. As a profession, it is growing rapidly in many countries.

Review Questions True/False Questions These questions are designed to allow you to evaluate your general understanding of the subject areas quickly. You should attempt these questions as quickly as possible.

What is a Project? 1.1 All types of production systems involve projects. T or F?

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1.2 Mass production systems comprise a series of individual projects. T or F? 1.3 A mass production system manager generally has more or less the same role and responsibilities as a project manager. T or F? 1.4 Project products tend to be largely repetitive and complex. T or F? 1.5 Knowledge transfer between projects is similar to knowledge transfer between batches. T or F? 1.6 A project generally has a single definable purpose, product or result. T or F? 1.7 A project is generally a temporary activity, concerned with the achievement of a specific goal. T or F? 1.8 Projects can exist both internally and externally to the parent organisation. T or F?

What is Project Management? 1.9 Project management is not concerned with the entire life cycle of the project. T or F? 1.10 Project management is concerned with multiple objectives. T or F? 1.11 The success of most projects can be evaluated in terms of time, cost and quality. T or F? 1.12 Project management has evolved primarily as a result of the increasing complexity of projects. T or F? 1.13 Project success and failure criteria are fixed at the outset of a project and cannot be changed once the project has started. T or F? 1.14 Project management and functional management are mutually exclusive and cannot exist in parallel within an organisation. T or F? 1.15 Research and development work would typically be best suited to a functional organisational structure. T or F? 1.16 Highly rigid functional organisations, such as the armed forces, cannot make effective use of internal project structures. T or F? 1.17 Project managers tend to have more power and status than functional managers. T or F? 1.18 Project managers tend to be selected from within the ranks of the organisation’s functional managers. T or F? 1.19 Successful project managers always make the best functional managers. T or F? 1.20 External project management is more cost-effective than internal project management. T or F? 1.21 Changing success criteria can be managed using trade-off analysis. T or F?

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1.22 The IPMA is the international steering body for global project management practice. T or F? 1.23 BS6079 is an EU standard for project management practice. T or F? 1.24 Life cycle phases vary in importance as a function of project type. T or F?

The History of Project Management 1.25 Project management as a discipline originated during the Roman road building programmes in the first century AD. T or F? 1.26 PERT and CPM methods of project planning and control first appeared as operational tools in the 1940s. T or F?

Project Management Today 1.27 Project management is proliferating through a range of professional disciplines. T or F? 1.28 Project management is a tool for strategy implementation. T or F?

Multiple Choice Questions These questions are designed to allow you to evaluate your knowledge and understanding of the subject areas in more detail. You should again go through the questions and try to answer them as quickly as possible.

What is a Project? 1.29 Which of the following is correct? Most projects have clear success criteria expressed in terms of A

time and cost.

B

quality and cost.

C

time and quality.

D

time, cost and quality.

1.30 Which of the following is correct? A typical example of a mass production system is the manufacture of A

an office building.

B

an automobile.

C

office carpets.

D

All three.

1.31 Which of the following is correct? A typical example of a batch production system is the manufacture of

Project Management

A

an office building.

B

an automobile.

C

office carpets.

D

All three.

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Module 1 / Introduction

1.32 Which of the following is correct? A typical example of a project production system is the manufacture of A

an office building.

B

an automobile.

C

office carpets.

D

All three.

1.33 Which of the following is correct? Internal project management systems typically involve projects running within A

other projects.

B

matrix groupings.

C

functional groups.

D

All three.

1.34 Which of the following is correct? External project management systems typically involve A

only Internal team members.

B

only external team members.

C

both.

D

neither.

What is Project Management? 1.35 Which of the following is correct? Project management involves the simultaneous control of time, cost and quality. Other obvious control criteria could be A

company strategy.

B

dividend levels.

C

human resources.

D

safety.

1.36 Which of the following is correct? In general terms, project and functional objectives are likely to be A

wholly compatible.

B

generally compatible.

C

generally incompatible.

D

wholly incompatible.

1.37 Which of the following is correct? In corporate terms, the success of the project in relation to the success of the function is likely to be

1/34

A

more important.

B

less important.

C

equally important.

D

variable.

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Project Management

Module 1 / Introduction

1.38 Which of the following is correct? The global body for project management practice is A

APM.

B

PMI.

C

IPMA.

D

BS6079.

1.39 What does BS6079 acts as? A

A global standard.

B

A European standard.

C

A British standard.

D

Other.

The History of Project Management 1.40 Which of the following is correct? Project management evolved largely in response to increasing A

project complexity.

B

project costs.

C

project time scales.

D

project team development.

1.41 Which of the following is correct? Project management evolved initially and primarily in A

the UK.

B

the USA.

C

Germany.

D

Japan.

Project Management Today 1.42 Which of the following is correct? Project management as a profession is

Project Management

A

in decline.

B

static.

C

growing slightly.

D

growing rapidly.

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Module 2

Individual and Team Issues Contents

Project Management

2/2

2.1

Introduction

2.2 2.2.1 2.2.2 2.2.3

The Project Manager Introduction Selecting the Project Manager Some Essential Project Manager Requirements

2/4 2/4 2/4 2/11

2.3 2.3.1 2.3.2 2.3.3 2.3.4 2.3.5

The Project Team Introduction Project Teams within Functional Organisations Team Multi-disciplinary and Heterogeneity Issues Group and Team Processes Project Team Performance

2/30 2/30 2/30 2/33 2/34 2/36

2.4 2.4.1 2.4.2 2.4.3 2.4.4

Project Team Introduction Project Team Project Team Project Team

2/36 2/36 2/36 2/40 2/42

2.5 2.5.1 2.5.2 2.5.3 2.5.4 2.5.5

Project Team Evolution Introduction Project Life Cycles Project Change Control and Management Project Team Evolution Groupthink

2/46 2/46 2/46 2/49 2/49 2/51

2.6 2.6.1 2.6.2 2.6.3

Project Team Motivation Introduction McGregor and Maslow Equity Theory and Expectancy Theory

2/53 2/53 2/53 2/56

2.7 2.7.1 2.7.2 2.7.3 2.7.4

Project Team Communications Introduction Project Communication Formal and Informal Communication Internal and External Communications

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2.8 2.8.1 2.8.2 2.8.3

Project Team Stress Introduction Origins and Symptoms of Team Member Stress Stress Management

2/63 2/63 2/63 2/66

2.9 2.9.1

Conflict Identification and Resolution Introduction

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Staffing Profile and Operation Staffing Profile Operation

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Module 2 / Individual and Team Issues

2.9.2 2.9.3 2.9.4 2.9.5

2.1

Sources of Conflict Conflict Characteristics Approaches to Conflict Conflict Management

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Learning Summary

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Review Questions

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Mini-Case Study

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Introduction In practice, managing the many internal and external people necessary for a project to succeed is a major activity and can be a source of difficulty for project managers. Thus, this module covers the human issues that are relevant to project management. There is a well-developed literature on individual and team human issues. This module will give a brief overview of some of the main areas that are relevant to effective project management. The overview concentrates on those aspects that are most relevant to the functional requirements of the project manager and the project team. The tools and techniques used in project management are becoming ever more refined and sophisticated. Complicated techniques are used in almost every aspect of project management today. At the same time, developments in information technology have provided much-improved capabilities for planning, budgeting, monitoring and controlling, using highly complex but easy-touse computer programs. Relatively low-cost software will calculate variances, smooth out resources, define the critical path, forecast cash flows, and carry out many other complex tasks at the push of a button or click of a mouse. Plans, budgets, detailed drawings and reports are easily generated and beautifully presented in formats that are easy to understand. Information can be processed and distributed quickly and accurately, around the world if need be. This provides project managers with a level of effective support that could not have been imagined even ten years ago. Although it is logical to assume that the tools and techniques used in project management will continue to develop, such has been the rate of development to date that future developments are likely to provide progressively more limited advancements. Certainly, today’s tools are very effectively used in even the largest projects and life without them is unimaginable. With the exceptions of speed of information generation and distribution, it is not clear how much more effective they need be. Despite all the assistance from the use of modern computerised tools and techniques, projects still continue to incur difficulties in all areas of project management. Many projects run out of money; some run out of time; others do not conform to specification; some projects fail altogether. On the other hand, many projects are completed ahead of schedule, well inside the budget, easily meet the specifications, and are very successful. We should not be surprised by

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Project Management

Module 2 / Individual and Team Issues

any of this. If project management relied only on tools and techniques, it would be a surprise if projects failed or were ‘too successful’. There is no urgent need for developing further the methods used in project management. Projects, in general, do not fail because the planning hardware or software broke down. People make projects succeed or fail. They make the decisions, predict, plan for and control the progress. Every project is unique, and the people involved contribute to that uniqueness more than any other aspect. The people, and how they relate to the project environment, are a major factor in the success of any project. Most project management practice has to be team-based. The complexity and information requirements of most projects effectively preclude individual operation except for the most simple of projects. As a result, project managers have to operate both as team members and as project team leaders. The technical tools for time, cost and quality management and control can only be used effectively if the project team operates properly. This module begins with the person who is, arguably, likely to have the greatest influence over whether the project has a successful outcome. That person is the project manager. The module then examines the classic management skills requirements of all managers, and relates this to a project management setting. These include a strong human element, such as managing the team-building process. The project manager has to be able to build the team and then maintain control and co-ordination as the team evolves and develops. The next section discusses project-team staffing, transition and change. Nearly all projects operate within some kind of defined life cycle. A project team may exist for a significant period of time and involve transitions as people join and leave the team at various stages as the project progresses. The staffing process is considered, together with the effects of transition and change as the team evolves. The module then moves on to examine some theories on motivation. This is perhaps the single most important aspect of team performance. The management functions of leadership and team building are important for good group performance, but the team has to be motivated, both collectively and in terms of each individual, in order for it to perform effectively. The module then considers project team communications. After motivation, communication is perhaps the most important single element in project team effectiveness. This section considers informal and formal communications, and also internal and external communications. Even with efficient leadership, team-building processes, and communications, the team is unlikely to operate in compete harmony at all times. Workload pressures, real or perceived inequities, team member transition and a range of other variables can all bring about stress and conflict within a project team. The final text section of the module considers project team stress. This section analyses the origins of team stress and appropriate stress-management options. Conflict is considered in terms of its characteristics and management. Project Management

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Learning Objectives By the time you have completed this module you will be familiar with: • • • • • • • •

2.2 2.2.1

the concept of what a project manager is; the typical position and role of the project manager; the essential project management skills; the concept of what a project team is and how it works; project team staffing and profiling; project team life cycles and evolution; project team communication and motivation; project team stress and conflict.

The Project Manager Introduction One of the most important decisions in project management is the choice of project manager. Many project failures can be traced to bad choices in this area. Conversely, there are projects where so many unforeseen obstacles and problems arose that failure could be expected but the project succeeds because of the leadership and other qualities of the project manager. There is widespread use of the term ‘project manager’ in commerce and industry, but the term means different things to different people. Given the wide range of types and sizes of projects, this is hardly surprising. There are also wide variations in the roles and duties that are undertaken by project managers in different industries and sectors. This section looks at the typical characteristics involved in the selection and positioning of the project manager within the organisation. It considers the typical duties and responsibilities of the project manager and relates these to the personal and management skills that are therefore required of a good project manager. Although this section considers the many attributes and skills that are desirable in a project manager, it is very unlikely that any one human being will possess all of these. In practice, it is a matter of deciding which are the most important in relation to any specific project and then selecting the person who most closely matches the specification. These factors should be borne in mind throughout this section.

2.2.2

2.2.2.1

Selecting the Project Manager Introduction Project managers are sometimes qualified and experienced project management specialists who are employed on a permanent basis by an organisation. Sometimes they are external consultants who are contracted to manage the project for its duration only. In the case of internal projects they are mostly selected from

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Project Management

Module 2 / Individual and Team Issues

within the existing workforce. In all cases they are charged with organising and managing a project team that will work together in order to meet the project objectives. This section considers the concept of the project manager in relation to that role’s characteristic central position within the organisation. It then extends this concept to consider the typical role of the project manager and links it to the skills that are required by an effective project manager.

2.2.2.2

The Concept of the Project Manager A project manager is similar to a chief executive or managing director. Indeed, it has become relatively common for large organisations to use project management assignments as a means of developing future general managers. The reasons for this development will become self-evident as you work through this module. The project manager owns the project and has sole responsibility for its outcome. In addition, where small to medium-sized projects are concerned, the project manager is often responsible for managing several projects concurrently. The project manager is usually responsible to a project sponsor. In the case of very large projects, or those that will have a significant influence on the future of the organisation, the sponsor will normally be a board member. In some cases there will be several sponsors who will operate as a team. As with the project team (discussed later) the project manager does not conform to one specific model. There are, of course, skills and attributes that make some people more suitable for the role of project manager than others, and these are explored later. But different kinds of project call for different kinds of project manager; not all capable project managers are suitable for all project types. For example, a project manager who is good at managing newproduct development projects within a pharmaceutical company is likely to have a degree of specialist knowledge and skills that is different from that required to successfully manage construction projects. The position of the project manager is a very difficult one because of a project’s position within an organisation. In traditional organisations, influence and authority tend to flow vertically down from the top to the bottom of the organisation. However, any complex project will usually require the support of many levels of management within organisations and of many departments/functions across the organisation. For example, a project for developing and introducing a new management reporting and control system for a complete organisation may be sponsored by the controller’s department but will require extensive co-operation and assistance from all the other functional areas if it is to succeed. It would take too long if all communications, instructions, resolution of problems and so on had to follow the functional hierarchy and travel from the project manager via the controller to other functional heads at the same level, from them down their hierarchical chain to the relevant subordinates, and back again through the same route to the project manager. Hence projects tend to be run outside the traditional hierarchy of the organisation. The project manager’s role is by its nature a temporary one, superimposed on the organisation. It does not have the power associated with traditional hierarchical positions. Project managers must work across functional and organ-

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Module 2 / Individual and Team Issues

isational lines and frequently have few direct subordinates. Therefore, perhaps the biggest single issue faced by project managers arises because they have the authority to make decisions about project priorities, schedules, budgets, objectives and policies, but often do not have the official authority to give direct orders to the people who must carry out the work as a result of these decisions. This disparity between responsibility and authority can be highly frustrating and means that the project manager must rely on other forms of influence, as shown in Figure 2.1. That influence may be applied directly to individuals or through other managers within the organisation.

Competency Professionalism

Project manager

Reputation

Functional managers

Skill Interpersonal skills Alliances

Figure 2.1

Sources of influence for the project manager

Ultimately, if the project manager cannot secure the necessary co-operation within the organisation, the assistance of the project sponsor(s) will be sought. It is therefore important when appointing project sponsors to choose people of sufficient seniority within the organisation. Projects sometimes require resources from a range of external organisations that may be locally or globally based. Hence, the project manager may be responsible for managing across functional, departmental, organisational and geographical boundaries – a good training ground indeed for future senior managers.

2.2.2.3

The Central Position of the Project Manager The project manager’s post lies at the centre of the principles of project management. Given the project manager’s ultimate responsibility for the project’s outcome, a key ability is to be able to focus on issues in detail while at the same time keeping a clear view of the project as a whole. This ability to focus within the overview ensures that people and resources are obtained and utilised in an integrated way – including reorganising to overcome problems and difficulties that will inevitably arise from time to time – in order to accomplish the project’s goals and objectives. To do this, the project manager occupies a central position relating to communications between the various people and organisations involved, much like a spider at the centre of a web.

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Module 2 / Individual and Team Issues

This central position results in the project manager being responsible for receiving and issuing more information than anyone else on the project. These communications are intended to ensure that all those involved, individuals and organisations alike, understand what is required of them at all stages of the project as it unfolds. Such is the volume of communications required that, in practice, at times the project manager’s job can feel like being that of merely a highly paid messenger. In part, this is also because the project manager is the primary decision-maker on the project and the main link with the organisation itself on project matters. Where there is no direct authority, the project manager also has responsibility for influencing decisions relating to the well-being of the project. The project manager needs to have both the intellect to devise the project strategy and the diligence to ensure that actions are taken, both to the required standards and on time. The project manager directs the project and its people towards these ends. This requires the energy and ability to motivate staff to achieve the project goals

2.2.2.4

The Role of Project Manager The primary requirements of the project manager’s role can be summarised as: • • • • • • • • •

planning the project activities, schedules and budgets; organising and selecting the project team; interfacing with the client, the organisation and all other interested parties; negotiating with suppliers and clients; managing the project resources; monitoring and controlling the project status; identifying issues and problem areas; finding the solutions to problems; resolving conflicts.

These roles are intrinsically linked and cannot be regarded in isolation. For example, planning the project activities depends on the characteristics of the project team. The time that has to be allowed for a given activity depends on the resources available when staffing the project team. In meeting the above requirements, the project manager will use many different skills, ranging from entrepreneurship to large-company politics, from diplomacy to single-minded determination, from technical skills to leadership skills. In essence, the role calls for skilled and competent generalists who, in the case of large complex projects, must also be very high achievers with strong communications and interpersonal skills. The requirements above have to be carried out within the overall success or failure criteria established for the project as a whole. These include delivering the project: • • • Project Management

within the agreed time limit; within the agreed cost limit; to at least the minimum quality standards laid down; Edinburgh Business School

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• • •

to the satisfaction of the client; in compliance with the strategic plan of the organisation; within the agreed scope. These objectives are sometimes summarised as shown in Figure 2.2.

Time, cost and quality problems

Time limit Limits defined by organisation strategy and scope

Cost limit Cost Time

Time and quality problems

Quality Window of acceptable outcomes Quality limit

Figure 2.2

Project objectives

The agreed project scope defines the limits of the project. It determines what is and, equally importantly, what is not part of the project. Cost, time and quality standards are established based on the agreed scope before the project commences. Any changes, frequently referred to as project creep, usually impact on one or more of these. The project manager role includes ensuring that only changes in scope agreed to by the client are authorised or contracted for. Creeping scope occurs because there is a tendency for clients or their advisors to change the scope as their perceptions change while the project is being executed. For example, during the detailed design phase it is not unusual for designers to find things that they have missed, or additional things that would be good to include. As clients circulate design reports and receive more and more feedback from the various stakeholders, the pressure to go back and introduce new design requirements often becomes very great. This phenomenon of ‘creeping scope’ can lead to the expansion of the original project beyond the original limits. It can in turn result in revision to the time and/or cost estimates, and possible compromises in quality standards if required to stay within the original parameters for the other two. Anyone who has employed an architect to design a family house will understand the phenomenon only too well. The 2/8

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architect will prepare an original design based on some broad parameters of size and cost. Once the family receives the initial designs, each member of the family will have ideas on things that could be altered or added in some way. These result in revised designs, additional costs and so on. It is but one example of project creep or creeping scope. Because the project manager in charge of the project has relatively little authority within the formal functional structure of the organisation, it can be difficult to control project creep. Therefore, part of the role involves navigating or controlling the boundaries between the project and functional teams/departments within the organisation (see Module 4). This role is sometimes referred to as interface management, with the system for control and delivery being known as the interface management system (IMS). The very important role can often also be referred to as the process of managing the organisational interfaces. As attempted control crosses the various boundaries, the control situation changes. This change in situation includes changes in authority, communication and accountability links. The project manager has to cross this boundary every day. Interface management is the control procedure that allows the project manager to work simultaneously across several different authority boundaries within the system. Interface management maintains a balance between managerial and technical functions. In order to be able to develop an interface management system and use it effectively, a project manager has to bring both management and technical skills to the role. Personal, Managerial and Leadership Skills The project manager may be in charge of one or more projects. Their operation and objectives have to be compatible with the operation and objectives of the organisation as a whole. In achieving this, the project manager needs to apply the full range of traditional management skills in addition to having a detailed technical knowledge of the project itself. Generally, in terms of ‘soft’ management skills and attributes, the project manager should • • • • • • • • • • • • • Project Management

be flexible and adaptable; be able to concentrate on more than one thing at a time; demonstrate initiative; be persuasive; be a good communicator; be able to keep multiple objectives in sight and be able to balance them; be well organised; be prepared to generalise rather than (always) specialise; be a good planner and implementer; be able to identify problems, find solutions and make sure that they work; be a good time manager; be good at negotiating and influencing (rather than arguing or giving orders); be diplomatic. Edinburgh Business School

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Technical and Business Skills The project manager also has to possess a range of technical and business skills. Technical skills are necessary in order to understand the detailed components of the project. For example, a project manager who is in charge of a large and complex project to install a new production line has to have an extensive knowledge of the mechanics of the production system. It is not possible fully to appreciate the inputs of the various designers, suppliers and contractors without this knowledge. In addition, in most cases the project manager also needs to have a detailed business and financial knowledge. Increasingly, project managers are responsible for investment appraisal and financial analysis of projects. Typical ‘harder’ characteristics include • • • • • •

2.2.2.5

understanding how to set up a team and run it; the ability to develop complex time and cost plans and achieve them; understanding of contracts, procurement, purchasing and personnel; active interest in training and development; understanding of the technology that is central to project success; ability to translate business strategy into project objectives.

Selecting the Project Manager For internal projects (see Module 4), the project manager is usually selected from the ranks of functional managers or staff. A good functional manager with the skills required for project management is by far the best option because of the understanding of the industry and the organisation that is brought to the post. Such a person will be familiar with the technology and bring credibility built up during performance of the functional role. Little, if any, time will be required to develop an understanding of the organisation and how it works, as this will have been gained while a line manager. The internally appointed project manager is likely to know the key players and also have established some sort of relationship with them. This can be put to good use in the project management position. There are a number of problems surrounding this route. The organisation may be reluctant to release a good functional manager because of difficulty in finding a replacement, particularly where the functional role is being carried out to a very high standard. One thing it cannot and should not attempt to do is have one manager act as both project manager for a major project and also continue in a functional management role. Apart from the fact that both roles are likely to be demanding, they may also be conflicting and hence could not be fulfilled effectively at the same time. The other primary alternative is for the project manager to be an external consultant. There is an increasing number of private practices that are offering professional project management commissions as part of their portfolio of professional services. This has the obvious disadvantage that the project manager is not used to the organisation and there will therefore be a learning curve involved. In addition, the project manager does not owe any particular allegiance to the organisation and there may therefore be scope for some disparity of interest.

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The concept of internal and external project-management organisational structures is explored more fully in Module 4. In many organisations, the pace of change is so fast that multiple projects will be under way at any one time. This has led to a growing tendency towards project management (as part of either an internal or an external system) as a career in its own right. It demands some skills that are very different to those of the normal functional manager. From a project point of view, this makes specialist project managers advantageous. The main issue with this route is around the area of technical competence. It is easy to lose the respect of the project team if the project manager either does not understand the technology or makes technical errors. In Europe and the USA, project management training is included by an ever-growing number of organisations in their management development programmes. Demand has become sufficiently large that an increasing number of postgraduate degree and business school courses in pure or applied project management are being offered. There were nearly 50 such courses as first or second degree level in the UK by 2001. 2.2.3

2.2.3.1

Some Essential Project Manager Requirements Introduction An effective project manager needs to be able to execute a number of primary functions. These primary functions are applicable to all areas of management, including project management. The project manager must have a reasonable command of: • • • • • • • •

project planning; authorising; team organising; controlling; directing; team building; leadership; life-cycle leadership.

Project management uses these functions in order to execute specific projects that are subject to: • • • •

time constraints; cost limits; quality specifications; safety standards.

The objectives are typical project success criteria. Let us consider each function in turn. Project Management

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2.2.3.2

Project Planning Planning is usually the first stage of any project and is one of its most critical. Planning activity is at its greatest during the early stages of a project. As the project progresses and is being implemented, the level of planning activity usually reduces substantially. Errors or omissions discovered during the initial planning stages are usually relatively inexpensive to rectify. Errors or omissions discovered in the later implementation stages can be very expensive to rectify. For example, if a severalstorey-high building requires an elevator to convey people between the various floors and this has been omitted, which is likely to be the more costly: (a) discovering and planning for this at the early design stage; or (b) trying to rectify and incorporate this into a building when the construction is almost complete? The second will obviously be much more expensive and likely to cause very high cost and timetable overruns. In terms of organisational and resourcing issues, planning covers the activities to be accomplished and the sequence in which they are to be executed. Many different planning applications will be involved. Technical planning will be required for project time planning and control (see Module 5), cost planning and control (see Module 6) and quality management (see Module 7). In addition, the project manager has responsibility for planning and establishing both individual and team authority and the communication relationships necessary for the project organisational system to function effectively. Planning authority relationships is about deciding what individuals and groups are authorised to do on behalf of the project, and how they are to be related to each other. This can be a complex process in project management systems. Traditional functional management systems tend to be fairly static and authority relationships can be clearly defined. By comparison, project management systems tend to be relatively complex, have a far shorter life span, and operate within complex and changing environmental conditions. The environmental conditions impacting on the project can arise from outside the project but within the organisation (internal environment), or outside the company itself (external environment). These environments are changing constantly, and the project itself will also be evolving. As a result, different projects tend to develop different authority relationships. Hence someone working on two projects, even within the same organisation, could be working within two different authority networks. The usual method of defining authority linkages is through a task responsibility matrix (TRM). A TRM typically shows: • • • • •

key milestones; individual important activities; general responsibilities; specific responsibilities; dates. Responsibilities would include such detail as responsibility for:

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• • • • •

approval; preparation; checking; making and input; authorising.

A project TRM has two axes (see Table 2.1). On one axis is a list of activities and/or outputs required. On the other axis is a list of the various individuals or groups involved in delivering the activities or outputs. The intersections on the matrix defines the responsibilities of individuals or groups. This is carried out for all activities/outputs throughout the project life cycle. Specialist software has recently been developed, and is increasingly being used, to generate and maintain project TRMs. However, a satisfactory TRM can be developed using a standard spreadsheet. The individual dates for specific actions can either be added manually or by linking the TRM to the appropriate project planning and control software. This linkage is highly desirable because a change in one part of the system has to carried on to all other parts of the system that are affected. For example, in the matrix of Table 2.1, any delay by person B will have an impact on persons A, D, and E. The new specialist software can create links between the computer systems automatically. The table further indicates that person A is responsible for all reports up to outline proposals stage. Higher-level reports are organised by person E, who is also responsible for checking and authorising reports at this level. Table 2.1

TRM extract Person A

Person B

Person C

Person D

Person E

Inception report

O, I

I

I

C

A

Feasibility report

O, I

I

I

I

A

Outline proposals

O, I

I

I

I

A

I

O, I

I

I

O, C, A

Scheme design report

‘I’ indicates Input, where the individual concerned has a responsibility to make a defined input to the stated design stage report. ‘C’ indicates a responsibility for checking the report. ‘A’ indicates an authority for authorising the contents of the reports prior to submission to the client. ‘O’ indicates responsibility for organising reports.

In practice, a working TRM would also clearly show dates for individual actions. In most cases, reports have to be produced by a certain date. The TRM should therefore show individual submission dates for activities as well as individual responsibilities.

2.2.3.3

Authorising Project managers are interested in authority from two perspectives: first, accumulating sufficient authority to get the job done; and, second, determining how much of their authority to delegate to others involved in delivering the project. This section concentrates on the first of these concerns.

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Project management organisational structures are characteristically complex (see Module 4). Their strong matrix structure, coupled with the high degree of interdependency that is characteristic of project management systems, can cause real authority problems. The most obvious one relates to the peer equality of the project manager and the functional manager. Officially, in matrix structures, both these individuals may have equal authority over certain project team members. Authority is not the same as power. Authority is a type of ability to control and direct that is delegated from higher levels in the organisation; power, in contrast, is given to an individual by subordinates at lower levels. For example, consider an individual whose future rewards or career depends on promotion within the functional structure. Given simultaneous but mutually exclusive demands from the project and functional managers, who is likely to be responded to? In such cases the functional manager’s demands are more likely to be met. This is an example of equal authority – both have authority to direct the subordinate’s efforts – but differing power. Authority is a key project-management characteristic. It is essential that the project manager can demonstrate authority across the various project, functional and organisational boundaries that exist. Authority is the means by which the project manager controls and channels all the various activities that have to occur, both in sequence and in parallel, so that the collective efforts are channelled towards developing the project. Generally, the level of authority granted to a project manager should be in direct relation to the size and complexity of the project. The larger these are, the higher the risk of project failure and its consequences. In practice, it is generally accepted that the project manager should be delegated more authority than is immediately required for the execution of the project. Project management is a special condition in terms of organisational authority. Project managers are in a unique position because they have to operate within the constraints of the ‘project management chair’ (see section 4.2.2.4). The project manager does not have authority over the functional manager, and yet the project manager has to use functional elements within the project team. This requires the project manager to enter, formally or informally, into authority negotiations with functional managers, both internally and externally. The project manager has to determine what is required and when it is required in order to resource the project. The project manager then bids and negotiates with the functional managers in order to secure the necessary commitment and resources for the project. This also generates the need for a senior level of project sponsor with sufficient authority to overcome any impasse that may arise between the project and functional managers.

2.2.3.4

Team Organising The project manager is responsible for organising how the work is to be executed. This includes devising the organisational structures and team-management approaches to support the project. But the project manager may not be the only manager interested in this. Others at various levels and functions within the organisation will also have opinions and may seek to gather senior management support for their views, particularly if they believe that any changes might

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impact adversely on their areas of responsibility. Thus, in order to develop an appropriate structure and management approach that will gain the commitment and support of the other managers, it is useful if the project manager has an understanding of both the politics of the organisation and how this is expressed in the present organisation structures and team management approaches. The current modes of organisation and working are likely to be determined, at least in part, by the managers’ views or philosophies about how their organisation works and should be structured. These views may differ from those of the project manager, particularly with regard to the aims and objectives for particular parts of the organisation. By understanding the viewpoints of the various stakeholders, the project manager is more likely to be able to devise ways to gain the support of the key managers. Any unilateral attempt to impose a philosophy that is different from that prevailing is likely to meet with strong resistance and may be doomed to failure. One way of identifying the dominant prevailing philosophies is to contrast the current practices with the main views on organisational procedures. The main characteristics of these are considered below.

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•

Classical theory. Under the classical or traditional view, management is the process that is executed in order to meet some form of organisational objective or group of organisational goals. The goals could be strategic, tactical or operational, and are usually some combination of these. In classical theory, the people involved in the process are simply components of a production process. Most emphasis is placed on the produced goods or services. Classical theory was predominant from the start of the Industrial Revolution until comparatively recently. It is still applicable to some extent in large-scale, repetitive manufacturing processes. A good example would be an automobile manufacturing production line: the process is highly complex and automated and there is virtually no flexibility or potential for deviations within it; there is virtually no requirement for project management as the process is self-regulating; there is little requirement for tactical organisation as there is little flexibility within the system. The process is so regulated at each stage that the individual operatives become absorbed into it and often act as little more than components. The operatives can still make mistakes or deviate from the prescribed sub-process, but the scope for doing so is very restricted.

•

Empirical theory. Under empirical theory, there are basic and essential similarities between the systems and processes adopted by organisations. Empirical theory and research is based on observation and interpretation. The idea is that if enough observations are carried out, the correct process or approach will materialise from the sample and data set. The end result is that managerial skill and organisational efficiency can be predicted and estimated by observing various management and organisational processes. Empirical theory would be applicable where a new process is being set up for the first time by an organisation in circumstances but where other organisations Edinburgh Business School

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have already been using that process for some time. There will generally be a range of good ways for organising and running any particular process, but there may only be a single best way. This best way will naturally evolve from the process, and it should be reflected, more or less, across all organisations that are active in the process. One example could be companies that operate trains. Any organisation that decides to develop a train operating system will be faced with the same series of factors to consider. These will include the purchase and maintenance of rolling stock, staff, deals with infrastructure providers, contingencies, government regulation, and so on. A review of the train operating companies in the UK will reveal that they have all tended to evolve into a similar basic structure. This is logical, and it is analogous to cars evolving into the same basic design concept even though there will be individual specialisations. Empirical theory is based on the idea that these natural evolutionary processes can be traced and predicted for individual organisations. •

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Behavioural theory. There are two main schools within behavioural theory. The human relations school considers the interpersonal relationship between people and their work. Essentially, this area suggests that there are intrinsic links between the behaviour of individuals and the behaviour of the organisation as a whole. The ideal solution is to match organisational and individual goals and objectives. This is one of the basic underlying theories of total quality management (see Module 7). It is obviously desirable to link the objectives of individuals with those of the organisation as a whole where possible. A simple example would include profit sharing, where employees are given a direct share in the profitability of the organisation or section that they work for. More complex examples would include expectancy theory behaviour (see section 2.6.3.2). Under this approach, individuals can be encouraged to contribute more to the organisation by linking the goals of the organisation with the expectations of the individual. An individual might be very highly motivated and contribute a great deal because of an expectation that these efforts will secure a longer-term reward. An example of this could be a section leader attempting to increase productivity in the expectation of promotion in recognition of the achievement. Alternatively, the individual might foresee the creation of a new higher level post resulting from the increase in output, and be ideally placed to secure this position as a result of the increased efforts. The social system school considers the social characteristics of an organisation and of its component individuals. As the social characteristics of the organisation change, so there is a need for the social characteristics of the individuals who make up that organisation to change. All organisations evolve and change. This occurs because of changes in the people who make up the organisation: some people leave and new people join. Organisations also evolve and change because of associated changes that occur within the organisational system and as a result of external Edinburgh Business School

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influences. As organisations change, so the people that work within them have to change. Attitudes to work and individual aims and objectives may have to change as the organisation evolves. The changes may go beyond attitudes and objectives, and may involve whole working practices and processes. There are numerous examples of this kind of parallel organisational and individual change. An example of an internally driven change would be a voluntary ban on smoking in the workplace. The organisation might make an arbitrary decision that all employees must refrain from smoking at work. This may be justified on moral grounds or in the interests of health and safety. Once this policy is in place, social attitudes will change very quickly, and the social system involving ‘smoking’ within the work environment will fundamentally alter. Another example might be new legislation from central government. A fairly recent example in the UK is the Construction Design and Management Regulations 1994. These regulations impose strict health and safety obligations on, as an example, designers of buildings. The regulations require building designers to consider in detail the health and safety aspects of their design, both in terms of the building process and during the subsequent long-term use of the construction. This can involve long-term risk assessments, risk evaluation and the compilation of risk registers (see Module 3). Such fundamental changes in working practice and design considerations tend to lead to a complete change in social attitudes towards health and safety within design practices. •

Decision theory. Decision theory is based on the concept that management and organisations can be studied mathematically. Organisations can be observed and modelled, and the models can then be used to interpolate and predict organisational efficiency in other organisations. Decision theory makes use of management science and operational research techniques.

•

Systems management theory. Systems models can be applied to management and organisations. The organisation can be characterised by the throughput of resources, and each stage in the production process can be characterised separately. All organisational systems have inputs (for example, people, machinery and equipment, money, and so on), some form of processing, and an output (usually goods and/or services). The inputs, processes, and outputs can be considered separately as component parts of the whole.

It is clear that managers who subscribe mainly to the views of any particular theory could be resistant to the introduction of any approaches or structures that are derived from one of the others. For example, consider a project to enhance the productivity of a creative organisation such as an advertising consultancy. The approaches developed under classical theory – typified by one right way of doing things and few degrees of freedom in carrying out the work – are not likely to be easily accepted by the staff. Project Management

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It is, of course, not possible to define which theories would be applicable to any given organisation. However, managers within traditional functional structures tend to favour classical, behavioural and empirical theory, whereas project managers tend towards a more scientific and analytical approach, favouring decision theory and systems management. This essential difference in viewpoint results from the characteristics of the managers’ responsibilities. Project managers tend to be concerned with the development of small multidisciplinary teams with short life spans, and to work on relatively complex projects. Project managers tend to be heavily involved in operational techniques such as project planning and control (see Module 5) and cost planning and control (see Module 6). They tend to see things in more analytical terms; in particular, they tend to see project-team members much more as functional units than functional managers do. As far as the project manager is concerned, the eventual project success or failure is all that really matters. Individual project-team members might only be assigned to a project for relatively short periods and are therefore not of great individual importance to the project itself (provided that the necessary planning and monitoring controls are in place). To some extent, the project manager has to be a kind of social engineer with the ability to understand how the overall organisation works, and how the various project teams function within this overall organisation. The project manager also has to be able to engineer the organisation, where possible, to suit the requirements of the project. Organisational development skills depend heavily on team-building skills (see section 2.2.3.7). The project manager has to take a number of different people with different backgrounds, qualifications, experience etc, and weld them into a team. Establishing a successful multidisciplinary team is a major undertaking (see section 2.3.3). The function of organising has to be carried out throughout the life cycle of the project. However, the greatest organisational development requirement occurs during the earliest stages of the project. The project manager has to review the available resources and to decide on an appropriate organisational structure as early as possible. Once this has been decided, it is communicated to the project team, usually by arranging a team meeting at which to announce this decision and discuss its implications. It is sometimes known as ‘first meeting’. Typical items that would be communicated and agreed at the first meeting would be: • • • • • • •

2.2.3.5

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individual responsibilities; project organisational breakdown structure, or OBS; project task responsibility matrix, or TRM; communication links; authority links; information configuration management system (see Module 7); project programme.

Controlling

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Controlling is considered in more detail for the time, cost and quality elements in modules 5, 6 and 7. But, in outline, controlling involves the project manager being responsible for establishing desired targets for performance, measuring actual performance against the targets, and initiating corrective action where the actual performance deviates too far from that desired. This is all done with the intention of achieving the project goals and objectives that were established at the outset. Controlling is essentially a four-stage process, as set out next.

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•

Targeting. This involves establishing some kind of workable and achievable target or series of targets. These targets should correspond and be aligned with the stated success and failure criteria for the project and its sub-components. The targets can be set for individuals or groups as appropriate. A company that manufactures electrical components is likely to have targets for cost, output and quality. There is a wide range of possible targets that could be set for each individual element. In deciding which to choose, it is necessary to consider the different levels of desirability of specific target options. For example, these targets could vary depending on the type of component and end customer. For a high-quality defence contract, the quality of the components could be critical and a very detailed series of checks may be necessary at all stages of production; this will increase costs and reduce productivity. By way of contrast, mass-produced components for television production could be targeted more towards low cost with lesser quality. In the latter case, different failure or rejection rates might be regarded as acceptable in relation to the overall final cost of the component. Targets can also be established at different levels. A manufacturer might set three different levels of defect rates for assembly workers. As the defect rate falls, so bonus payments increase up to some maximum level.

•

Measuring. The measurement of the extent to which actual progress is achieving targeted progress. This could be formal, such as by the use of earned value analysis (see Module 6) or informal, such as by an indirect appreciation and evaluation of progress.

•

Evaluating. This includes the identification and isolation of areas where progress is not being made in accordance with the overall project plan, and consideration of any alternative options for appropriate corrective action. Most forms of evaluation are based on some kind of variance analysis (see Module 6). Variance analysis is a retrospective tool. It looks at variances between planned and actual events and uses these as the basis for some kind of corrective action. As such, it looks at past events and uses them as a measure of current efficiency. This can be dangerous if it is the only approach used. It is important to use variance analysis in conjunction with a system for Edinburgh Business School

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forecasting or predicting the future. A forecasting system has the advantage of helping to identify areas where past variances are likely to correct themselves without any management intervention being required. Equally importantly, it also assists the identification of areas where the currently planned actions are likely to result in poor future performance. This allows the project manager to initiate corrective actions, either to avoid the major problems occurring or, in cases where this is unavoidable, to reduce the impact on the overall project. •

Correcting. This includes implementing the proposed corrective actions for reducing or eliminating the effects of deviations from target. Correcting is certainly one of the most important management functions of the project manager. The whole point of establishing targets, measuring and evaluating performance is to produce data that can be used as the basis for corrective action. The evaluation process identifies where problems are occurring. The correction process identifies why the problems are occurring, puts a programme in place for correcting them, and then monitors actual and planned correction performance (often called a second-level variance analysis) in order to ensure that any programme of corrections is working.

2.2.3.6

Directing Directing is the process involved in converting organisational goals into reality through the use of organisational and project resources. It involves directing other people in order to ensure that their actions are appropriate to achievement of the overall aims and objectives. Typical directing activities in project management include those set out next. •

Setting up the project team. This includes ensuring that the project team has sufficient human resources to allow it to function. It also involves ensuring that each team member fits into the team as efficiently as possible and (where possible) individuals are compatible and work well together (see section 2.3).

•

Team Training and development. Project teams develop and evolve in response to team-member and project changes throughout the project life cycle. Training and development are essential in order to ensure that team members remain attuned to the needs of the project.

•

Supervision. This involves giving tactical guidance to team members at all levels. It covers numerous aspects, including setting individual targets, personnel evaluation, discipline, and the definition of individual and group objectives and responsibilities.

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2.2.3.7

•

Individual and team motivation. High levels of individual and group motivation are usually essential for the effective functioning of the team. Project teams can have excellent resources and back-up, but without adequate motivation they will not function effectively. Motivation is a highly complex area and can be affected by numerous factors. These include individual and group reward systems, evaluation and feedback, and the reconciliation of individual and organisational goals (see also section 2.4).

•

Co-ordination. Co-ordination includes the directing of groups and individuals in order to ensure that all actions are being carried out toward achieving the common objectives of the project team and the overall organisation in an efficient and effective manner. It includes the classification and prioritisation of work in order to ensure that resources are committed in relation to the importance of each individual operation. It also involves monitoring resources in order to ensure that functional and project teams avoid conflict wherever possible. Directing in a project team setting is particularly complex because individuals are often assigned simultaneously to both functional and project teams. Functional managers might also be directing the same individuals and there is obvious potential for conflict through counter or contradictory direction. In addition, project team members may only be assigned to the project for a relatively short period of time, and it may therefore be difficult to establish directional trust and commitment, when compared with the situation in longer life cycle functional teams.

Team Building Team building in a project management context is the process of taking a series of individuals from different functional specialisations and welding them together into a unified project team. Although these individuals may belong to a range of organisations, it is the project manager’s responsibility to ensure they work as a team. As mentioned previously, there is an ongoing team-building requirement throughout all stages of the project life cycle because people join and leave the project team, and the project requirements change at the various stages. The early stages are perhaps the most critical, for these stages are when the team ‘culture’ or way of doing things is established. No matter how the project evolves and how fluid the team remains, the initial culture often continues to prevail throughout the life cycle of the project. Generally, there are ten primary sections in any good team-building process. •

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Individual and team commitment. In order for any team-building process to work, the team members must have a level of commitment. The acceptable minimum will vary between teams and projects but, generally, it is desirable that team members share the overall aims and objectives of the project. The degree to which this desire is met in a team will of course vary. It may be easier to develop Edinburgh Business School

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collective objectives in an internal project management system where all the individuals in the project work for the same organisation and therefore (at least to some extent) have common objectives. In an external system, the various participants all work for different organisations and hence may have different loyalties and responsibilities. In some cases, commitment has to be ensured through some kind of reward system, such as bonus payments or profit sharing. In other cases it can be linked to individual and group motivation drivers (see section 2.4). In yet other cases, commitment can be linked to individual interests and external factors. For example, a major competitor might suddenly enter the market and an existing company might introduce a project to redefine its production processes and efficiency in order to remain competitive. This sudden new threat to people’s jobs might lead to an increase in commitment within the company. Project managers have to be able to develop commitment in their teams. In many cases this is done by aligning individual and project goals so that, as people strive to achieve their own goals and objectives, they also help the company towards its goals and objectives. This duality of objectives can be either direct or indirect. Examples of mutual delivery of goals that are not driven by money or other forms of personal benefit would include an airline pilot landing an aircraft and an accident-and-emergency unit doctor performing an emergency medical procedure. In the pilot example, a pilot knows that when landing the aircraft his or her own safety is at as much risk as everybody else on board. The pilot therefore has just as much desire to see the plane land safely as everybody else on board. There is no requirement to offer pilots a bonus for every safe landing achieved as it is in their personal interests not to fall below this minimum level of performance. In the doctor example, the doctor has chosen to work in the accident and emergency area and is expected to handle any emergency that arises. There is a professional responsibility to do everything necessary and possible to save life. In order to do this, complete commitment to the patient’s interests is paramount. •

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Developing a sense of team spirit. Generally, the more competitive and interactive the project, the greater the need for a good team spirit. Team spirit cannot easily be defined. It is a measure of the motivation of the team and the extent to which its members can work effectively together. The effects of team spirit are apparent in many project examples. For example, it is possible to cite several examples of football matches or other sporting events where a better team has been beaten by an inferior one because the inferior team had better team spirit. This could include desire to win, attacking spirit etc. Team spirit is not the same as commitment. It is possible to have a highly committed team with very little team spirit. An example could be a group of authors assembling a book using internet communications. The team might never actually meet each other or talk directly, but they could still be fully committed to working together until the book is finished. It is also possible to have well developed team spirit but little commitment. An Edinburgh Business School

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example could be a group of experienced team players who are also friends, and who are working on a project where they resent the team leader or project manager.

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•

Obtaining the necessary project resources. A common reason for many project teams failing to meet objectives is the lack of necessary resources. This applies particularly in systems where team success generates growth. In such cases, it is very important that resources are introduced into the system so that increases in workload are matched by resource investment. Inadequate matching between success criteria and resource investment is one of the main reasons why project teams tend to suffer from quality compromises as productivity increases. Senior management tend to be happy to see project output increasing, but they often are less happy to invest in the project team in order to allow continued increases in productivity. In large organisations, there could be numerous projects all running at the same time. In some instances, the same project manager may be responsible for a number of different individual projects. Where this occurs, the process of securing necessary increases in resources to support individual projects can become a complex issue. It is also important for the project manager to ensure that, in addition to the number of people required, the team also has an appropriate mix of skills. Some managers use projects as a dumping ground for their less capable or less experienced people. In such cases, the project team might well contain the required number of people while failing to have the mixture of skills and experience that the work requires.

•

Establishment of clear individual and team goals and success/failure criteria. Another common problem area in team building is a lack of clearly defined individual and team goals and success/failure criteria. Again, most people could cite examples where managers have set an objective and then ‘moved the goalposts’ (criteria) for project success. There are many reasons why this could occur – for example as organisations strategic objectives evolve and change. If there is a strategic change, it is essential that this is relayed in detail to the project manager so that he or she can re-establish project objectives. There must also be a set of clear project success and failure criteria, and these have to be clearly identified in a form that can be quantified and against which project performance can be compared. The most common success and failure criteria relate to time, cost and quality performance, although there could be others.

•

Formalisation of visible senior management support. The project team has to operate within the context of the overall organisation. The project will be one aspect of the organisation’s overall efforts and will feature somewhere within the overall equation that determines the organisation’s strategic management policy. Edinburgh Business School

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It is very important, both to the success of the project as an entity and to the perceptions of the project team members, that senior management is seen to be backing the project. This can be achieved by senior staff becoming actively involved with it and concerned for its satisfactory performance – for example, by attending major project-review meetings.

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Demonstration of effective programme leadership. The project manager has to be able to lead the team. This involves many duties and responsibilities, including some that overlap with other teambuilding headings (such as motivation). The success of the project will depend on the accuracy of its planning and on the efficiency of its monitoring and control systems. The project team is likely to recognise that these are essential to the success of the overall project and will expect the project manager to take a strong ongoing interest in their development and application. The project manager will also be expected to take personal ownership of larger problems and issues as they arise, and to ensure these are resolved.

•

Development of open formal and informal communications. In most teams, output and efficiency can be related to communications; larger teams and more complex projects tend to have greater requirements for good communications. The latter is also an important motivator because people usually work better if they feel able to communicate with other people in the system, and in particular with the section heads or managers. This provides them with a direct sense of how the project is progressing and of the priorities and concerns at all stages of the project life cycle. It contributes toward creating strong feelings of team membership in a way that encourages the taking of personal ownership of issues and problems as they arise, and commitment to overcoming them. In practice, effective communication systems are one of the most neglected areas in most organisations. This is equally true in project management. Many people act as if they believe that traditional methods of communicating and organising information, such as via written reports, memos, face-to-face meetings and so on, are the only ones that are available. Project managers have been known often to complain about the amount of personal time required in communicating, and of the limitations of current communications methods. Leading providers of project management systems are well aware of the large unfilled demand for improved communications and have been developing communication-management and configurationmanagement systems to meet the complex requirements of project management. Some new software packages are now available and it is one of the most rapidly expanding areas of software development in the USA and the UK at present.

•

Application of reward and retribution systems. Team members have different skills and abilities. However, in most systems at one time or another, bad feeling will arise because some people appear to be working harder and making a bigger contribution than others. The Edinburgh Business School

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project manager has to set up monitoring and control systems to make sure that good performers are recognised and rewarded, and the poor performers are checked and reprimanded. Failure to do this will generally result in a proliferation of bad feeling, with consequent effects on motivation and a tendency towards team fragmentation with its associated increase in individualistic behaviours such as ‘every person for themselves’.

2.2.3.8

•

Identification and management of conflict. Conflict arises in most human systems. Construction project teams, with their multidisciplinary characteristics, high degrees of sentience and interdependency, and pressure to meet time scales in the face of unexpected problems arising, tend to be particularly prone to conflict. Conflict between incompatible individuals is likely to occur whenever numbers of people are in contact with one another, but the high degree of pressure associated with most projects exacerbates this. However, conflict can take other forms, such as conflict between incompatible design and cost information, or design of one aspect being unacceptable in terms of the design of associated sections. A common example would be engineers designing pipe runs that cannot fit into the spaces allowed for them by architects. Conflict, whether based on argument and confrontation or on incompatible working practices, is generally a negative entity and the project manager is responsible for resolving or controlling such conflict. Good project managers recognise that sudden changes in energy levels or performance by individuals or groups of people can be a sign of emerging conflict. However, not all conflict is bad. In groups engaged on creative work, it can provide the stimulus toward higher levels of achievement and the emergence of novel solutions. Even in these cases, the project manager must ensure that the conflict does not spiral out of control.

•

Development of heterogeneity control and cohesiveness. These issues are discussed in section 2.3.5.

Leadership It is obviously essential that the project manager is able to lead the project team effectively. If the project team is to work together as one entity, it requires leadership. Leadership as a concept is not easily defined. It covers a wide range of qualities and skills, and these can vary from project to project. Classical leadership traits are as set out next. •

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Decision making ability. The project manager has to be able to make good decisions across a range of different subject areas. Some decisions must be referred to senior management and/or the project sponsor for approval; others may require a collective decision involving all the team members. In all cases, the project manager must gather all the relevant information and then make good decisions or recommendations based on the available information. Edinburgh Business School

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Problem-solving ability. The team will need to solve the many problems that will inevitably arise during the project. The project manager provides the problem-solving leadership. The project manager cannot solve every problem personally but can act as a catalyst and focus for the team’s attempt to solve problems.

•

Ability to integrate new team members. Project teams tend to work on relatively short-term projects, and as a result this may not be a major factor. However, longer-term projects, such as major motorway developments, power stations, and major tunnels, may last for more than ten years and a significant number of staff changes can be expected over the duration of the project. This is also sometimes true during major IT systems development and implementation projects. Integrating new members into established teams is an important skill. The system has to be flexible enough to allow new members to join, and to provide sufficient learning time for new members before they are expected to make a full contribution.

•

Interpersonal skills. Interpersonal skills can be very difficult to quantify. Some people are good at working with other people and getting them to devote their best efforts to the work at hand, while others find this more difficult. Some people are good at using their persuasive skills to overcome problems and resolve conflicts. The most successful teams tend to be those where individuals relate very strongly to each other and where there is a high degree of comradeship and trust. Project managers with good interpersonal skills are well placed to develop these characteristics within the project team.

•

Ability to identify and manage conflict. Conflict avoidance and control is a key team-building skill. The project manager has to be able to identify conflict even where it is not immediately obvious, and to take any necessary actions to resolve it. Conflict could arise within the internal team itself, or between internal and external team members in the case of a combined project organisational structure. In construction projects, the most common form of conflict is between design team members when objectives or limitations are changed.

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2.2.3.9

•

Communication skills. Effective communication is a crucial leadership skill. Effective communication is perhaps the single most powerful leadership and control tool. The communication requirement is compounded because of the interface management requirement (see below). This significantly increases the requirements of the communication system and makes the communication process itself much more complex than in a single-interface system.

•

Interface-management skills. The project manager is in the unusual position of working within a three level continuum consisting of reporting upwards to the senior managers or project sponsor, horizontally to the functional managers, and downwards to the individual project-team members. In addition, the project manager could be in charge of a range of external consultants and authorities that all report to different managers. There is, therefore, a need for strongly defined interface management skills as part of the project manager’s leadership effort.

•

Factor-balancing skills. Different factors affect the performance of the team, and the relative importance of these factors can change over time. In terms of decision making, problem solving etc, the project manager has to be able to balance the relative weighting of different factors in order to allow the correct decision to be made.

Life-cycle Leadership Project management is somewhat unique in terms of the way that leadership requirements vary over time. First, project teams are characteristically formed for a specific project and last only until the project is completed. The term ‘project’ could, of course, include numerous life cycle phases between inception and recycling inclusive (see section 2.5.2). However, most of the project team members will only operate as part of a specific team for a relatively short period of time. The project manager will have little time in which to gain sufficient knowledge of the project and of the team to be able to lead it. Second, project management is typically concerned with the complete life cycle of the project rather than just individual stages (such as design or implementation). The functioning of the project team will change to meet the different needs and challenges associated with the specific project requirements and environment at each stage of the life cycle. As a result, the project manager has to be able to apply a range of leadership skills and styles, and to choose to apply those that are appropriate to the particular circumstances as the project progresses. This concept of life cycle leadership is not common to all leadership applications. It is only relevant where one person is involved in leading one or more project team(s) through the entire life cycle of a project. Most forms of management concentrate on a relatively small number of specific phases or stages.

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Most research suggests that leadership in any organisation has to change in relation to the maturity of the employees. The longer that employees are employed by the organisation then the more relevant experience they acquire. Thus their leadership requirements, namely what they require from their leaders, change. It is generally possible to consider life cycle leadership in relation to specific phases or stages of development. One possible relationship is that exhibited by task-oriented and people-oriented leadership. Task-oriented leadership relates to the tasks itself, including the actual mechanics of the process. People-oriented behaviour relates to the leadership of the individual members of the team and how they work as part of the team. If the life cycle of the team is considered in terms of four phases, the characteristics of each phase will be as set out in Table 2.2. Table 2.2

Phases of project team leadership

Phase

Characteristic

Task

People

Effect

1

Inception

High

Low

Telling

2

Development

High

High

Persuading

3

Stabilisation

Low

High

Participating

4

Maturity

Low

Low

Delegating

Phase 1 is characterised by high task-related, low people-related leadership. In this sector, the activities of employees are highly task-oriented and there is only a weak relationship between employees and management. These are the typical conditions under which employees would enter an organisation. An example would be raw recruits entering a boot camp. The non-commissioned officers responsible for training are only concerned with turning out another batch of recruits for the front line. They know that the recruits are inexperienced and there is no attempt at forming NCO–recruit relationships. In addition, the only concern is the output; there is very little concern for the aspirations or desires of the recruits. In most cases, relationship behaviour is inappropriate as there is widespread confusion and apprehension among recruits. Phase 2 is characterised by high task-oriented and high people-oriented leadership. This is often the secondary stage of life-cycle team development. The need for strong task leadership remains, as the system has not yet evolved enough to run itself. There continues to be a great emphasis on output and productivity. However, as the manager–subordinate relationship begins to evolve, there is a growing trust and understanding between the different levels within the power structure. Despite these growing levels of trust and understanding, particularly those between managers and subordinates, the employees have still not achieved sufficient maturity to justify unsupervised actions. Phase 3 is characterised by low task-oriented and high people-oriented leadership. This sector is the stage in the leadership life cycle where the team has stabilised and output is secure. Under such circumstances, the immediate aims and objectives of the organisation have been realised and the manager can move on to consider higher-level motivational factors (see Maslow’s hierarchy of needs section 2.6.2). In some cases, this could include a transition from task-oriented 2/28

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goals to personal goals, such as developing the trust and understanding of the other members of the project team. This sector tends to be characterised by team members becoming so confident and assured in team output and performance that they no longer need task-oriented direction. Phase 4 is characterised by low task-oriented and low people-oriented leadership. In theory, if the team has enough time, it will eventually evolve so that it can be ‘left alone’ to run the project. If the team lasts long enough, the team members will develop such operational skills that they no longer need task-related leadership or instruction from management, and they no longer need people-relationship leadership or instruction. At this level, the team can operate without direct leadership or direction. An example would be a symphony orchestra. The conductor could be suddenly removed without making any immediate difference to the immediate efficiency and operational capability of the team. The transition from high-task low-relationship operation to one that is lowtask and low-relationship is a characteristic of the development of any project team. Not all teams reach the last stage. Some become stuck at an intermediate level. However, the fact that the team progresses through these definable stages implies that the appropriate leadership style will also have to change. Most people who have worked in teams will recognise these basic phases. Phase 1 represents what is effectively a command process; the project manager in this phase is simply telling the team members what to do. In phase 2, the action is no longer to tell them, but in effect to persuade them. In phase 3, the project manager is allowing the team to participate; and, in phase 4, the project manager is effectively delegating control to the other members of the team, leaving them in charge to get on with it. ♦ Time Out Example on life-cycle leadership: relationship and task considerations. Leadership requirements change with time on most projects. The leadership style that is most appropriate during the early stages of the project may be less appropriate during later stages. The two most important determinants of leadership style in relation to the life cycle are relationship and task factors. A group of strangers who have never played football before would have no idea of how to work as a football team (relationship) or how to win the game (task). The captain or project manager would therefore have to be operating in high-task and low-relationship mode. The manager would be most concerned with giving orders and explanations in order to give the group a basic understanding of the rules of the game. As the basic knowledge of the game is developed, the group begins to relax slightly and team relationships begin to develop. As skills and understanding develop further, the team begins to gel and the captain no longer needs to provide any significant task input, as everybody understands exactly what is required. There will come a point where the team works as efficiently as possible with minimum input from the captain.

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Questions:

• • •

Do all project teams evolve at the same rate? Why do some football teams develop better and more quickly than others? How important is the captain?

♦

2.3 2.3.1

The Project Team Introduction The text so far has considered the typical roles and responsibilities of the project manager together with selection considerations and key skills. To be effective, a project manager needs the support of an appropriate project management team. It is therefore necessary to understand the main characteristics of project teams. The concept of project teams, and how they can fit into larger organisational structures is covered in more detail in Module 4. This section considers briefly how internal project teams can be established within existing organisations. It then goes on to address briefly some important team issues, including the effects of multidisciplinary team membership and related heterogeneity issues. These can have an important impact on team cohesiveness and therefore on the team building process in general.

2.3.2

Project Teams within Functional Organisations Most projects are carried out within traditional organisations designed along functional lines. Figure 2.3 shows a typical organisational structure for a mediumsized manufacturing company and some of the areas of responsibility within each functional discipline. Projects undertaken in this environment would be allocated to the most appropriate department. For example, a packaging redesign or product launch would be the responsibility of the marketing department. A project to employ more mature people or carry out a training needs analysis would be done by the human resources department. These are all relatively easy projects to place within this structure, whereas a project to install a new company financial system may be supervised by the IT department, but would require substantial input and support from the finance department. Alternatively, it could be supervised by the finance department with substantial inputs from the IT department. Project teams are established within the existing system, using resources from within one functional department or across several functional departments. Other examples would include a university setting up a new combined studies course, or a police authority putting together an inquiry section. Both would require the participation of specialists from a number of different specialist sections. This is discussed in more detail in Module 4. At the other end of the spectrum, the pure project organisation exists solely for the purpose of the project or for a group of projects. The organisation itself may

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Board of directors

Managing Director

HR Director

Figure 2.3

Marketing Director

Financial Director

IT Director

Sales

Salaries

Support

Advertising

Payments

Updates

Packaging

Invoicing

Promotions

Cost control

Operations Director

Typical functional organisation for a manufacturing company

Note: some sections omitted for clarity. Shaded areas show functional orientation.

be broken up upon completion of the project in much the same way as a project team will be broken up. Whereas most projects within the functional organisation would tend to be internal projects for the sole benefit of the organisation itself, the project organisation is most often set up to deliver a project for an external client or customer. Pure project organisations tend to exist for relatively large, one-off, projects where project team members have responsibility solely for the project. For example, the Millennium Dome Development Company in the UK was set up specifically for the purpose of building and operating the Millennium Dome for a finite period. This type of organisation may be created as a standalone subsidiary or satellite of a parent organisation. It is set up specifically to deliver projects and could be linked to the parent company by a reporting system. Many project organisations have total freedom to organise themselves according to their own preferences but within the limits of final accountability, while others have functional support assigned to them by their parent company. For example, the project organisation may have total responsibility and authority for the design of a new product, but the parent company may look after administrative functions such as paying the salaries of the project team members or preparing the accounts. Figure 2.4 shows a typical project organisation structure. This arrangement could be used for a large one-off project split into different project areas. Again using the example of the Millennium Dome, using the structure shown in Figure 2.4. there could be a project manager in charge of construction, and another in charge of exhibits. In most project management applications, project teams are set up within Project Management

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existing functional organisational groups and therefore lie somewhere between the pure functional and pure project extremes. Although projects carried out in this environment may be strategically important to the organisation, they are highly unlikely to be the reason for its existence. They are likely to be developmental in nature and would tend to be projects to improve systems, procedures, methods or products; and they would tend to be internal projects for the benefit of the organisation’s effectiveness.

Board of directors

Managing Director

Program Manager

Marketing Director

Operations Director

Financial Director

IT Director

Project manager

Marketing input

Operations input

Financial input

IT input

Marketing input

Operations input

Financial input

IT input

Figure 2.4

Typical project organisation structure

Note: some sections omitted for clarity. Shaded areas show project orientation.

There are numerous advantages associated with operating project teams within functional organisations. These include the following: • • • • • • • •

The structure provides excellent flexibility and full use of employees. Employees are given the opportunity to gain new experience and to develop new skills. The overall team and cross-functional working attitude of employees is improved. Individual experts can share their expertise across a number of different projects. Experts working together can create new synergies that cannot evolve in the rigid functional structure. Employees working on projects are not prevented from following their primary career path within the function. Project membership offers new potential career paths within the organisation. Making use of internal project team members is often less costly than employing a series of external consultants to provide the same service.

The disadvantages associated with running project teams within an existing functional organisation include the following: 2/32

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•

•

• •

•

•

2.3.3

The function continues to operate as normal despite being depleted of resources (at least to some extent) by the project. This can become a serious problem where a number of key people are assigned to projects. Functional managers often try to ‘offload’ their less efficient or productive people to projects in the hope that this will minimise the negative effects on the function. People who have worked for a long time in a functional environment may have difficulty in adapting to the demands of the project environment. Several projects are likely to be running simultaneously within organisations. A project manager sometimes has difficulty in ensuring that his project is given the priority and attention that it requires. There are often communication buffers and bureaucratic layers between projects and senior management while functional units tend to have more clear and longer established communication channels. Motivation can be a problem unless the project is given high profile senior management support. Project team members tend to see their project responsibilities as secondary to those of the functional unit.

Team Multi-disciplinary and Heterogeneity Issues Project teams may operate as individual units within existing functionally structured organisations. They often consist of a range of different specialists from different functional departments and it is this multidisciplinary composition that makes them unusual. Each functional specialist will have distinct qualifications and experience. The project manager has the task of attempting to blend these specialists into an effective project team. Some types of project teams – for example, construction project teams – tend to suffer from high levels of sentience and interdependency, and as a result they have definite needs for deliberate team-building activities if they are to perform satisfactorily. Sentience is the tendency for individuals to identify with their own professions and background rather than with the projects or organisations and their goals. For example, faced with the need to revise a design, engineers, because of their training and experience, will tend to seek the ‘best’ engineering solution, while surveyors will tend to seek a cost-based solution. Interdependency is the tendency for teams to depend on inputs from more than one individual in order for the whole system to develop. For example, an architect can design a particular detail, but it may not finally be accepted until it has been costed by a surveyor. The input of both individuals is required before the design can progress to the next stage; hence the interdependence. Systems can feature pooled interdependency, where individual sections or divisions make contributions to the whole. There may also be sequential interdependency or reciprocal interdependency, where an input is required from a number of individuals or sections before the process or system can move past a milestone or project gateway and onto its next phase. Differentiation (specialism) contributes to sentience and causes teams to fragment. This can lead to breakdowns in communication among groups of specialists where each group is working on its own particular areas. For example,

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an engineer would probably prefer to design a building’s foundations and its frame without having to liaise with the surveyor whose job is to ensure that cost limits are not being exceeded. The best solution from an engineering point of view might not be the cheapest nor the most cost-effective. Integration mechanisms are a basic requirement for teams containing highly differentiated individuals or groups. Integration is simply the process of defining responsibilities and control, and ensuring everyone adheres to the definition. A highly integrated team is one where everybody knows exactly what they have to do in order to meet the targets. A team that is not integrated is one where there are no specific targets and everybody can do more or less what they think is best at any one time. At the extreme end of this continuum lies the disintegrated team – if indeed it can be called a team at all – where all the participants do what they want and the project objectives are ignored, leading to failure to deliver the projects goals and objectives. An example of a highly integrated team would be an army special forces team where all the team members work to precise timings, frequently to the second, and follow highly rehearsed and planned procedures. An example of a low level of integration would be a pure research and development laboratory where only very vague time scales and utilisations may be set. Generally, the greater the multidisciplinary nature of the team, the greater is the tendency towards sentience and interdependency. In such cases, highly structured teams tend to develop. This is also the case where the project is relatively complex and where a long learning curve is required. The extent to which team membership is multidisciplinary appears to affect team performance. Generally, the greater the range of team member characteristics and backgrounds, the less chance there is of an overall bias or sentience affecting the operation of the team. The greater the range of backgrounds of team members, the more likely it is that the group will generate new ideas, make effective use of brainstorming, and become more efficient at problem solving. However there is also likely to be much more discussion and conflict. Whether the members of a team should be homogeneous (of one type) or heterogeneous (many disciplines) depends on the nature of the project that is to be undertaken. 2.3.4

Group and Team Processes Groups are collections of individuals who work together in pursuance of a common objective. Teams are collections of individuals who work under the direction of a team leader in pursuance of a common objective. A team is therefore a specific kind of group. Organisations contain many formal and informal groups and there is a tendency for groups and sub-groups to form wherever large numbers of people come together. Formal groups are those deliberately created by organisations in pursuit of their goals and objectives. A project team is one example of a formal group. They are generally created and staffed by the organisation for the benefit of the organisation. An example would be a course team within a university. Course teams are formally constituted groups of people who work together in

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order to ensure the continued success and development of a particular course. They may elect, or be assigned, a leader; and they will establish performance criteria that are in line with the aims and objectives of the department. Another example of a formal group is a football team. The whole team is working together to try to win the game, but there are specialist self-directed sub-groups within the team (such as the goalkeeper) who act more or less independently but nevertheless within the overall aims and objectives of the team. Informal groups tend to form because of social reasons such as racial and sexual similarity, economic, social and political similarity, actual and perceived status, and even attitude similarity. Most university lecturers would be familiar with this group formation process and also with the types of group characteristics that could be expected from any new class of undergraduate or postgraduate students. Informal groups tend to form quickly and voluntarily. An example would be students on a course from a certain country. For reasons of sentience (see section 2.3.3) students from the same country or range of countries will naturally tend to associate with each other. Hence, on a university course, there may be formal work groups that have been set up by the module leader for educational reasons, and informal groups that have been set up by the students in response to social considerations. In lectures, students will tend to sit in their informal groups. When required by the module leader, they will migrate to their formal work groups. It is important that project managers are aware of both the formal and the informal groups that exist within organisations and the constraints/opportunities they present in executing the project. Informal groups can be as powerful – sometimes even more so – than formal groups. The project team is subject to both individual and group behaviours. Individuals tend to behave and function differently depending on whether they are on their own or are acting as part of a team. Groups tend to perform better at problem solving than individuals. This is probably why humans (and other primates and numerous non-primates) have evolved to work in teams. Studies comparing the performance of teams and individuals at problem solving reveal that teams tend to:

Project Management

•

brainstorm problems more effectively;

•

consider a wider range of factors;

•

develop an enhanced logic flow;

•

generate more new ideas and original thoughts;

•

discuss and consider a wider range of potential solutions and implications;

•

develop better approaches to weighing up the consequences of a range of potential actions;

•

solve problems more accurately and quickly.

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2.3.5

Project Team Performance Team performance is a complex issue. Numerous internal and external factors can influence the performance level of any project team. The strongest single factors in determining a multidisciplinary group’s performance are heterogeneity and cohesiveness. •

Heterogeneity. Heterogeneity is the extent to which the team members are unlike each other, either in terms of qualifications, experience, outlook or a range of other factors that could affect team performance. Generally, the greater the degree of heterogeneity, the more effective the team will be at solving problems. They will consider more information and will brainstorm more effectively. However, this increase in efficiency is at a cost of increased discussion and conflict.

•

Cohesiveness. Cohesiveness is a combination of how much the members of the team want to be members, how well their personal goals are aligned to the team goals, and to the overall commitment and morale of the team members. Generally, the more cohesive the team, the better it will perform.

In general terms, the higher the heterogeneity and cohesiveness of the team, the more effective it will become. Thus, multidisciplinary teams (and hence, by definition, most project teams) are good so long as they are established and controlled properly. However, in order for team heterogeneity and cohesiveness to be useful to the organisation, the goals and objectives of the individual and the group must be clearly aligned with those of the organisation. As with team motivation in general (see section 2.6) there is no point in developing team commitment and drive unless the goals of the individual, team and organisation are all compatible.

2.4 2.4.1

Project Team Staffing Profile and Operation Introduction This section considers the staffing and profiling of the project team. The effectiveness of the team performance and the whole team-building evolution will depend on the characteristics of the individual specialists who comprise the team. These characteristics will influence the project manager’s choices in a number of areas, including organisation structure, monitoring and control.

2.4.2

Project Team Staffing Staffing a project team with competent people is the first stage in a team-building process. In selecting team members, a balance of various skills and experience is sought in terms of

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• • • •

technical skills; management skills; administrative skills; interpersonal skills.

In most project management scenarios, the project manager recruits people from different functional teams within the organisation (see Module 4). The project manager does this, in its simplest form, by assembling some kind of schedule of the resources estimated to be required and then submitting this in the form of a bid or proposal for approval by senior management. At the same time, the project manager has to negotiate with the various functional managers in order to secure the people required for the team. A lot of different factors will to be considered within this negotiation process. Typical factors for consideration include: • • • • •

immediate and long-term availability; ability; continuity requirements; teamworking skills; special skills.

For example, the best people within the organisation will always be in greatest demand. The project manager may be able to get some of these people for part of the project duration, but few of them will be available for all of that time. The project manager would therefore have to consider the ‘trade-off’ between continuity and ability. Is it better to get the best person some of the time, or somebody less capable for all of the time? What would be the consequences of breaks in continuity? How easily could support staff cover for the highly able people when they are not available? In addition, the best people will be in demand by other project managers and competition for their services can be intense. For example, a particular project manager might secure an adequate supply of services from the best performers at a given point; but if, say, three weeks later the organisation won a new high-prestige contract, then senior managers might be persuaded to support the project manager who wants all the best resources for the new high-profile contract. The best employees also tend to be head-hunted by other departments or organisations, and these employees are more likely to be promoted into positions where they are no longer available to work on projects. Another factor to consider is the mix of internal and external staff. This is relevant to the classic internal and external project-management organisational breakdown structures (see Module 4). If the right calibre of internal people is not available, it might be necessary to hire an external consultant with the required qualities. This has obvious advantages and disadvantages (see Module 4), and it has far-reaching organisational and leadership implications. In general, the characteristics found in a successful project-team staffing process include the following examples. Project Management

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Staffing is generally voluntary. The project manager should in theory ask individual functional members whether they wanted to join the project team, for this is important for the motivation of the individual (see section 2.6). However, in most practical scenarios, people are drafted into project teams, sometimes against their wishes. In addition (depending on the internal status of the project), project managers usually do not get their entire first choice of team members The project team is staffed in relation to the value of the project. The project manager is able to choose the most appropriate people subject to any obvious limitations on their availability. Project team members therefore know that they have been chosen because their skills and experience are important to the project’s success. There is no ‘dead wood’ of the kind that can often be found in functional departments. Project teams are staffed and operated in a less formal manner than functional teams. Because the project is (in organisational terms) small and dynamic, the bureaucracy associated with running it tends to be much less than that required by the functional units. In addition, the smaller relative size of the project team generates a requirement for smaller and more compact formal and informal communication systems. Project managers lead by example. They are generally closely integrated with the project team. Functional managers tend to be more isolated from their team because of the authority systems that form within functional units. Project managers tend to work with less rigidly defined authority. They have to work in this way because of their relationship with the ‘borrowed’ functional resources. Project teams are flexible and responsive. Projects tend to operate within conditions of constant change and project-team members have to be able to respond to change quickly and efficiently. Functional units tend to operate under conditions that are more stable. Good project managers can use this adaptability to advantage. Project teams interface. They often work across both internal organisational boundaries and across the organisational boundary (where external consultants, contractors and suppliers are involved). This leads to a reduced sense of insulation from ‘outside’ and tends to promote a greater commercial awareness. Project teams innovate and evolve. Constant change generates a requirement for rapid problem analysis and innovation. Hence, successful project teams can identify new solutions and implement the corresponding processes quickly and effectively. Functional teams tend to be more ‘set in their ways’ and find it more difficult to introduce new approaches and processes. Successful project teams can identify new solutions and implement the corresponding processes quickly and effectively. Functional managers who provide resources for project teams receive recognition or credit when the project team performs well. In addition, all deals and agreements between project and functional managers in order to ensure that staff are released to the project should be strictly honoured. In practice, this is frequently not the case! Edinburgh Business School

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There is some research evidence to suggest that conflict should be promoted during the staffing process. Assuming that the usual team-building process of forming, storming, norming and performing is to be followed (see section 2.5.4), the sooner the storming process begins the better. The idea is that there will inevitably be some conflict within the project team. Sources of conflict should be identified and highlighted as early as possible in the team’s evolutionary process. The later that sources of conflict are recognised, the more damage is likely to have been dome to team cohesiveness and morale.

The staffing process can involve a large number of different considerations, but the outcome is crucial to the effective functioning of the project team. ♦ Time Out Think about it: staffing the project team. A wide range of factors can affect project team staffing. An IT project manager might be responsible for setting up a project team to programme and run a major changeover in IT equipment and operating systems. This may affect several different departments. The project would identify the individuals required for the project team and make some kind of estimate of when, and for how long, they would the required. Individuals would be selected in relation to the demands of the position and current availability. In general, the more senior the person, the more direct input they have and the more power and influence they carry within their parent functional departments. The probability of the project of being allocated the project manager’s first choice of potential project team members depends on a number of factors including:

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availability;

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changing priorities within the existing functional groupings;

willingness to work on the project; cost per hour of each specialist in relation to the cost limit for the project as a whole; changes in the perceived value of the project to the organisation.

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What could happen to change the perceived value of the project to the organisation as a whole?

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Where might a project status change lead to the potential for improved resourcing?

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2.4.3

2.4.3.1

Project Team Profile Project Team Mix The project team consists of the group of people contributing to meet the objectives of the project. Some team members – for example specialists whose expertise is only required for a particular activity over a short time scale – may have very small parts to play in the project as a whole and probably will not feel like part of the close body of people involved in more active and longer-lasting roles. However, in the case of a project, it is worth thinking of the project team in the widest possible terms, including: • • • • •

contractor’s personnel; subcontractors; clients; in-house staff; any other interested bodies such as inspectors, government, community groups, and lobby groups.

It may not seem like it in practice but it is, in the case of the first four groups at least, in everyone’s best interests to meet the project objectives in a timely and cost-effective manner. This being the case, success is best achieved in a good, open, close-working relationship. Often, client personnel are seconded into the contractor’s team. Alternatively, and where appropriate, the client may establish an office next to a contractor on the project site. With regard to lobby groups and project protesters, the common objective will be less clear. If dialogue is open and there is a clear understanding of each point of view, the resolution process will be made easier. If nothing else is mutual, the project manager should recognise that the only common goal may be to resolve the conflict, and this must be kept in mind as it may be the only negotiating counter available. Even for small projects, it is useful to have a project office. This space will be the hub of the project. It acts as a focal point and gives project team members a base in which they can set down some personal roots, feel comfortable, and feel like part of the project team that is located there. It is also important to provide an element of focus, because the project team often contains members from a range of different functional backgrounds. Team members may well have their own permanent desk space back in their functional department, but the project office is a place where they can concentrate fully on the needs of the project with less distraction.

2.4.3.2

Uniqueness of Project Teams It is well established that every project is unique, and thus it could follow that every project team must be unique in order to succeed. The differences between project teams may be marginal or they may be enormous. A project team can consist of two or three people in the case of

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very small projects, or thousands of people in the case of very large projects. Teams may be all from the same office or they may originate from different companies and work in different geographical locations. They may be full of young people, as in many software projects, or they may be a mixture of young and old, as in many of the more traditional construction projects. They may be male-dominated, female-dominated, or have a good balance. They may be made up of highly-skilled technical experts, as in many NASA projects, or they may be commerce-oriented with no technical staff. Thus, it is sensible to conclude that there is no set skills profile for an effective project team. The skills employed must fully reflect the nature of the project. There are, however, three specialist project-management positions that need to be filled: • • •

project manager; project planner; project controller.

They are effectively the managing director, the operations director and the financial director of the business that is the project. And, although knowledge of the technology underpinning the project is valuable in performing each of these roles – indeed, it is unlikely that anyone without some knowledge of the industry would be employed in such positions – the primary function in each position is a project management one.

Project Manager

Project cost controller

Project planner

Figure 2.5

Team supervisor A

Team Supervisor B

Project team A

Project team B

Typical project management team organisation

The skills and expertise of the project management team should cover the main areas of the project, and should both recognise and explicitly state where this may be weak. This will draw special attention to that area because any aspect of the project that lacks a competent project management team member supervising and supporting it is in danger of running out of control without the fact being recognised. Looking after particular specialist aspects of the project may not be a full-time job, and so the team should be flexible and open to temporary members coming in and out whenever their particular expertise is required. The typical project-team organisation chart shown in Figure 2.5 shows team members Project Management

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looking after individual work aspects, which would be the principle specialist areas of the project. As with every team, there are behavioural profiles across the team that can increase its chances of effectiveness. Discussion of different personality types and their suitability for working in a team is outside the scope of this module and is well documented elsewhere. Suffice it to say that a team full of natural leaders, despite their technical competences, is unlikely to be the most effective project team. When potential team members have been identified with the skills required to tackle the project successfully, consideration must be given to whether the various personalities will work together effectively. 2.4.4

Project Team Operation Reviews of the many teamworking approaches and techniques that claim to enhance the operation of teams by improving team performance and assisting in the development of good team spirit reveal that they share many similar underlying characteristics. Most team handbooks identify similar objectives and contain common elements. Some typical common areas include those set out next: 1

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Establishing measurable objectives. • Identify and acknowledge the stakeholders who will determine, on completion of the project, whether or not it has been successful. They may be the client, a project sponsor, members of the project management team or, most likely, some combination of interested individuals and groups. Stakeholder identification, and reconciliation with the project and project team, can be achieved through a stakeholder mapping and management exercise (see Edinburgh Business School Mergers and Acquisitions text). • Work with the stakeholders to determine and state explicitly what their dimensions of success are. Use this to establish how good performance could be measured. There may need to be a complex trade-off between the conflicting desires of the various stakeholders. It is likely that multiple measures will be required as no single measure can capture the many dimensions involved. • The importance of determining and agreeing criteria for success cannot be overemphasised. It is important to find out what stakeholders’ expectations of success actually are. In many cases they may not have articulated these previously and a great deal of effort may be required to describe, agree and document them. Once this is done, the team can then focus on meeting the requirements without the fear that, despite the team’s best efforts, the stakeholders will deem the project a failure because of expectations of which the project team was not aware. Stakeholders management. • Stakeholders are sometimes referred to as the ‘invisible team’. These include all stakeholders who are members of the extended project team outside the immediate project management team. If managed properly, they will provide a great source of support. Edinburgh Business School

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Protect the image of the team. How the team is perceived from the outside will have a significant bearing on whether it is considered successful or not. It is not enough to do a good job; the good job has to be recognised by people outside the project team. In the case of very large projects, it is not unusual for advertising or public relations people to be employed for this purpose. • Develop a network of useful contacts who may be able to help or advise the project team as required. Key relationships should be established. These can help overcome barriers and smooth problems, should they occur. • Use the network to identify and provide quality project resources when and where they are required. Establishing and planning measurable targets. • Plans should be prepared in a manner that is understandable and that can be used in practice by the members of the project team. • In the first instance, the plans should be prepared at different levels (e.g. overviews for senior managers, detailed plans for operatives) and should contain as much information as is known and is appropriate for the particular level of communication. • Plan for the unknown. Have contingency arrangements in place to cover any unexpected events that might occur. • Set realistic and achievable milestones that will act as celebration points throughout the project. These have an important effect on motivation as the project progresses. Planning and establishing processes. • Establish firm ground rules so that participants understand both their own roles and as many aspects of the project as possible – for example, how each individual should respond to people outside the project team in a wide range of circumstances. • Plan for creating an environment where team members are energised to air their opinions, take responsibility, and be creative when confronted by problems. The attitude or spirit of the team is important in terms of stimulating thought processes and improving decision making. • Develop a plan for managing and developing relationships. Done well, this will keep team morale high, with team members supporting each other, doing things together, making sure that all the team members feel as though they belong, and keeping communication lines open. This will not happen automatically and requires conscious effort by the project manager. • The rules should be firm, but they should not be unchangeable should circumstances require it. The project team should operate within a flexible environment and should be able to change in response to changes in the environment – including the evolution of the team itself. Leadership. • Strong, credible leadership is required to provide clear direction and stimulate high performance from its members. Edinburgh Business School

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Continual research is required into ways to improve both the internal and the external workings of the team, and then action on the findings should occur. • Rewarding good performance will motivate members. It is also important to ensure that poor performance is not ‘tolerated’. This is important in maintaining motivation (see section 2.6). Membership and identity. • Team members need to support the project manager for the team to be successful. The project manager requires their respect and must have credibility to carry out the job. The members need to believe in the project manager’s ability to get the job done. • Active followership is much more valuable than passive followership, and the project team should support and reward, debate and challenge between its members. • Specialists and others drafted into the team temporarily must be seen in a positive light and not considered a nuisance. • Team members should clearly understand their roles and what these entail. • Team members should be aware of their individual contribution to the project but also recognise their value to the team and the need for co-operation with the team. Communication systems. • In order to develop a good working team spirit, formal or informal meetings are important not only from the classic point of view (i.e. meeting to exchange information, solve problems and make decisions) but also for other important purposes such as confirming the group’s identity, providing opportunities for active involvement, reinforcing rules, and celebrating success. • Meetings can be very effective if sufficient advance preparation has taken place and they are well run. • Accept and address conflict. • Establish an effective formal communication system and make use of informal communications. Project managers tend to work more closely with their team members and the relative power of the informal communication network should be exploited. • Efficient communication with external bodies is particularly important. The project manager should ensure that adequate communication systems are in place and are functioning correctly. There may be a requirement to work through an interface, such as an internal legal services department. • Meetings should always result in actions, preferably documented with time scales and individual or group responsibilities. Team separation. • Team members are expected to deliver on time what they agreed to. Being apart from the other team members does not mean they have reduced their expectations. Edinburgh Business School

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Members should be encouraged to rely on the ability of fellow team members to deliver what they agree to. This leaves individual team members free to manage their own responsibilities without unwarranted distractions. • Commitment and momentum have to be maintained even when the team is working in different locations or is unable to meet as regularly as the members might desire. • Keeping in regular contact enables clear communication lines. Information technology Recent advances in information technology have brought significant changes to managing projects. Email, the Internet, groupware and client–server technology have enabled project team members to work autonomously at remote locations at any time of the day or night, Monday to Sunday. For the project, this means that some project team members may never need to meet face to face. There are many advantages to making use of IT advances: • it reduces the need for specific accommodation and facilities. Video link conference facilities mean that project teams can still meet when geographically separated. • reduced direct interaction can lead to fewer conflicts resulting from personality clashes. • records can be kept so that accountability and audit become simpler. • team members work under less direct supervision and therefore have greater freedom of action. • less control bureaucracy is required. There are also disadvantages, including the following: • Supporting individual team members from a remote location can be expensive, especially if another team member needs to visit them, or have them visit, should face-to-face contact be necessary. • Loneliness can be a major factor. Project team members are used to working in teams. Many of them are motivated by the daily interaction with their work-mates. There may be fewer opportunities to develop a good team spirit. • Managers lose control of work. • If there are significant time differences between team members’ locations, co-ordination may be a problem. • People often say that video-link conferences are ‘not the same’ as direct face-to-face interaction. • Some people have a natural hostility towards the use of advanced IT. • IT can always go wrong. It can be very frustrating if the land line or satellite link suddenly goes down mid-conference! • Team building processes and the formation of cohesion are severely restricted and the team has to develop alternative approaches to these requirements.

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2.5 2.5.1

Teams in general. Most teams operate at their optimum efficiency and effectiveness under the following conditions: • there are regular face-to-face meeting with team members; • performance measures and completion criteria are clear; • team members are given responsibility and accountability for their part of the project; • clear time commitments are established to which team members are expected to adhere.

Project Team Evolution Introduction This section briefly considers how project teams evolve and change over time. This is a very complex area with many interacting variables involved. For example, as the project progresses through its life cycle, the team has to adopt different perspectives that are appropriate to each stage. The team therefore has to work and interact in different ways, as objectives and project characteristics change.

2.5.2

Project Life Cycles All projects have a life cycle with phases, or stages, of development and evolution through which the project passes. The following is an example of typical phases associated with new product development: • • • • • • • • • • • • •

inception; feasibility; preliminary research and development; manufacture of prototype; development and testing of prototype; feedback and analysis; second stage research and development; final trials and approvals; production; commissioning; use; decommissioning; recycling.

There could, of course, be more or different phases. For example, a market research phase may be included. Many variations are possible and the appropriate one will depend on the specific circumstances of the project. However, in one form or another, there will be at least five clear stages. These are set out next. 2/46

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Conception and feasibility. This involves the preliminary conception of the idea and then some form of feasibility analysis. Conception is the initial phase. It involves the client in identifying a need for a project and establishing some form of scope or limitations in the form of project boundaries. The feasibility analysis will include an evaluation of the likely need or demand for the project claim, what will be required in order to produce it, how much it will cost, how long it will take, and so on.

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Outline proposals and definition. Outline proposals will involve a more detailed analysis of what the project will entail, and greater precision in defining the precise scope of the project requirements. These proposals will include more detailed time and cost estimates, a clear statement of the manufacturing and production requirements of the project, clear time scales, etc. In most cases, the proposals would also include a summary of the project resources that will be required. The project manager will use this information to gain the approval from senior management to proceed. There will generally be some form of approval required at the end of each major life-cycle stage. These approval barriers are sometimes referred to as gateways.

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Tooling up. Tooling up is the process of producing all the manufacturing equipment and other process requirements of the project. Once the bid has been approved, the project manager has to set up the organisation and production systems. This consideration could represent a major investment in some production systems – for example, the development of a full manufacturing production process. This phase could represent a very large investment in relation to the unit value of the product. Generally, tooling up tends to form a high proportion of project costs, and a lower proportion of mass production costs.

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Operation and production. This stage represents the production phase. The production system produces whatever the outcome or result of the project requires. This section could itself contain numerous subsections. It could include minor repetitions of the whole life cycle – for example, where the product changes and the whole manufacturing process has to be re-evaluated.

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Decommissioning. The decommissioning stage involves reassigning all the resources that remain after the project is completed, including reassigning people back to their functional units or to other project teams, and scrapping the production equipment or reusing it elsewhere if possible. It should also include recycling the product where possible. The requirements of the project team will obviously vary in relation to the project life cycle. The composition and success criteria of the team will change, as well as the type and level of effort required at each stage. In Edinburgh Business School

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addition, as the team and objectives change, the project manager’s leadership approach also has to change. The whole process is fluid, and a high degree of flexibility and adaptability is required. The relative importance of each life-cycle phase will also vary in relation to the characteristics of the project. One project may feature a very large design period and a relatively small production period. An example could be the development and production of a new car component. The research and development behind the design process could be relatively complex, while the actual production process, perhaps using established casting techniques, could be relatively straightforward. Other projects might involve lengthy decommissioning phases. An example of this would be a nuclear power station. Dounreay, on the northern coast of Scotland, had a design period of around ten years and a construction period of around seven years. The decommissioning process had already been ongoing for ten years by 2001, and it has been estimated it will run for at least another twenty-five years. ♦ Time Out Think about it: project life cycles. All projects necessarily evolve moving through a life cycle and exhibit different phases as the project evolves. The characteristics of the life cycle and the actual phases exhibited will vary depending on the nature of the project. A project based on the development of a new car will probably involve long design and prototype development phases. This is so because the end product will be produced under mass production processes and this factor will involve detailed research covering every aspect of the design prior to tooling up the production system. The maintenance characteristics of the new car might not be a major consideration, as most buyers of new cars will tend to dispose of them before maintenance costs begin to escalate. Recycling and decommission costs should not be significant as it is relatively easy to recycle most parts of a car. A project based on the construction of a new road will probably involve relatively little research and development work, as the optimum design for given road types is well established. The main consideration during the design stage could be maintenance, as this is likely to require large investments later in the life cycle of the project. Recycling costs could be significant, especially as increasing levels of landfill taxes on industrial waste disposal make it more and more difficult to find depository areas for road and similar waste. Questions:

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What would be an example of a project with a large design phase and a relatively small implementation phase?

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Are decommissioning and recycling phases likely to become more or less important in future?

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2.5.3

Project Change Control and Management The project and the project team are subject to constant change throughout the life cycle of the project. However, there has historically been very little attempt to standardise life-cycle phases and either the individual or the team responses in these to change. This situation is changing to some extent with the introduction of new national and international standards on project management practice. The new British Standard for Project Management Practice (BS6079) advocates the use of a standard generic strategic project plan or SPP. This defines standard planning and control systems and gives recommended standard approaches to change control. BS6079 is discussed in more detail in Module 4.

2.5.4

Project Team Evolution Teams evolve over time through a number of recognised phases. Each phase is characterised by different team behaviour as each stage of evolution is followed by succeeding stages. Tucker’s widely known four stages of team development are summarised as forming, storming, norming and performing.

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Forming. Forming is the start of the process. In forming, the team meets for the first time, the introductions are made and the project aims and objectives are established. The forming process involves an individual and group evaluation of the project as a whole and of the team itself. The forming process is dominated by the ‘first meeting’, where the team summarises the main project and team characteristics and aims. These are often summarised in the form of: – a task responsibility matrix; – an organisational breakdown structure; – a project staff register; – a baseline set of team and project objectives establishing duality. The forming process ensures that all team members know all other team members, the rules of operation are established, and that everyone knows their own responsibilities and objectives. A team may or may not have a leader at this point.

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Storming. The storming stage is about establishing cohesiveness. As individual team members begin to know each other better, they are able to build up a clearer picture of each person in terms of ability, commitment, skill, interpersonal skills etc. As these perceptions develop, there is an increasing tendency for conflict (see section 2.9). For example, some team members may resent other team members whom they believe to have authority or control that is not proportional to their ability or commitment. In an open system, the group might depose the existing leader and elect one who more closely matches the group’s perception of leadership ability. In closed systems, where there is no flexibility for leadership change, conflict and resentment may increase. Edinburgh Business School

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The development of a cohesive group ideal is imperative (see section 2.3.5). Cohesiveness is essential to productivity and effectiveness. This cohesion must develop; if it does not, the group will be unproductive. However, in most cases the cohesion can only develop if the storming process is managed subtly. If the storming process is overly restrained, and the team is forced to accept members (especially leaders) who are perceived to be of insufficient ability or value, interpersonal conflicts will arise and the cohesiveness of the group will be compromised. This can result in a reduction in commitment and individual motivation, and the group could fragment. This often happens where one group supports the leader and another does not. The leader, depending on personal level of authority and power, may use influence to support and promote the leader positive school while restricting the leader negative school. Managed poorly, the whole process can lead to destructive conflict and an inability of the team to emerge from the storming phase.

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Norming. Norms are team standards. Any group or team will develop both formal and informal standards of behaviour that all members will be expected to observe. This norming process starts as soon as the storming process is complete and the organisational hierarchy and power structure has been established. Team norms vary widely in relation to a range of individual, team, organisational, and external influences. Standards of performance are likely to differ between projects because of differences in the expectations and demands of different clients. They can also differ because all project managers will have their own views about what constitutes acceptable behaviour in any particular set of circumstances. Examples of areas where norms become established for a university course team include: – teaching standards; – research publication quality and rate; – meeting deadlines for returning assignments and setting examination papers; – commitment to course development.

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Performing. Once the team norms are in place, the process of actually performing begins. The team can only perform at anything like full capacity if it has overcome any internal fragmentation that may have occurred in the storming process. In addition, performing can only take place if a full set of norms is in place. All team members have to be satisfied that the team is equitably balanced and that the contributions of each member are adequate. The performing team has resolved most or all of its interpersonal conflicts. Any new conflicts that arise can be dealt with professionally by the team and would not require the intervention of higher authorities.

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2.5.5

Groupthink Groupthink can occur where a group of individuals becomes very highly – sometimes totally – committed and motivated towards a set of beliefs, aims and objectives that the group shares. These may or may not be consistent with those of the other members of the project team, with the remainder of the organisation, or with the reasons the project is being undertaken. Important inconsistencies can cause serious problems that adversely impact on the effective operation of the team. Under the right conditions, the whole project team will enter a groupthink state. Groupthink is sometimes an unintended consequence of highly successful team development and often starts to express itself during the performing stage of the development process. Individuals become so highly committed and motivated that they substitute the group’s emerging beliefs, aims and objectives for their own. In psychology this is referred to as a form of displacement, where the group’s objectives displace those of the individual. Groupthink is surprisingly common and the highly pressurised project environment can very easily contribute to its development. Typical symptoms of groupthink are listed below.

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Absolute commitment to the project. Groupthink develops a misdirected certainty in the minds of group members as to the right and justice of the project. It may also include delusions of the relative importance of the project to the overall corporate strategy of the organisation. Individual project managers may develop disproportionate perceptions of the value of their projects.

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Lack of respect for competitors. Negative propaganda is another aspect of groupthink. High cohesion and commitment can lead to the development of misdirected perceptions of direct and indirect competition. In some cases, derisory attitudes can even develop between branches of the same organisation. This type of derisory attitude can often be observed between accounts department personnel and engineers or salesmen. It can be very dangerous to underestimate the opposition. In 1990 the English Rugby Union team were on the verge of winning the five nations championship by a ‘grand slam’ – winning against all their opponents. Their last game was against Scotland. The English team were easily the better side and they fully expected to beat the Scottish team quite easily. As a result they played with an openly attacking formation and consistently went for high scoring ‘tries’ rather than lower score ‘drop goals’. The Scottish team put on an inspired performance and eventually beat the English team, largely as a result of English over confidence and groupthink.

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Intolerance. Powerful group cohesion and commitment can lead to an intolerance of any dissenters i.e. people with alternative points of view. Informal or formal rules and regulations are put in place to dissuade dissension and to ensure that team members either follow ‘the party line’ or leave the team. Edinburgh Business School

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As with derision of the competition, internal ‘censorship’ can be extremely dangerous. In the late 1990s Marconi decided to move out of its traditional defence specialisation and into the then high growth telecommunications and ‘dot com’ fields. Marconi sold off GEC (its primary defence arm) and bought a number of UK telecommunications and ‘dot com’ companies. Some directors within Marconi advised strongly against this, especially as established telecommunications players such as Vodafone and Nokia were already issuing profit warnings. The dissenters were however overruled and Marconi went ahead with what later proved to be a whole series of disastrous acquisitions. The voice of caution was ignored in the face of the optimism that had become established within the company.

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Fear. Team members may perceive that something is wrong but choose to censor themselves and remain silent rather than challenge the leader or be seen to be in conflict with the aims and objectives of the group. One example of this is suggested by the behaviour of the co-pilot of the 737 aircraft that crashed into the 14th Street Bridge over the Patomac River in Washington, USA on 13 January 1982. The aircraft took off from Washington’s National Airport that day and shortly afterwards hit the bridge and crashed into the river. Seventy-four of the seventy-nine people on board died because the de-icing equipment on the aircraft had not been used. The co-pilot was an ex US airforce F-15 pilot who realised during the pre-flight checks that something was wrong. Analysis of the plane’s black box recorder revealed signs of stress in the co-pilot’s voice. However, had his military training conditioned him to follow orders and not question the leader? When the lead pilot overruled him, the co-pilot may have unconsciously elected for the self-censorship developed during his training, and the result was seventy-four dead people.

•

Self-delusion. Groupthink usually occurs where cohesion and commitment are very high. Incoming information is filtered to portray only good results and nobody is willing to criticise the team and the leadership. One result can be that the team develops a false sense of invincibility. This tends to pervade the system and can endure despite undeniable reversals. It tends to be exhibited by most military dictatorships that face defeat. It is often exhibited by people and organisations that have enjoyed success over a long period of time. Self-delusion is surprisingly common in successful teams. This is often expressed as an unwillingness to implement internal change in response to changes in the environment. In 1996, the UK Conservative government had been elected twice in a row and had served as the government since 1979. They had implemented a series of unpopular policies. The UK electorate had undergone a sea change in opinion during the mid-1990s and the government failed to recognise that their policies were rapidly becoming out of date. As a result the election swing to the opposition Labour party was one of the largest in UK history and the Conservatives were comprehensively defeated. Edinburgh Business School

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•

2.6 2.6.1

Selective reporting. Another common groupthink element consists of team filters. These are individuals or sub-groups who filter all information entering the system in order to ensure that only positive information enters and negative information is suppressed or reduced. This action is perceived to be necessary as negative feedback and criticism is unacceptable in groupthink. An example would be casualty figures in a conflict. In the late summer of 1940, the German High Command firmly believed that they had eliminated 3500 British military aircraft between 12 August and 21 September. In fact they had only eliminated around 650. The figures for German losses were similarly incorrectly reported. These figures were assembled from data that were provided by individual sector commanders who believed absolutely in the cause and wished to maintain morale. As a result, inaccurate information was fed back to the High Command because people were filtering their own totals to make things look better. As a result, the High Command continued with an air assault that was far less effective and much more costly than they realised. They eventually gave up and withdrew, but only after much unnecessary loss of equipment and personnel. With correct information they might have changed their strategy or tactics earlier and achieved a different outcome. Similar filtering behaviours have been observed during new development projects of all kinds.

Project Team Motivation Introduction Motivation is a highly complex area and includes a multitude of different elements. The approach(es) required in order to increase levels of motivation will depend on the characteristics of the particular project team. Individuals and teams can be naturally (self) motivated or may need to be artificially (externally) motivated. A significant element of contemporary motivation theory is based on the works of McGregor and Maslow.

2.6.2

McGregor and Maslow McGregor advocated his famous Theory X and Theory Y to characterise opposing views on motivation within teams and organisations. Theory X states that operatives are basically lazy and unmotivated; they dislike work and will avoid it if possible. They must therefore be carefully supervised and threatened with punishment if they do not perform. They naturally avoid increased responsibility and control, and they prefer to be directed rather than use their own initiative. Theory X implies that a highly centralised and authoritarian management structure would be most appropriate. Traditionally, military hierarchies and structures were examples of this type of approach but, today, even they adopt a less polemical stance.

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Theory Y states that operatives are willing to work and complete the job without close supervision. Operatives want to do well at their jobs, find work stimulating and satisfying, and like to succeed because this generates greater self-respect. Theory Y implies a less authoritarian management style, with more operative initiative and enterprise. In practice, most operational systems fall somewhere between these two extremes. Most employees are motivated in their jobs to some extent, although they occasionally have to be threatened, either directly or indirectly, in order to keep them motivated. The threat could be no more direct than referring to external market forces and encouraging operatives to work harder and more efficiently so that the organisation can succeed in the marketplace, and as a consequence they have a better chance of keeping their jobs. This relative imbalance between perceptions in Theory X and Theory Y can lead to problems within a project management context. Functional managers often tend to be more autocratic, and naturally more oriented toward Theory X. They typically operate within more rigidly defined operational structures, and their success and failure criteria tend to be relatively clearly defined. Project managers are often less autocratic and more flexible in their approach and operation. This is generally because they are used to more flexible working practices, working with different teams for relatively short periods of time on relatively complex processes. These characteristics call for people who can innovate and improvise. In order to do this, project managers have to have more faith in the abilities of their team members and generally have to allow more freedom of action. On the other hand, project managers frequently work to much closer tolerances of time, cost and quality performance than many functional managers. As a result, project managers have to engender a much closer understanding of time, cost and quality limits by team members, and therefore closer adherence to measurement and control systems. Problems occur when one manager regards a member of staff as a Theory X employee and the other manager regards the same person as a Theory Y employee. Other classic research has suggested different theories of motivation. Maslow suggested a hierarchy of needs rather than two alternative and contrasting theories. In the hierarchy of needs, operatives value different desires and preferences according to which of them they already possess. Maslow’s hierarchy is listed below. • • • • •

self-actualisation; esteem; belongingness; safety; physiology.

At the lowest level, operatives have basic physiological needs such as food and water. Once these are satisfied, they are no longer motivators, so the individual looks to a second level of need. Typical second-level needs would 2/54

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include job security and safety. Again, once these are satisfied they are no longer motivators, and a third level of needs arises. Third-level needs could include a sense of identity, togetherness, belonging, loyalty etc. Above this is the esteem level, where individuals have a desire to feel good about what they are doing and to feel a sense of esteem and value within the system. The highest level includes self-actualisation. This involves feeling that one has the freedom to make the best of one’s talents within very limited constraints. Like McGregor’s alternative theories, Maslow’s hierarchy has direct implications for project management. The hierarchy should be considered from a number of different project management perspectives.

Project Management

•

Relative importance of the needs. The relative importance of each element will vary from project to project, from team to team, and from individual to individual. Safety could be far more important to team members on a project that involves toxic or radioactive materials than one developing a software system. In other cases, people may not wish to join project teams because their need for a sense of belonging or togetherness is already being satisfied within their functional settings and they do not wish to lose this.

•

Time-based requirements. Generally, the higher the level of need being considered, the more there is a time element involved. Developing a sense of comradeship and togetherness takes time. In some cases (such as self-actualisation) it may take a great deal of time. However, project teams are characteristically of a relatively short life span. In many cases, the project manager cannot offer to fulfil this kind of higher-level need because the project duration is not a sufficiently long period of time to do so. Project managers typically have to motivate team members at the lower needs levels rather than at the higher ones.

•

Unsatisfied needs. The hierarchy shows the needs at each level but there is obviously no guarantee that any one individual’s needs will be satisfied. Some employees may well have a need for a sense of self-actualisation, but if this is not allowed to happen – possibly because the nature of the project or organisational influences cannot accommodate it – the result can be resentment and employee dissatisfaction, which will in turn affect performance and output.

•

Complex needs. Higher-level needs are more subjective than lower-level ones. It is easy to determine when a person needs food, and also to determine how much food is needed at any one time. It is much more difficult to work out an exact requirement for self-actualisation, and to specify exactly when this need has been met. Some people will feel fulfilled at different levels than other people.

•

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Fulfilled needs are no longer motivators. According to Maslow, much of an individual’s motivation is therefore based on anticipation. People are motivated by the belief that the future will provide fulfilment of the next level of needs. The reward system therefore needs to reflect this belief. Although fulfilled needs are no longer motivators, they are hygiene factors. Withdrawing the conditions that keep them fulfilled will lead to strong resentment and dissatisfaction. People then become motivated towards finding alternative means of fulfilling the need. For example, an on-site caf´e may meet the physical food needs of people. If this is withdrawn, people will seek alternative means of filling this need. Some examples include sending a junior member of staff for sandwiches, leaving the site to visit an external caf´e, and bringing their own sandwiches.

2.6.3

2.6.3.1

Equity Theory and Expectancy Theory Equity Theory Equity theory is based on the perceptions of individuals in relation to what they do and how they are rewarded. Employees perceive the fairness or otherwise of their rewards by comparing these, and the level of effort necessary to obtain them, with those of other employees. Any perception of receiving an inadequate personal reward generates a feeling of inequity (unfairness). This type of perceived inequity is very common in organisations, and it acts as a powerful motivator. There are, of course, numerous choices facing an employee who is in a state of perceived inequity, as set out next.

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Seek promotion. This will increase the amount of reward, although it could also increase the contribution required. However, the contribution could be of a different kind and (perhaps) be more attractive. This is the best option as far as the project is concerned, although it depends on the ability of the system to meet that particular need.

•

Seek increased reward level. Employees who feel they are doing a particularly good or important job could ask for an increase in salary. Agreeing to this inflates project costs and can normally only be justified if the cost can be passed on to the client in some way or is covered by contingency amounts within the project’s budget. While this may satisfy those individual employees, the overall efficiency of the system may fall if feelings of perceived inequity are created elsewhere.

•

Make a lesser contribution. A common way to reduce the perceived inequality, and the easiest of the three to execute, is for the employee to reduce his or her own contribution while maintaining the same reward. Again, the overall efficiency of the project is reduced and perceived inequity elsewhere in the system is likely to increase. Edinburgh Business School

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•

Increase other inputs. This could happen where additional resources are put in as a result of individual(s) making a lesser contribution. Such a situation can arise because individuals unilaterally decide to reduce their contribution, or where the supervisor decides that employees are being asked to do too much. In any case, the perceived inequity acts as a motivator. Employees will strive to correct the situation so that the perceived inequity is corrected.

It is also important to appreciate that there can be positive and negative perceived inequities. Positive inequity is where the individual perceives an inequity as being in his or her favour – as in the case of a person who feels overpaid in relation to the contribution that is required. Negative inequity is where the person feels undervalued in relation to the contribution being made. Obviously, negative inequity is a more powerful motivator for change than positive inequity.

2.6.3.2

Expectancy Theory Expectancy theory suggests that people are motivated to make efforts to achieve goals that they believe will result in obtaining the rewards they desire. It is based on the idea that motivation is related to personal goals and objectives. Expectancy theory suggests project managers can motivate team members even where the individuals have no immediate financial incentive to improve their performance. The individual employees can be motivated provided that the successful completion of the project can in some way be linked to the personal goals of the individual. An example could be course leaders in a university. They may be motivated to increase student numbers consistently over a long period of time on the understanding that, when student numbers reach a certain predetermined level, professorial positions will be created in their disciplines. The course leaders would naturally be in an ideal position to apply for the new professorships. The motivation in increasing numbers is therefore not anchored to the success of the courses but to the future positions and opportunities that it could open up for the course leaders. Course leaders might not be prepared to accept current perceived inequities when considering the workload and rewards of other course leaders, but they might be prepared to accept such inequities on the strength of the expectancy of what (professorship) may follow on from current actions. ♦ Time Out Think about it: motivation. Most people are motivated by a combination of different factors, and the leadership style adopted should depend on the particular context or situation. A factory might be producing different kinds of components. A project team might be set up to develop new ways of fitting the components together. The functional managers, in charge of producing individual components on a mass basis will tend to have more rigidly defined standards and approaches to motivation. These will tend to be dominated by money-based incentives, probably linked directly to production and output. The project manager, by virtue of the job is likely to be more flexible

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and adaptive, and will therefore probably have a different motivational perspective. In addition, employees of functional units often have difficulty in establishing a direct allegiance to the project. Project managers tend to motivate through linking individual performance to the success of the project itself, so far as this is possible within the organisational reward system. Questions:

•

In a project to develop a new computer game, how could the motivation of the programmers (functional employees) be linked to the success of the project?

•

What motivational factors other than money could apply in this case?

♦

2.7 2.7.1

Project Team Communications Introduction In order to ensure good working relationships, to monitor and control, and to take swift corrective actions when required, project managers require good flows of information. Information flows in two directions, 1) inwards to the project managers from other people and organisations and 2) outwards from the project manager to others. Both formal and informal communications will be used as appropriate. One reason for establishing informal communications is because the time taken by formal communication channels to identify and report problems arising can be overly long. This can result in problems becoming very serious before any corrective action is taken. Informal channels can respond faster on occasions, but not always.

2.7.2

Project Communication Communication among the various people and organisations involved in a project is analogous to the central nervous system of a body. Communication is the process by which the project manager sends out information, directives and objectives and then monitors actual performance. The quality of the information flowing through the system, and of the system through which it flows, is vitally important. For example, communications containing data that is relevant, accurate, and delivered on a timely basis to the appropriate decision makers are essential for monitoring and control purposes. Good communication involves high-quality information sharing and exchange. It is a system for effectively integrating the efforts of project participants and for facilitating the project management and system development processes. In successful projects there is continuous, clear communication among all personnel within the project team, and this is maintained throughout all stages of the project life cycle, from conception through to project completion. Good communication partly depends on the quantity and quality of face-toface meetings. In successful projects there tend to be frequent review meetings

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to exchange information and instructions about project objectives, status, policies, problems that arise, and changes taking place. Access to meetings should be open to all project team members and they are encouraged to attend. At meetings, it is usual to specify which issues and which people have priority. However, the lead roles can change hands as required because personnel have a mutual commitment to addressing and solving problems quickly. Seminars are often held so that project team members can get a better understanding of the issues faced by other members. Many meetings are informal because this engenders trust among team members and they are more likely to respond to requests to express their viewpoints on the various issues. Successful project managers listen carefully to the views of their project teams. Inadequate project communications is a common cause of many project failures. Problems often stem from poor-quality information, inaccuracies, or being out-of date, or from information that is ineffectively collected or distributed. The project environment is highly conducive to effective communication because of the nature of the project structure. Being built along horizontal lines and having a relatively flat hierarchy encourage direct, quick and open discussion without fear of recrimination from the distant top of the organisational structure. This type of communication results in quick decision making, which is an important aspect of projects with their conflicting constraints and commercial deadlines. The project managers can choose from a wide range of ways of communicating including: •

meetings;

•

telephone conversations;

•

letters and memos;

•

email;

•

notice boards;

•

chats;

•

seminars;

•

project plans and reports;

•

newsletters.

Whatever method is used to carry the communication, the message will basically fall into two of four principal categories: formal or informal, and internal or external, as described next. 2.7.3

Formal and Informal Communication Organisations naturally develop barriers to communication. Most organisations tend to evolve different areas, which are separated from each other by boundaries, that are typically based on functional specialisation and power. This concept is shown in Figure 2.6.

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Senior management

Increasing authority

Authority boundary

Functional manager (A1)

Functional manager (C1)

Production unit

Production unit

Production unit

Production unit

Team (A2)

Team (A2)

Team (C2)

Team (C2)

Level 2

Team (A3)

Team (A3)

Team (C3)

Team (C3)

Level 3

Function A

Function C Functional boundary

Figure 2.6

Level 1

Operational island

Increasing number of people

Organisational barriers to communication

The various sections of the organisation that are defined by the power and functional boundaries are sometimes known as operational islands. They represent isolated areas where there are clear boundaries to communication with other sections. Section A2 in Figure 2.6, for example, represents organisational members who work for Department A at level 2. Section C3 similarly represents members who work for Department C and operate at level 3. In general terms, there is no need for A2 people to communicate directly with C3 people. The chances are that any such communication that does occur will in fact be informal, unless an internal project management system is set up (see Module 4). Formal lines of communication are set up with the purpose of ensuring that project stakeholders get whatever information they need, delivered in a suitable format when and where they need it, and that there is a means of providing a reciprocal service by delivering accurate and timely information into the system as required. In well-run projects, formal communication lines are strictly adhered to and rigorously maintained. Good formal communication lines are an essential element for successfully collecting and disseminating project information. A well-managed system will monitor and record the flow of information. This is particularly important in the project environment where deadlines are tight and contracts contain many obligations relating to issuing and receiving information. For example, the interdependent nature of projects demands regular progress reports in order for later activities to be aware of any delays and their likely consequences. However, today’s formal communication systems often become choked with volumes of relatively low-value information because it is easy to rely on the latest project-management software packages. The output from such packages is 2/60

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frequently distributed to large numbers of people who have little or no use for the information they are receiving. The use of email systems has exacerbated this problem. The tendency to ‘cover your back’ by issuing every piece of available information to all project stakeholders is common, but should be avoided for the benefit of the project. The recipients of low-value information waste valuable time reading and discarding it; and in the worst case, recipients will start to ignore the information, hence taking the risk of missing something of real importance. Formal communication tools include: •

frequently issued reports on all aspects of the project, with clearly defined distribution lists to ensure that only relevant people receive the information;

•

regular project meetings, where information is disseminated in person – this encourages debate and discussion but can result in conflict, which needs to be carefully managed to prevent it obstructing the communication lines;

•

project memos;

•

project newsletters that are useful for distributing information of lower urgency or of a social nature around the project team – these can be of immense value in helping to integrate the project team;

•

a project notice-board;

•

project away-days and events.

Although informal communications systems are much less easy to manage and control, they are nevertheless essential to the project team from a social and integrative perspective. The informal communication system in most projects and organisations tends to revolve around the ‘grapevine’ and, whilst it is largely impossible to control the grapevine, it is possible to influence it. A healthy project ‘grapevine’ can identify and expose real project issues very quickly, whereas the unhealthy project grapevine will be a safe haven for resentment and disillusionment within the project team members. Rather than expose issues and deal with them, the unhealthy grapevine will harbour issues and allow them to grow (often out of all proportion) and can be instrumental in destroying the effectiveness of the project team. Informal communication lines are established in many ways, including: •

lunch and dinner appointments with colleagues;

•

telephone conversations;

•

coffee breaks;

•

evenings in the bar after away-days;

•

social events.

Project managers can put informal communications to better use if they can influence the channels in a positive way to encourage good working relationships between team members. This can be done in a number of ways, but some wellknown examples are as follows: Project Management

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•

• • •

•

Walt Disney employees at Disneyland Florida and Disneyland Paris all wear name badges. This introduces an immediate perceived rapport because customers know the name of the person that they are dealing with. Call centre staff increasingly identify themselves before starting a conversation. Hewlett Packard staff are encouraged to use first name terms in order to reduce formality. Some companies insist on open-plan offices for everybody, including senior managers. When AT&T acquired NCR, they insisted that all existing NCR senior managers’ offices had the doors removed (much to the dismay of the NCR senior managers). Some companies insist on weekly or even daily ‘walkabouts’ by senior managers in order to raise their contact profile amongst employees.

The grapevine is a useful method of gauging feeling on the project but can be a very unreliable way of collecting and distributing information. First, one cannot be certain that the person that one wants to receive the information actually does receive it; and, second, information tends to get garbled on the grapevine and its accuracy cannot be guaranteed. 2.7.4

Internal and External Communications Project communication is either internal to project team members, or external to all other people, and it is important to know who is being communicated to. In general, the informal channels are solely used for the purposes of internal communications, although the increasing popularity in informally leaking information as currently observed in world politics will, no doubt, filter its way down into the project environment. External communications are generally conducted through explicit formal channels. Good internal communications rely on team members’ willingness to communicate and disseminate information openly, particularly that relating to problem areas and issues. Good external communication is almost the antithesis of this and requires absolute control in the dissemination of information. In large projects, the external communication channel is often via a single highly-trained expert communicator who is well-versed on the ‘party line’ and under no circumstances will be drawn into other areas. It is essential to nominate an individual who is responsible for all external communications and it is absolutely vital that the other project team players are fully aware of who this is. This individual should approve all non-routine communications with outside parties. If this is not done, the messages released by the project team members may appear mixed, conflicting, and confusing and could be highly damaging to the success of the project. ♦ Time Out Think about it: communications. In most organisations and projects, informal communications are as important as formal communications – in many cases more so. A good project manager accepts

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this and engineers the informal communication process to try and make use of it. A course leader in charge of certain courses might choose to write formally to students every few weeks; the university administration might also have regular mailings; there may be set procedures for applying for extensions to submission dates or for deferring examinations. These are all formal communication channels. However, the informal channels are often far more widely used and of greater value within the course group. Examples include the student grapevine, where information is disseminated and communicated by phone, fax, email, word of mouth etc. Some course leaders attempt to formalise the informal communication patterns by introducing some kind of centralised informal communication control. One example would be an Internet site making use of an electronic notice-board for all team members (a so-called bulletin board or forum). Any student can ‘pin’ a question or problem on the notice-board. Other students can read this, along with all the other notices on the boards. Students who have already solved the same problem can volunteer to help students who are still struggling with it. This technique of informal communication can often supplant the more formal communication pattern of asking for help through the tutor. Questions:

•

What are the disadvantages of using an electronic notice-board for informal communications about a course?

•

How could the disadvantages be reduced?

♦

2.8 2.8.1

Project Team Stress Introduction Project team stress is an important issue because it affects the efficiency of the team and of each individual team member. At the extreme, a team can be ‘stressed out’ to such an extent that it is unable to perform and the project fails. Hence, it is important that project managers can identify individuals or groups that are susceptible to stress, and are able to identify symptoms of stress at the earliest possible stage. This early identification provides the opportunity to intervene before the effects become too severe. An effective form of stress management is useful and the basic elements of such a system are discussed below.

2.8.2

Origins and Symptoms of Team Member Stress

Origins Project team members are particularly susceptible to stress. Typical reasons for this susceptibility include: Project Management

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• • • • •

team members having project and functional bosses, who sometimes make conflicting demands on their time; having to work to strict time, cost and quality limits; teams having only a relatively short life span; projects tending to be relatively complex; operating within a frequently changing environment.

Stress has been recorded as becoming more or less endemic within the USA and EU workforces over the past ten years or so. There are numerous causes, but perhaps the primary one has been the sustained long-term drive to reduce costs. There has been a continuous cost-reduction drive in developed economies since the 1980s, and this has produced a pressure to improve efficiency. This drive has brought two pressures onto employees: the need constantly to work harder, and the fear of losing one’s job as fewer workers are needed to produce the same outputs. Workers in most industries would report similar perceptions. Stress is more than just an unpleasant aspect of a demanding work environment. Stress leads to a real loss in productivity and efficiency. Employees who are subject to high levels of stress take more time off work and are less efficient than employees who are subjected to acceptable levels of stress. The main sources of project team stress are often grouped under the following headings: • • •

personal stress; work stress; environmental stress.

Personal stress originates from within the project team member concerned. Even if a person is being subjected to acceptable levels of stress within the project team, personal problems can add additional stress that makes the overall level unhealthy. Obvious personal problems would be domestic and family problems, financial problems, health concerns etc. These stresses are not related to stresses generated within the project team, but they contribute to the overall level of stress that is being experienced by the individual concerned. Personal stresses are almost always outside the control of the project manager. The project manager can attempt to reduce these personal stress levels by directly counselling the team member concerned, or referring him or her to a specialist counsellor. Work stresses originate from the work environment. Obvious examples would be high workload, individual responsibility, conflict, and leadership responsibility. The project manager has some control over these stresses and can take action to reduce them. However, in many project management arrangements only a proportion of any one individual’s workload is directly attributable to the project; the rest is attributable to the functional unit and is outside the control of the project manager. Environmental stresses originate from outside both the individual and the workplace. Obvious examples would be fear of unemployment, level of national economic activity, changes in technology, new working practices, and changes 2/64

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in government. Fear of unemployment can be a very significant stress for many people, and it may be exacerbated at times of economic or political uncertainty. The fear could be triggered by global factors such as the level of economic activity, or it could be far more specific, such as new technology making old practices redundant. The project manager has virtually no control over personal and environmental stress within the project team, and only limited control over work stress. Therefore it is very difficult to avoid this problem through planning and control.

Symptoms Most people have experienced all three types of stress at one time or another and are familiar with the main symptoms associated with it. These will be grouped under three headings: • • •

physiological symptoms; psychological symptoms; behavioural symptoms.

Physiological symptoms include raised blood pressure and increased heart rate. More advanced symptoms can include persistent nausea, migraine headaches, trembling limbs, sweating and visual disturbance. Psychological symptoms include sleep interruption (classically manifested as a reduced sleep requirement or poor quality of sleep), depression and anxiety. These are usually coupled with an overall loss of drive and motivation and job satisfaction. More advanced symptoms can include disorientation, memory loss, aggression and perceived physiological symptoms. Behavioural symptoms include an overall loss in energy and enthusiasm, an increased number of complaints and listlessness. In more advanced cases, absenteeism increases, attendance decreases, working patterns and characteristics change, regulations are disregarded and so on. These symptoms are all potentially harmful to the project team. The physiological symptoms are unpleasant and affect the output and efficiency of the team member concerned; the psychological symptoms certainly affect the reasoning and mental capacity of the person; and the behavioural symptoms can have a direct and immediate effect on the functioning and efficiency of the whole team. It is important to appreciate that the overall level of stress encountered by an individual depends on the cumulative total of all three different types of stress that are being experienced. The discrete levels of personal, work and environmental stress experienced by a person might be acceptable but, overall, the cumulative stress level may be higher than is regarded as acceptable by the individual. More recently, judges in law courts have been awarding large sums of money in damages to employees who have been put into excessively stressful situations by their organisations or who carry excessive levels of stress in relation to the job position they hold. The frequency and level of claims is expected to increase for the foreseeable future. This trend puts the onus on organisations, and project managers in particular, to have systems and processes for identifying Project Management

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work-related stress conditions and for correcting them before the individual is harmed. 2.8.3

2.8.3.1

Stress Management Individual Stress Management Changes in both approaches to work and employer expectations over the last ten years have resulted in a stress-aware culture. As people are forced to work more and more efficiently, the incidence of stress-related problems has increased dramatically. Doctors report that stress-related problems are now one of the largest causes of patient visits to their medical practices in the UK. Stress counsellors have access to a substantial body of research about managing stress. Some key findings from the research relate to: • • • • • • • •

healthy diet; reduced tobacco and alcohol consumption (difficult for some project managers!); regular exercise; physiological awareness and control; communication; periodic re-alignment and reconciliation between goals and self-limits; psychological self examination and seeking advice where necessary; breaks and holidays.

There appears to be a definite link between poor diet, lack of exercise and higher stress levels. Whether this is a cause-and-effect relationship, and which direction the cause and effect takes, is not totally clear. Physiological control seeks to counter and relieve stress by a range of methods. including learning how to control breathing and respiratory function. Communication is perhaps the most important single element in avoiding or reducing stress. A significant contributor towards stress arises from the inability of many people to talk about what is causing the stress. Hence, one of the first things that most general practitioners recommend to patients who are suffering from stress is a stress counsellor. Simply having somebody who will listen can make a great deal of difference. Teams that listen to each individual empathetically, and communicate well, tend to exhibit fewer symptoms and lower levels of stress.

2.8.3.2

Project-Team Stress Management While corporate approaches to stress management are still relatively underdeveloped, many organisations are realising that stress costs them large amounts of money. Absenteeism, work interruptions, and unreliability all have effects on overall productivity and efficiency. As a result, an increasing number of companies are developing work practices that attempt to control work-stress development. These work practices include the following.

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Project Management

•

Deregulation. Too rigidly defined and applied working practices can be a source of great stress for many employees. One example is strict working hours. People with children at school may find a conflict between school drop-off and collection times and official work start and finish times. In such circumstances, it can often be of considerable help to allow flexible working times. As an alternative, individual contribution to the project could be evaluated in terms of end results rather than time spent on the work premises.

•

Reasonableness. Project managers should try to put themselves in the position of the team members. In doing, so they are more likely to treat team members in the way they would like to be treated in similar circumstances. Simple gestures such as understanding if someone needs time off work for family-related reasons, or overlooking a short-term drop in productivity (provided the output is made up elsewhere), can do much to reduce stress.

•

Fairness. It is rare to find a project team where all the team members are equally motivated and doing their best. In most teams, there are some team members who are less motivated or are resentful, and who attempt to do less than their fair share of the work. Equally, there may be some team members who are more dedicated and take on more than their fair share of the work in order to keep the team going. This inequality usually leads to resentment, and this in turn contributes to overall work stress. The project manager should ensure fair play by balancing the workload across all team members according to their abilities, and making sure that all team members perform to the required levels.

•

Open-mindedness. It is important that the project manager is able to maintain an open-minded attitude. It is very easy for a person to become established in a particular routine and to expect constant adherence to the system. Projects operate under conditions of constant change and it is important that the project manager can identify where a corresponding change in working practices is required.

•

Flexibility. The project will impose varying demands on the project manager and on members of the project team. There will be peaks and troughs in work demand and the project manager should ensure that he or she makes full use of any troughs to allow project team members to take a break or reduce their output for a while. This approach can be psychologically very valuable to team members.

•

Approachableness. The project manager must establish a position where he or she is viewed as being immediately approachable. A lack of communication and feelings of isolation are significant elements in stress development. Team members are Edinburgh Business School

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generally much happier when they can approach the project manager and explain their worries and concerns. There is an old saying in the UK that ‘a problem shared is a problem halved’. There is certainly some truth in the saying, and it can be a powerful tool in stress management.

2.9 2.9.1

Conflict Identification and Resolution Introduction With the exception of the most simple of projects, conflicts are likely to arise from time to time between various individuals and/or groups involved in delivering any project. The efficient identification and management of conflict is essential. Conflict can lead to inefficient project teams as well as mistakes, with the end result being time, cost or quality problems. In its most dramatic forms, conflict can lead to project failure. Hence, identifying conflicts at an early stage of their development and resolving them swiftly wherever possible is very important. Conflict can take numerous forms and can originate from many different sources within the project system. The appropriate management response will depend on the conflict’s source and characteristics. These are examined below, and a basic outline for conflict management is introduced.

2.9.2

Sources of Conflict Conflict as a phenomenon is a natural by-product of human interaction. When it is constructive it can be useful in developing team relationships (see section 2.3.4) and it is a feature of the decision-making and problem-solving approaches used by most successful heterogeneous teams (see section 2.3.3) This type of constructive conflict is sometimes referred to as ‘meaningful’ conflict. In most cases the project manager will not intervene unless it reaches a level that is no longer beneficial to the overall aims and objectives of the organisation. In a fast-changing project environment, conflict is almost certain to occur at some point in the project life cycle. Conflict results to some extent from change, but it can arise for numerous reasons. Typical examples include: • • • • • • • • • • •

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onerous resource constraints and limitations; pressure to increase speed and/or reduce costs; pressure to meet demanding deadlines; imposition of new aims and objectives; change and consequent need for re-alignment; conflicting functional and project demands; personality clashes; misunderstandings and differing interpretations of requirements; incorrect or late information and communications; individual perceptions of inequalities; underlying resentment.

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2.9.3

Conflict Characteristics It has been observed that, in general, the more multidisciplinary the nature of any team, the greater the tendency for conflict. Project management, by making use of shared resources from many disciplines, is particularly susceptible to conflict. In addition, project pressure puts a lot of stress on the project team players and when this stress is particularly high, tempers can become frayed and levels of tolerance can become greatly reduced. Conflict does not only arise out of bad feeling but may involve a genuine, heart-felt disagreement over a particular issue; it is not necessarily destructive. Positive action may result in avoiding action that may have been disastrous for the project in general. History would have been different had the White Star chairman listened to the strongly expressed views of the captain of the S.S. Titanic about slowing the vessel down because of the risk of icebergs. Research has indicated some key elements that are regularly found when conflict occurs. There appears to be a relationship between conflict levels and organisational factors as follows: •

•

•

•

•

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The greater the heterogeneity or multidisciplinary nature of the team (see section 2.3.3) the greater the potential for project team conflict. This characteristic is almost certainly because the greater the range of backgrounds, perspectives and opinions, the greater the probability of differences of opinion among team members. The lower the project manager’s degree of power and authority within the functional organisation, the greater the degree of potential for project team conflict. There seems to be a link between the perceived power of the project manager and the willingness of the project team to work without conflict. Very powerful project managers tend to establish and manage teams with little conflict. The weaker the perceived power of the project manager, the greater the probability of conflict between the project manager and the other team members. The lower the degree of specified and quantifiable objectives, the greater the degree of potential project team conflict. Objectives and targets that are vague are open to misinterpretation. This lack of clear specification allows different team members to develop contradictory ways of achieving the ultimate goals and objectives, and this in turn can lead to conflict within the team. The lower the level of individual communication and accountability within the project team, the higher the degree of potential project team conflict. Conflict is generally more widespread in systems where communications is lacking. The greater the degree of change required, the greater is the potential for conflict to arise. Change is a catalyst for conflict. Change requires all kinds of alterations to the established and evolving project organisational and technical structures. This in turn leads to the development of stress and generates a potential for conflict. Change can be managed to some extent but the pressure for constant re-alignment and re-organisation caused by imposed change is a classical source of potential conflict. Edinburgh Business School

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•

2.9.4

The lower the relative perceived prestige of the project, the greater the degree of potential conflict. People tend to associate more readily with a high profile project than a low profile one. People tend to like prestige and to be associated with something that is widely perceived within the company as being important. People associated with high prestige projects tend to resist the tendency towards conflict longer than those that associated with other projects. The reasons for this are complex and relate in part to expectancy theory (see section 2.6.3.2) and to a desire to be associated with perceived success.

Approaches to Conflict There are two main approaches to conflict within organisations. The traditional view is that conflict is always bad and is to be avoided if possible; if it cannot be avoided, strict procedures should be put in place within the control system to make sure that the conflict is resolved as quickly as possible. The alternative approach, the contemporary view, considers that some conflict may be useful; it can be used to maintain group dynamics and to prevent team stagnation. The main factor is making sure that divergencies of opinion are monitored and managed; provided that this is done, the conflict may actually contribute to team development and evolution. In the project environment there are eight principle areas where conflicts regularly occur: • • • • • • • •

when onerous deadlines have to be met; where change occurs; where errors or omissions are discovered; when resources are reduced or are supplied at an inadequate level; where people clash because of personalities; in agreeing areas for concentration; in agreeing priorities; where uncertainty is high.

Conflict tends to be at its greatest during the highly active phases of the project and is reduced at both the start and the end. Outside this typical pattern, it is difficult to generalise on the nature of conflict within the project environment. Experienced project managers should ask the following questions when seeking to identify the source of the conflict: • • • • •

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What is the source of the conflict? Why is the conflict occurring? What is the potential impact of the conflict on the project? Can the conflict be reduced or eliminated and if so how? Could the conflict have been foreseen and can similar occurrences be avoided in future? Edinburgh Business School

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The first question is perhaps the most important. A significant proportion of project conflict originates from contradictions or inconsistencies within the project objective criteria. It is obviously very important that the objectives and success criteria for the project are communicated accurately and effectively to all the individuals who are involved with the project. If this clarity and communication does not occur, different members of the project and functional teams might develop different perceptions of what the project is trying to achieve. This potential incompatibility is an obvious origin for future conflict. As a general rule, project objectives should be: •

clear and precise;

•

realistic;

•

related to each other (where appropriate);

•

achievable with the resources and constraints given;

•

measurable;

•

compatible with the overall strategic plan;

•

agreed by senior management;

•

communicated to everybody in the project team;

•

communicated to stakeholders (where appropriate).

These principles can all be applied at an early stage. However, they are subject to change as the project develops and evolves. For example, a university might want to set up a new combined-studies degree in order to increase student numbers while maintaining teaching quality. This new degree might involve teaching inputs from specialist staff from a number of different departments. The combined-studies project might work and show a significant increase in student numbers over a three-year period. However, this growth might not be matched by the resources required to sustain it. The result might be an increased student-to-staff ratio and falling teaching quality, both of which would be considered unwelcome. The achievement of one project objective (increasing student numbers) has compromised another objective (maintaining teaching quality), because a project resource requirement (maintaining an adequate student-tostaff ratio) has not been satisfied. In this type of example, another phenomenon that can occur is objective reclassification. The head of department might see student numbers increasing and thus a corresponding increase in fee income. Originally, fee income and quality might have been regarded as having equal priority. However, once the head of department sees the large increase in fees, compromises on quality might be accepted rather than expending additional resources (and therefore reducing cost-efficiency) on the project. The end result of this objective redefinition is increasing class sizes and falling quality. This again is an obvious area for conflict to evolve because staff resent increased class sizes and workloads, and feel frustrated by falling standards and levels of student performance.

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2.9.5

Conflict Management Project conflict is a natural occurrence. Thus, a project manager has to be a conflict manager and reduce levels of conflict where necessary. There are several alternative approaches for managing conflict, as set out next: •

Conflict avoidance. Senior managers within an organisation may know about a conflict but chose to avoid becoming involved. This may arise when no reasonable or acceptable solution can be found, or because the matter is deemed to be insufficiently important to justify any detailed conflict resolution.

•

Conflict absorption. A manager might absorb the costs of a conflict where a mistake has been made, or where circumstances have changed to such an extent that the manager’s previous position is no longer tenable. Conflict can sometimes be accepted as inevitable. It is common to find a project team where two or more people have personality clashes. This often leads to conflict simply because the personalities of the individuals concerned are incompatible. Under such circumstances, the project manager probably has to accept that conflict will occur and try to minimise the consequent effects. The usual guidance to relieving stress in such a situation involves persuading team members that it is important to be able to work with people even if team members do not like, or even respect, them – a difficult task to achieve.

•

Conflict resolution imposition. Conflict resolution imposition occurs where there is no alternative. This kind of approach is justified in extreme or emergency situations. An organisation might suddenly find itself in extreme financial difficulties because of some unforeseen event, and as a result it has to take extreme action with no time for consultation or negotiation. For example, it might be necessary suddenly to announce a large number of compulsory redundancies (job losses) without consulting the unions or other people involved. This action will produce inevitable conflict within the organisation, but there may be no alternative.

•

Negotiated conflict resolution. This option involves accepting that there is a conflict and then attempting to agree or negotiate a mutually acceptable solution. This usually involves some compromise between the positions adopted by the parties to the conflict. An example of this approach could be employer–union negotiations over a pay rise. It depends on the parties having similar powers and being able to make similar levels of threat.

It is important to deal with conflict as quickly as possible to ensure that a project team’s performance does not suffer as a result of minor disagreements between key players. The project manager will usually be the main arbitrator in any contentious situation within the project team. His or her judgement is 2/72

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unlikely to be popular with everyone, but it is an important driver for the project. One process for doing this is to: • • • • •

• • • • • • • • • •

calm everyone involved down and give them time to get their emotions in check; clarify the facts of the situation; acknowledge each party’s position and feelings and respect their viewpoints; focus on the cause of the conflict and do not apportion blame; establish the best option in view of the project goals and priorities (this is most valuable if both parties can be persuaded to work on this and arrive at the decision together); attempt to get everyone to accept the decision; present the decision as a win–win situation in terms of the project’s success; look for any evidence of personality clashes and speak to the people involved; look for any evidence of victimisation or specific targeting; examine the project-function interface and see if it is working correctly; attempt to talk to everyone (or at least to the people who appear to be central to the problem) and gather any relevant background information; talk to the functional managers concerned and ascertain if there is any functional involvement or connotations; set a timetable for reconciliation, if possible ; set up a monitoring system to make sure that things improve; learn from this occurrence and try to avoid future conflicts that may arise from similar sets of circumstances.

♦ Time Out Think about it: project team conflict. Conflict in some form is inevitable. A football team can again be used as an example. When things are going well, there will be little tendency for conflict. However, if results start to go against the team, there will be a tendency for the team members to start arguing among themselves. A typical reason for conflict would be playing formation: the team is not scoring many goals so it has to be the fault of the strikers; they will in turn blame the mid-field players for not getting the ball through to them often enough, and so on. Generally, the more the players talk about the problem, the less direct confrontation and argument there will be. In addition, the stronger the personality or position of the head coach, the fewer arguments there will be among the players. One solution to such conflict could be to adopt the players’ collective recommendation. However, this is actually a weakening move as it further compromises the leadership and perceived authority of the head coach at exactly the time when that position needs to be strengthened. A discussion forum, where all views can be raised openly and without fear would also be a good idea, provided it is properly managed. The Head Coach should also clearly set out the aims and objectives of the team for the remainder of the season. If it is not to win the league championship, then what is the objective?

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Questions: • How else could potential conflict be reduced in the team? • What could happen outside the team that would result in an increase in conflict potential within the team?

♦

Learning Summary This section summarises the key points that have emerged from this module. They are presented in a similar order to that in which they appeared in the text.

The Project Manager • •

• •

•

• • •

•

•

•

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There is no one single model for a project manager. Different projects require different approaches. Project managers tend to operate across the usual vertical functional boundaries within organisations. Their projects tend to be of relatively short life span and the position of the project manager is always temporary. The temporary nature of a project, and the cross-functional nature of the project administration, tend to limit the project manager’s authority. The official authority of the project manager is often lower than the project requires. Frequently, there is a mismatch between the project manager’s level of responsibility and level of authority. The project manager needs to have a good range of managerial, professional and technical skills. These skills must be applied within the overall success and failure criteria for the project. These criteria usually revolve around time, cost, performance and safety limits. Project managers work across interfaces. Project managers have to be good at interface management. Project managers are usually either converted functional managers or, increasingly, specially trained professionals. The primary requirements for effective project management are planning, authorising, organising, controlling, directing, team building, leading, and the provision of life-cycle leadership. Project management involves numerous applications for the planning of a project. Technical planning is required for project planning and control (see Module 5), cost planning and control (see Module 6) and quality management (see Module 7). In addition, the project manager has a responsibility for planning individual and team authority and communication relationships. Project management is a special condition in terms of organisational authority. The project manager is in a unique position and the project manager has to operate within the constraints of the ‘project management chair’ (see section 2.2). Project managers and functional managers might have completely different views on how their organisation works and should be structured. Different approaches can be considered from viewpoints arising from empirical, behavioural, decision and systems theories. Edinburgh Business School

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•

•

•

•

•

Project managers must be able to control. This skill involves targeting, measuring, evaluating and correcting. Most forms of controlling used in project management are based on historical variance analysis and forecasting the future. Project managers have to be good at directing people. This function involves achieving organisational goals through the use of organisational and project resources. The function also involves directing other people in order to ensure that their actions are appropriate to achieving the overall aims and objectives of the organisation. Team building in a project management context is the process of taking a series of individuals from different functional specialisations and welding them together into a unified project team. The process involves establishing commitment, developing team spirit, obtaining necessary resources, establishing success and failure criteria, securing senior management support, developing good leadership and communications, and establishing reward and conflict controls. Project managers have to be good leaders. Leadership skill requirements vary from project to project. Classical leadership traits are decision-making ability, problem-solving ability, an ability to integrate new members, interpersonal skills, an ability to handle conflict, communication skills, interface management skills and factor balancing skills. Project management leadership is involved with the life cyle of the project. The leadership demands and style change through the course of the project life cycle. The general trend of leadership evolution from high task/low relationship to low task/low relationship is a characteristic of the development of any project team.

Project Team Processes •

•

•

• •

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Many projects teams operate as individual entities within functional departments. Larger ones operate across functional departments. Some operate externally. In most project-management applications, project teams are set up within existing functional organisational groups and therefore lie somewhere between the purely functional and purely project extremes. Although projects carried out in this environment may be strategically important to the organisation, they are highly unlikely to be the reason for its existence. The projects are likely to be developmental in nature and would tend to be projects to improve systems, procedures, methods or products and would tend to be internal projects for the benefit of the organisation’s effectiveness. Project teams tend to be unusual in that they are often highly multidisciplinary. The project manager assembles specialists from a number of different functional groups and then welds them into a project team. Project teams tend to exhibit pronounced sentience, interdependence and differentiation. The project team is subject to individual and group behavioural variations. Individuals behave and function differently when they are on their own Edinburgh Business School

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•

than when they are acting as part of a team. The strongest factors in determining a multidisciplinary group’s performance are heterogeneity and cohesion.

Project Team Staffing Profile and Operation •

• • •

•

•

Most frequently, the project manager recruits people from different functional teams within the organisation (see Module 4). The project manager does this by assembling some kind of estimated schedule of resources required and then seeks senior management approval to implement it. Simultaneously, the project manager has to negotiate with the various functional managers in order to secure the people desired for the team. The team requires a balance of technical and management skills, with the appropriate blend of individual specialisations. The project team is the group of people contributing to meet the objectives of the project. Some team members – for example, specialists whose expertise is only required for a particular activity – will have very small parts to play in the project and probably will not see that they are a part of the close body of people who have more active and longer-lasting roles. The senior manager on the project team acts like a managing director, financial director and operations director of the business that is the project. Although knowledge of the technology underpinning the project is vital in performing each of these roles, the primary function in each position is a project management one. The project management team members should cover the main areas of the project in terms of skills and expertise, or at the very least should recognise and explicitly state any gaps or weaknesses. This identified shortfall will draw special attention to that area and is important because any aspect of the project without a competent project management team member supervising and supporting it is in danger of running out of control without the fact being recognised.

Project Team Evolution •

• •

All projects have a life cycle, including a definite start and completion point. The life cycle represents the phases of development and evolution through which the project passes. There are four generally recognised stages of group development. These are summarised by Tuckman as forming, storming, norming and performing. ‘Groupthink’ is one possible stage of project team evolution. It occurs as a result of the normal performing process. Groupthink tends to occur in highly cohesive and motivated groups and can lead to undesirable behaviours that can compromise the project’s chances of success on occasions.

Project Team Motivation •

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Project managers are responsible for developing high motivation levels within their teams. There are a wide range of models and theories that can be used to guide them in this process. Edinburgh Business School

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•

•

•

•

•

McGregor’s ‘Theory X and Theory Y’ model offers one approach to motivation theory. Theory X states that operatives are basically lazy and unmotivated, disliking work and avoiding it if at all possible. Theory Y states that operatives are willing to work and complete the job without close supervision; they want to do well at their jobs, they find work stimulating and satisfying, and they want to improve themselves and generate greater self-respect. Problems occur when one manager regards a member of staff as a Theory X employee and another manager regards the same person as a Theory Y employee. Maslow’s ‘hierarchy of needs’ is an alternative viewpoint. This theory suggests there are different levels of need depending on the relative position of the individual within the needs hierarchy. The different levels of needs are termed and physiology, safety, belongingness, esteem and self-actualisation. Equity theory is another approach to motivation theory. It is based on the perceptions of individuals in relation to what they do and how they are rewarded versus how other employees or groups are treated. Any perception of unfair personal reward generates a feeling of inequity. Expectancy theory is another approach, based on the idea that motivation is related to personal goals and objectives. Expectancy theory allows project managers to motivate project team members, even where there is no immediate or direct financial incentive from the project itself. Individual employees can be motivated provided that the successful completion of the project can in some way be linked to achieving the personal goals of the individual.

Project Team Communications •

•

• •

•

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Successful projects are often characterised by good communication and highquality information sharing and exchange. Good communication implies a system for effectively integrating the efforts of project participants. Inadequate project communications can be a significant factor in project failure. Problems often stem from poor-quality information, inaccuracies, out-of-date information, or from information that is ineffectively collected or distributed. There are four principal categories of communications: formal, informal, internal and external. Formal lines of communication are set up with the purpose of ensuring that project stakeholders get whatever information they need, delivered in a suitable format, when and where they need it, and that there is a means of providing a reciprocal service by delivering accurate and timely information into the system as required. Informal communications systems are much less easy to manage and control. They are nevertheless essential to the project team from a social and integrative perspective. The informal communication system in most projects and organisations tends to revolve around the ‘grapevine’ and whilst it is largely impossible to control the grapevine, it is possible to influence it. Edinburgh Business School

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•

•

Good internal communications rely on team members’ willingness to openly communicate and disseminate information, particularly that relating to problem areas and issues. Good external communication requires absolute control over the dissemination of information.

Project Team Stress •

• •

Stress is more than just an unpleasant aspect of a demanding work environment. Stress leads to real losses in productivity and efficiency. Employees who are subject to high levels of stress take more time off work and are less efficient than employees who are subjected to tolerable levels of stress. Project team stress can originate from numerous sources. The three main sources are personal stress, work stress and environmental stress. Personal stress originates from within the project team member concerned. Work stresses originate from the work environment. Environmental stresses originate from outside both the individual and the workplace.

Conflict Identification and Resolution •

•

• • •

The greater the heterogeneity or multidisciplinary nature of the team, the greater the potential for project team conflict. This tendency is almost certainly because the greater the range of backgrounds and opinions, the greater the probability of differences of opinion arising. The lower the project manager’s degree of power and authority within the functional organisation, the greater the degree of potential for project team conflict. The lower the degree of specified and quantifiable objectives, the greater the degree of potential project team conflict. The lower the level of individual communication and accountability within the project team, the higher the degree of potential project team conflict. Conflict tends to be at its greatest during the highly active phases of a project and is lower at both the start and the end. Other than this, it is difficult to generalise on the nature of conflict within the project environment.

Review Questions True/False Questions The Project Manager 2.1 Operational islands are caused by power and functional boundary divisions. T or F? 2.2 Operational islands tend to lead to organisational inefficiency. T or F?

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2.3 An internal project-management organisational structure represents a compromise between purely functional and purely matrix organisational structures. T or F? 2.4 In an internal project-management system, the project manager has authority equal to the functional manager. T or F? 2.5 In an internal project management system, the project manager has equal authority to the project sponsor. T or F? 2.6 A project sponsor is necessary in order to ensure that the organisational power of the functional manager is maintained. T or F? 2.7 Project teams are temporary compared with functional teams. T or F? 2.8 All project managers are former functional managers. T or F? 2.9 Team building is the single most important skill requirement for a good project manager. T or F?

Project Team Processes 2.10 Most internal project teams operate within existing functional boundaries. T or F? 2.11 Larger project teams operate across existing functional boundaries. T or F? 2.12 Project objectives rarely relate to overall organisational objectives. T or F? 2.13 Project teams are generally multidisciplinary. T or F? 2.14 Multidisciplinary teams are more efficient than single-discipline teams. T or F? 2.15 In terms of multidisciplinary team performance, cohesion is more important than the degree of heterogeneity. T or F? 2.16 In terms of multidisciplinary teams, the higher the degree of heterogeneity, the greater the efficiency of the team. T or F?

Project Team Staffing Profile and Operation 2.17 In most cases when project managers are staffing internal project management teams, the project managers are able to pick and choose between functional staff in order to assemble the strongest possible project team. T or F? 2.18 Time spent working on the project always detracts from functional performance. T or F? 2.19 Time spent working on the function always detracts from project performance. T or F?

Project Team Evolution 2.20 All project teams evolve through life-cycle phases. T or F?

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2.21 Project manager leadership skills and requirements vary according to the project team life-cycle phase. T or F? 2.22 The more multidisciplinary the team, the faster the evolution of the team life-cycle. T or F? 2.23 Groupthink is inevitable. All project teams will reach a groupthink stage eventually. T or F?

Project Team Motivation 2.24 Theory X and Theory Y relate to mechanistic/authoritarian and organic/democratic theories of organisation, respectively. T or F? 2.25 Maslow’s hierarchy starts with basic physiological needs and progresses to more complex psychological needs. T or F? 2.26 In Maslow’s hierarchy, food is more important than shelter. T or F? 2.27 Equity theory is based on an individual’s perceptions of their contribution or value to the organisation in relation to their cost to the company, relative to the same equation for other people. T or F? 2.28 Expectancy theory is based on an individual’s expectations of possible future advancement in relation to contributions made now. T or F?

Project Team Communications 2.29 Effective communication is essential to project team operation. T or F? 2.30 Communication can be formal or informal. T or F? 2.31 Formal communication is more important than informal communication. T or F?

Project Team Stress 2.32 Project team member stress has a direct impact on efficiency. T or F? 2.33 Stress originating from the workplace is always the largest single stress contributor to an individual. T or F?

Conflict Identification and Resolution 2.34 The more multidisciplinary the project team, the greater the potential for conflict development. T or F? 2.35 Conflict is always bad and should always be discouraged. T or F? 2.36 In general terms, the greater the project manager’s perceived power the greater the potential for conflict development within the project team. T or F? 2.37 There is a direct relationship between project team communication and the potential for conflict development. T or F?

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Multiple Choice Questions The Project Manager 2.38 In terms of overall organisational authority structures, what does the authority of the project manager in relation to the functional managers tend to be? A

Greater.

B

Equal.

C

Same.

D

Variable.

2.39 In terms of an organisation’s objectives, what do project objectives tend to be? A

Central.

B

Supplementary.

C

Complementary.

D

Irrelevant.

2.40 In terms of overall organisational life span, what does a project life span tend to be? A

Longer.

B

Comparable.

C

Shorter.

D

Intermediate and variable.

2.41 Which of the following is correct? Project managers operate within what is sometimes referred to as the ‘project management chair’. This implies communication and control involving A

one level.

B

two levels.

C

three levels.

D

four levels.

2.42 Which of the following is correct? Most retrospective monitoring and control in project management is based on A

variance analysis.

B

cost–benefit analysis.

C

performance analysis.

D

earned-value analysis.

Project Team Processes 2.43 Organisations can be set up and operated in different ways. What would a pure functional organisation be typical of?

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A

A football team.

B

A research division.

C

A university faculty.

D

A government department.

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2.44 What would a pure project organisation be typical of? A

A football team.

B

A research division.

C

A university faculty.

D

A government department.

2.45 A matrix or internal (non-executive) project management structure represents a combination of functional and project philosophies. Which of the following example is correct? A

A football team.

B

A research division.

C

A university faculty.

D

A government department.

2.46 What do project teams within internal (non-executive) project management systems tend to be? A

Unidisciplinary.

B

Bidisciplinary.

C

Multidisciplinary.

D

Other.

2.47 Which of the following is correct? Sentience is the tendency for project team members to A

associate with each other.

B

be bidisciplinary.

C

be multidisciplinary.

D

associate with members with a similar background.

2.48 Which of the following is correct? Differentiation is the tendency for project teams to A

integrate.

B

fragment.

C

unify.

D

evolve.

2.49 Which of the following is correct? Interdependency is the tendency for multidisciplinary project teams to develop

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A

dependencies between people.

B

dependencies between sections.

C

dependencies between objectives.

D

dependencies between sub-teams.

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Project Team Staffing Profile and Operation 2.50 Which of the following is correct? In internal (non-executive) project management scenarios, project team members are generally recruited from A functional teams. B other project teams. C outside the organisation. D Other. 2.51 The project team should contain a balance of a number of different types of skills. What should they comprise? A Technical skills. B Management skills. C Other skills. D Technical, management and other skills.

Project Team Evolution 2.52 Project teams evolve through established evolutionary phases. What is the chronological sequence? A Forming, storming, norming and performing. B Storming, forming, norming and performing. C Norming, performing, forming and storming. D Performing, storming, norming and forming.

Project Team Motivation 2.53 Which of the following is correct? McGregor’s Theory X and Theory Y are based on perceived individual characteristics of A communication. B interaction. C motivation. D stress. 2.54 Which of the following is correct? Equity theory is based on individuals’ perceptions of their contribution to an organisation in relation to their cost relative to A organisational objectives. B project team objectives. C other project team members. D other. 2.55 Which of the following is correct? Expectancy theory is based on an individual’s perceptions of what he or she can obtain from the organisation in the longer term in return for A current actions. B past actions. C future actions. D Other.

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Project Team Communications 2.56 Which of the following is correct? Project teams tend to be characterised by A

internal communications.

B

external communications.

C

formal communications.

D

informal communications.

E

All of the above.

F

Some of the above.

G

None of the above.

Project Team Stress 2.57 Which is correct? All project team members are subject to stress. The stress that is experienced by any individual project team member is a function of A

individual stress.

B

external stress.

C

work stress.

D

All of the above.

E

Some of the above.

F

None of the above.

Conflict Identification and Resolution 2.58 Which of the following is correct? Conflict within project teams relates to a number of different areas. Generally, the greater the heterogeneity of the project team A

the greater the potential for conflict.

B

the lesser the potential for conflict.

C

the potential for conflict remains unchanged.

D

None of the above.

2.59 Which of the following is correct? Generally, the greater the degree of authority of the project manager within the organisation

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A

the greater the potential for conflict.

B

the smaller potential for conflict.

C

the potential for conflict remains unchanged.

D

None of the above.

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Mini-Case Study Background John is a senior employee of a large UK company food and drinks retailer ABC PLC. The company is well-established and has a history of making successful mergers and acquisitions in support of its strategic growth objectives. ABC already owns a number of different food and drinks manufacturers and retailers and controls a number of well-known UK brands. ABC is now considering the acquisition of DEF Ltd. DEF is a well-known high street frozen food retailer. DEF has outlets in most major towns and cities around the UK. The acquisition is likely to be friendly in that the board of ABC have made a generous offer to the board of DEF, and this offer has been accepted in principle by the board and recommended for acceptance to the shareholders. The shareholders themselves are expected to agree the sale at an extraordinary general meeting due to take place within the next month. John has been approached by a senior manager and has been asked to act as project manager for the proposed acquisition. John is currently a functional manager with specific responsibility for a group of manufacturing processes. The board of ABC considered awarding the acquisition project management function to external consultants as they had done with previous acquisitions. In this case a decision was made to use in-house expertise in order to reduce the overall cost of the merger. John has been given two weeks to develop a project team which will accept responsibility for all aspects of the planning and implementation of the acquisition. Some human aspect problems are expected in this case because company ABC has a different organisational culture from company DEF. Company ABC has a ‘laid-back’ culture with informal authority links and a fairly loose power structure, while company DEF has a much more formal approach largely as a result of historical developments. John will therefore have to be careful to allow for the different cultures of the two organisations when trying to achieve the acquisition project objectives. The structure of the project team will be very important as it will have to be able to handle a complex range of motivation and commitment issues. Questions: 1 Discuss a possible arrangement for the project team. 2 Consider any other teams that are likely to be involved. 3 Discuss the likely human based problems that may arise and consider possible counter measures.

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Module 3

Project Risk Management Contents 3.1

Introduction

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3.2 3.2.1 3.2.2 3.2.3

Background to Risk Introduction The Concept of Risk The Human Cognitive Process

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3.3 3.3.1 3.3.2 3.3.3

Risk Handling Introduction Risk Assessment and Control Project and Strategic Risk

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3.4 3.4.1 3.4.2 3.4.3 3.4.4

Types of Risk Generic Risk Headings Market Risk and Static Risk External Risk and Internal Risk Predictable and Unpredictable Risks

3/19 3/19 3/20 3/22 3/25

3.5 3.5.1 3.5.2 3.5.3 3.5.4

Risk Conditions and Decision making Conditions of Certainty Decision Making under Conditions of Risk Decision making under Conditions of Uncertainty The Need for a Risk Management Strategy

3/25 3/27 3/28 3/28 3/33

3.6 3.6.1 3.6.2 3.6.3 3.6.4 3.6.5 3.6.6 3.6.7

The Concept of Risk Management Introduction Risk Identification Risk Classification Risk Analysis Risk Attitude Risk Response Risk Control, Policy and Reporting

3/33 3/33 3/34 3/38 3/40 3/46 3/48 3/53

3.7 3.7.1 3.7.2 3.7.3 3.7.4 3.7.5 3.7.6 3.7.7

Risk, Contracts and Procurement Introduction Basic Contract Theory Procurement Characteristics of Contracts Transfer of Risk in Contracts Variation Orders and Change Notices Claims Risk

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Learning Summary

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3.1

Review Questions

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Mini-Case Study

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Introduction This module introduces the concept of project risk management. A good project manager also has to be an effective risk manager. All projects are subject to risk of one kind or another, and the project manager has to be able to manage this risk through the life cycle of the project. In order to do this, the project manager has to be able to look at the project and its environment, and identify the risks that are present. The project manager also has to be able to transfer or reduce unacceptable risks and then set up monitoring and control systems so that the residual risk can be managed effectively. Risk is an inherent factor of virtually every human endeavour. Human beings naturally consider risk and reward as part of the decision-making process. The consideration is not always formalised and may occur at a subconscious level. If a gambler is placing a bet on a horse, he or she might consider a whole range of variables that relate to the possible outcome of the race. These outcomes might include the fitness of the horse, the competition, the racetrack conditions, and so on. Another gambler, who is playing poker, might have no idea of what the competition has to offer and uses a more intuitive, less structured and formalised approach to assessing the potential risks and rewards of folding or playing. Between these two extremes, the human reasoning and evaluation of any particular event is based on decision making within the limits of what are acceptable and non-acceptable outcomes. The gambler does not like to lose, but there is a difference between losing what he or she can afford and losing what he or she cannot afford. Risk analysis can therefore be considered as a basic function of the human cognitive process. People evaluate potential risks and rewards when deciding on whether or not to do something. The human mind considers a risk as a form of model in which possible events and outcomes are considered in terms of possible actions. The possible gains are then balanced against the possible losses, and a subjective (or objective) decision is made. The same consideration applies to project management. Projects tend to be complex and one-off. They may operate within an environment that is characterised by uncertainty. The project manager has to make decisions under conditions where risk is an everyday factor. A project manager is therefore an inherent risk taker. The ability to be able to identify and control risk is a primary project-management function. The project manager has to be able to evaluate fully all the relevant risk information in order to make an informed decision that gives the best balance of potential favourable outcome against potential negative outcome. This module considers the origin of risk and briefly considers how the human thought process addresses risk. It goes on to look at decision-making under conditions of certainty, risk and uncertainty. The module then explores the basic

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components of a generic management system and considers the association between risk and contracts.

Learning Objectives By the time you have finished this module, you should understand: • • • • • •

3.2 3.2.1

what risk is and why it is important; the difference between certainty, risk and uncertainty; how decisions can be made under each condition; the concept of risk management; the basic components of a risk management system; the basics of contract theory and how contracts are used to transfer risk.

Background to Risk Introduction This section introduces the concept of risk and relates risk to decision making. It then goes on to consider the basic conditions under which decisions can be made and links these to the human cognitive process. A basic knowledge of the latter is necessary as this is fundamental in the ways that risks are considered in decision making.

3.2.2

The Concept of Risk Risk is all around us; it plays a part in virtually everything that we do. It can be very difficult to predict and assess risky outcomes accurately. ‘Risk’ as a word originates from the French word Risqu´e, meaning ‘daring’. The English word risk is actually of fairly recent origin. It only entered the language around 1600, though, people before that were of course just as familiar with the concept of risk as is the modern reader. The English word ‘risk’ first appeared in contracts and insurance assessments around 1750. Risk management as a discipline really evolved with the design and development of the first commercial nuclear reactors for electricity generation in the USA and UK in the 1950s. The designers of these installations realised that the energy source was inherently dangerous; the consequences of any kind of major failure could clearly be catastrophic. They realised that the design of the systems and containment used for the reactor and all associated areas had to be carefully considered and analysed from the point of view of what could go wrong. They also quickly realised that it was no good looking at single events. Things could go wrong in different combinations, and the worst-case scenario would be where everything goes wrong at the same time. It is generally not feasible to design everything for the worst-case scenario, but in the case of nuclear power, where the results of a single or multiple systems failure could be catastrophic, it is often prudent to do so.

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The Chernobyl nuclear reactor explosion in the Soviet Union in 1986 was one example of a situation where the designers did not allow for the worst-case scenario. Chernobyl No. 2 was designed without a containment vessel. If the reactor blew, it blew straight into the reactor house. The reactor house contained other reactors and also the reactor control-room areas. The safety systems could be overridden and the cooling systems could be manually closed off. These considerations clearly constituted a series of individual risks and an overall collective risk. The end result was the worst nuclear accident in history. The legacy and full long-term effects are difficult to evaluate in detail but are still being felt today. Risk can be considered from many perspectives and we are all familiar with risk in our everyday lives. Obvious activities that carry significant risks are: • • • • • •

driving an automobile; rock climbing; gambling; speculative investments; entering a relationship; getting married.

Risk in our context is a measure of the probability and consequence of not achieving a specific project goal. It therefore depends on both the likelihood (probability) of an event occurring and on the consequences (impact) if that event should it occur. Risk is therefore a function of the event, the probability of it occurring and the effect if it occurs. This relationship is sometimes known as the first level equation for risk and can be expressed as Risk = f (event, uncertainty, consequences)

Two different events might therefore carry the same risk. For example, a radiation leak in a reactor resulting from a mechanical failure might be of very low probability, but the consequences could be very great if it were to occur. The chances are that the designers of the nuclear plant will be prepared to spend a great deal of time and money building in systems to control any such leak, even thought it is extremely unlikely that it will ever happen. Conversely, human error might have a lower impact, but may be much more likely to occur. Again, the plant managers would probably be happy to spend a large amount of time and money training people, even if the consequences of errors are relatively minor. Both failures could have the same level of risk to the operation of the plant, but entirely different individual probabilities of occurrence and effects. The first level equation for risk relates the probability of an event occurring and the consequences of that event occurring. However, there could be some considerations where it is virtually impossible to identify a probability of an event occurring. For example, a combat helicopter designer has to consider how much armour and duplicate systems to put on the helicopter. This really depends on how seriously the helicopter is likely to be damaged from a range of different weapons that might be used against it. This is almost impossible to say because it depends on so many variables. The designer can, however, 3/4

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look at the various ‘hits’ that could occur and then make an assessment of what safeguard would be necessary in order to make the impact of the various hits acceptable. It is therefore sometimes prudent to consider risk in terms of the second level equation for risk: Risk = f (event, hazard, safeguard)

In this consideration, something – or the lack of something – causes a risky situation. The source of danger is a hazard and the mitigation or defence against the hazard is a safeguard. The risk of the helicopter being shot down is therefore a function of the hazard (loss of hydraulic power) and the safeguard (armour or duplicate hydraulic systems). Both level equations are equally useful determinants of risk. In both equations, the likelihood of the event occurring is important. Events can occur under a number of different types of environment, which will be discussed more fully in section 3.5. Risk separates the men from the boys and the women from the girls, so to speak. Risk acts like a barrier to the development of effective strategy. Risks are evaluated in some way, and if the risk is perceived as being greater than some minimum threshold level, the organisation shies away from encountering it; proceeding is too risky. However, effective risk management allows the risk to be controlled to such an extent that there is no longer any need to shy away from it, so that the risky application is able to be pursued ahead of the competition. One example could be the development of decommissioning and dismantling techniques for obsolete nuclear submarines. There are around two hundred obsolete nuclear-powered military submarines in the world; nobody has yet effectively dismantled one. The first organisation to do so could potentially make a fortune in future decommissioning and dismantling fees. The very difficulty and complexity of the work means that fewer rivals will bid for the work, increasing the odds of success for a determined bidder. The impact of a risk and the probability of it occurring can be considered in terms of the exposure of the organisation and the organisation’s sensitivity to a particular risk profile. Exposure is a measure of the vulnerability of parts of the organisation to risk impacts. Exposure arises when any asset or other source of value for the organisation is affected by changes in key underlying variables resulting from the occurrence of a risk event. An organisation is exposed to risk when a realised change in a variable within a given time scale will result in a change in one or more of its key performance indicators. The greater the potential change in performance (positive or negative), the greater the exposure. Exposure is therefore a measure of the vulnerability of an organisation to stated risks. An organisation’s sensitivity to risk is a function of three elements. These are the significance (or severity) of the enterprise’s exposures to the realisation of different events (that is, sensitivity to such items as changes in competition, weather conditions, etc), the likelihood of the different events occurring, and the firm’s ability to manage the implications of those different possible events should they occur. Sensitivity is therefore a measure of likelihood and impact, modified to some extent by the ability of the organisation to manage these variables. Project Management

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Risk management is not only about competitor advantage in terms of approaching ventures that contain high risk levels. The organisation that is able to develop an effective risk-management programme, within the limits of its own sensitivity and degree of exposure, is the one that can take good commercial decisions. Having mastered the risks that put the others off, the successful risk-management organisation is in a much better position to take advantage of risky ventures in the marketplace. Effective risk exploitation (ERE) allows organisations to make use of assets and factors that are not usually measured on profit and loss accounts and balance sheets to create wealth. This includes such considerations as the supply chain, intellectual property rights, and knowledge-equivalent capital. It is possible to say that risk is the distribution of possible outcomes in a firm’s performance over a given time horizon that are due to changes in key underlying variables. The greater the dispersion of probable outcomes, the higher the firm’s level of exposure to uncertain returns. In other words, the greater the range of possible outcomes from a particular decision, the greater the risk that is associated with that decision. These uncertain returns can have either positive or negative values. Thus both positive and negative changes in key variables must be viewed as sources of risk. The use of risks to create value is changing. The profile of risk management and the risks defined by organisations in decision making are also changing. As more risks come within the decision-making boundaries of an organisation, the risk management system becomes more sophisticated and refined. As a result, the risk profile faced by a given organisation is becoming increasingly daunting and complex. Outsourcing and risk transfer has limited this to some extent, but the complexity of the risk environment is undeniably far greater than it was in the early 1990s. In addition, the risks themselves are changing, and at an ever increasing speed. So risk is inevitable and can be good. There is therefore a need for some effective way of managing this risk to make sure that is effectively addressed and used. It is always unclear what will happen in the future; and opportunities and threats can be forecast with different degrees of accuracy. However, in general terms, the decision maker acting under conditions of risk would be most concerned with the following questions: • • • • • • • • • • 3/6

What can go wrong with the project? What possible outcomes do we face as a result of these risks? Where do these risks and consequent outcomes originate? Do we have any control over these risks and if so are we using it? Are the risks and consequent outcomes related to any extent? What is the degree of exposure of the organisation to these risks? How sensitive is the organisation to each degree of exposure? Do these risks affect the achievement of the overall strategic objectives of the organisation? What response options do we have? What contingencies or emergency responses are in place? Edinburgh Business School

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• • • •

Can we match the worse case scenario? If not which scenario reaches the limit of our response abilities? What is the potential reward associated with each risk? Are we prepared to accept a risk and corresponding outcome that is beyond our limits to absorb?

In addressing these questions it is advisable to consider a number of facts about risks in general. •

•

•

•

•

•

•

•

•

•

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The world is uncertain. Somebody once said that there are few things that are certain in life apart from taxation and death. All aspects of life and enterprise are subject to risk. In some cases risk cannot be eliminated. However, provided they are properly identified and assessed, and that some form of monitoring and control system can be put in place there is the possibility of effectively managing them. Risk is a function of opportunity. Companies are faced with new opportunities all the time, but in most cases these opportunities come with an element of risk. Some opportunities carry more risks than others. The potentially most profitable opportunities usually carry higher levels of risk. To take advantage of these opportunities it is necessary to accept the high degree of risk that accompanies them. Risk is also an ally. Risk can intimidate the competition. The company that is prepared to accept the highest level of risk may also be the one that has the opportunity to gain the greatest rewards. Risk management provides a range of analytical tools that allow opportunity and associated risk to be analysed so that an informed decision on which route to take can be made. Risk management operates at all levels. Strategic planners consider strategic risk while operational managers consider operational risk. There is also a requirement to consider unforeseeable or catastrophic risk at all levels. Companies have to take risks. There is no way around it. Market places are constantly changing and companies have to evolve in order to take advantage of the resulting opportunities or overcome the threats. In doing so, they expose themselves to risk. Companies operate within a ‘risk universe’ and risks affect the organisation at all levels. Single risks should not be considered in isolation as there are intrinsic links between the various risk levels. Operational risk impacts directly on strategic risk. Risk control and management is only possible up to a point. The risk universe contains risks that are foreseeable, partially foreseeable and wholly unforeseeable. The risk management system should consider the capacity of the company to absorb the different types of risk. No risk management system is infallible. There will always be some external risks that are outside the scope of even the most detailed risk analysis. An extreme example would be an unidentified asteroid hitting the Earth in two years time and rendering all human risk management systems irrelevant. Edinburgh Business School

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Risk is therefore both a good thing and a bad thing. It is the driving force behind innovation and enterprise, but it is also a threat if not properly evaluated and managed. It is particularly significant in a project context where the work is typically complex, subject to change, and does not form part of a repetitive cycle. A project manager has to be a good risk manager. 3.2.3

3.2.3.1

The Human Cognitive Process Pattern Recognition and Attention Decision making and risk are elements of the human cognitive process. People make decisions in relation to perceived rewards and risk. The decision-making process is largely dependent upon perceived rewards and risks. Perception of risk varies from person to person and in relation to the potential effects of the risk event. Most aspects of the human cognitive process make a subjective evaluation of risk. In humans, this ability has evolved strongly as it has been a very effective aid to survival. Efficient subjective risk assessment has evolved as a powerful positive ability. In assessing risk in decision-making, the human cognitive process involves a number of distinct processes. The first process is pattern recognition. This process is where the brain takes incoming information and stores it temporarily at a superficial level. It then compares that information to previously stored information in order to make an assessment of what the new information represents. When a human brain is presented with a stimulus, a certain amount of information enters the brain. This information could be visual, aural or other. The brain recognises whether or not it is seeing a table because it has seen tables before. It does not need to see every joint and screw. The fact that it sees a flat surface with four legs is enough to convince it that it is seeing a table. As pattern recognition occurs, a second process is taking place. This is called attention. The attention process acts as a kind of filter. It takes the information that is incoming and filters out any unnecessary information so that only that information relevant to the decision is considered. In deciding whether or not to risk standing on the table, the attention process will ignore the colour of the table, but it will consider the size of the table top and the thickness of the legs, together with all other characteristics upon which a subjective appraisal and decision can be made, and which relate directly to strength or bearing capacity. The next process relates to memory. Short-term memory stores the basic pattern recognition information. Once interpreted and after subjective assessment through attention, any relevant information is then stored in the brain’s longterm memory. Some information becomes permanently fixed in the long-term memory. This information will be used again when the brain is faced with the decision of whether or not to stand on a table.

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3.2.3.2

Bounded Rationality The approach to information processing is known as bounded rationality. It is based on the philosophy that a being will generally opt for rational behaviour within constraints. Most cognitive processes will be based on reasoning, and therefore logical and rational outcomes, based on pattern recognition and learning, will be naturally preferred to illogical and irrational ones. In addition, all decision making and risk consideration will be evaluated within some kind of parameters or constraints. There will be limits or degrees of freedom that are open to the decision maker. In addition, the decision-maker does not know what the precise outcomes from a decision will be. It might be generally all right to stand on a certain type of table, but 5 per cent might be defective and it will not be all right to stand on those tables, even through they look like all the others. In other words, the decision maker has limited knowledge of the prospective outcomes from the decisions, and this knowledge is fuzzy (non-specific). The decision maker within bounded rationality therefore looks at all the possible actions and all the possible outcomes and separates outcomes into acceptable and unacceptable outcomes. The decision maker than rejects any action that leads to unacceptable outcomes and considers those options that lead to acceptable outcomes. Acceptable outcomes can be considered as goals of the decision maker. The relationship between possible actions and acceptable outcomes then determines what action to take. In addition, possible actions are subject to the constraints of acceptable outcomes, and satisfactory outcomes are not necessarily optimal outcomes – they are merely acceptable outcomes within the bounded rationality of the process. Decisions can then be made based on past experience and current information. The decision-making process itself may be programmed, if it is highly structured, based on considerable past experience, and is replicable. It may be non-programmed if it is flexible, reactive and based on limited pattern recognition from past events.

3.2.3.3

Risk Forecasting and Prediction Momentum Bounded rationality therefore uses knowledge of past events to assess a current risk in making a decision. This assumes that acceptable outcomes from the past will continue to be acceptable outcomes during the current evaluation process. This is the concept of risk forecasting. In relation to risk forecasting, we can generally say that it is: • • • • •

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based on experience. Experience gained in the past is used to analyse and forecast what might happen in the future. as much subjective as objective based. possible to subject it to complex modelling as in chaos theory, although it is not restricted to complex mathematical modelling. an area that is perhaps best evaluated using a combination of modelling and subjective approaches. based on using data from past experience in order to allow extrapolation as a basis for predicting future trends. Edinburgh Business School

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In other words, what happened in the past and is happening in the present will continue in the future unless something happens to change it – known as prediction momentum. This is analogous to Newton’s second law of motion, which states that any body will continue in its present state unless some other force acts upon it. A runaway train coming down a hill onto a stretch of level track will eventually stop because of the friction acting on the wheels and bearings, together with any wind and air resistance. However, if there is no friction from tracks or air, it will roll along indefinitely with constant momentum. In developing a forecast, a decision maker uses a two-stage process. The decision maker infers what the future is like before the proposed action, and also infers what the future will be like after the proposed action. This is of course not an exact science. The future is uncertain, and the decision maker may make wrong assumptions and inferences. In addition, even in the most careful predictions, some unexpected mutation may affect the predictions. Various forecasting techniques can be used and each has strengths and weaknesses. Some important considerations are given below in relation to forecasting.

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•

Accurate data. Any forecasting technique is only as accurate as the data used in developing and operating it. Most organisations store formal records and most individuals retain relatively accurate records and memories of their own experiences. The more accurate the data, the more accurate the prediction.

•

Time limits. Generally, the accuracy of any prediction model is a function of the time scale that is required. The longer the time scale, the more difficult it is to make accurate predictions. More and more variables and mutations come in to the equation as time continues.

•

Cost. Detailed and complex forecasting is a labour-intensive endeavour. It can be very expensive to provide all the resources that are required. If fewer resources are provided, the overall accuracy of the prediction could be reduced.

•

Vision. Intuition and bias are powerful influences on any forecasting application. It can be very difficult to erase them from the equation completely. Vision is an important attribute. It is important that the project manager attempts to predict the future and identify possible events that are outside his or her experience. This is a particularly difficult area. The terrorist attacks on New York on 11 September 2001 were totally unforeseeable. They were not based on any reasonably connected chain of events. The New York Harbour Authority (owners of the World Trade Centre twin towers) only insured one tower as the likelihood of both towers being destroyed at the same time was considered too insignificant for consideration. In the event both towers were destroyed on the same tragic day and the New York Harbour Authority were faced with a massive loss. Edinburgh Business School

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3.2.3.4

Intuition and Bias Intuition and bias are major determinants in how successful forecasting models are in both application and outcome. In most real applications, the decision maker looks at a prediction model and then makes a decision based on his or her intuitive reasoning. An airline pilot has a lot of instruments to help him or her land the plane successfully, but the intuition and training of the pilot are necessary when the actual landing is in process, especially if something goes slightly wrong or if last-minute corrections are needed. Intuition is a combination of experience and extrapolations forward. It is an example of pooled interdependency within the cognitive process. By using experience, the decision maker can look at all the data and information that have been stored in his or her long-term memory, and also at the pattern recognition information that is arriving in relation to the current situation. He or she can then combine the two and project the situation forward to decide on the best course of action. The extrapolation from known to unknown often includes large areas where definite information is lacking. It is an example of reasoning where the move forward equates to more than the sum of all the individual components that made it possible. Intuition can be both individual and organisational. Companies store and use collective experience in much the same way as individuals. Bias is the tendency for a person or group to misinterpret data or observations because of their own perceptions or outcome preferences. A marketing team may truly believe that their company’s product is better than it actually is because they have been committed to selling it for a long period of time. Fans at sporting events may wrongly believe that their team is better than the opposition because their senses of loyalty, association and desire to see the team win cloud their better judgement.

3.3 3.3.1

Risk Handling Introduction So risk is all around us and it is essential for the propagation of enterprise and innovation. There will always be an element of risk in any enterprise, and this characteristic is not going to go away. The key factor is to manage risk. This is done by deciding what level of risk is acceptable and what level is not acceptable. Risk that is not acceptable is transferred or reduced in some way. Once the residual risk is at an acceptable level, it is managed so as to ensure that it does not affect the performance of the project and/or of the organisation as a whole. This section considers some basic approaches to handling risk.

3.3.2

Risk Assessment and Control Risk analysis is discussed in more detail in section 3.6.4. This section introduces the idea and establishes the basic links between risk assessment and risk control.

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There are different types of risk. Risks also have different characteristics. People often assess these characteristics as part of the risk analysis process. While this assessment is often subjective, it can involve highly complex objective analysis. Total elimination of risk is rarely achieved and is often impossible. Therefore, the assessment process acts as a means of evaluating the risk that remains so that some kind of monitoring and control system can be set up. This concept forms the basic elements of a risk management system. Risk management is a strategic approach. Risk assessment and control have to form a part of a long-term operational process. Risks have to be calculated and analysed in advance and then monitored against performance to identify where risks are changing and how effectively they are being managed. There is a tactical element involved as well, since responses may depend on the specific nature of the occurrence. However, it is important to realise that a risk management strategy should be developed in detail for a project before the project actually starts, the strategy being implemented as early as possible in the life cycle of the project. Risk assessment is part of the collective risk analysis process. Risk analysis involves the determination of the probability of individual risky events occurring, and also of establishing some measure of the potential consequences of each event occurring, together with some kind of monitoring and control system to assist with the management process. Risk handling is the process of dealing with risks. It is not sufficient to identify and analyse the risks; the risks have to be handled in some way in order to reduce the likelihood of individual events occurring. Risk feedback is an essential section in the process. Feedback is the process where the results of occurred risks are analysed and any results and items for use in future strategies are fed back into the system. Risk analysis, handling and feedback are often referred to collectively as risk control. Even though, as stated above, risk assessment can be viewed as part of the risk analysis element (itself part of risk control), many authors subdivide risk management into two parts along those links. Accordingly, the remainder of this section will consider risk management as a two-stage process comprising risk assessment and risk control. Although risk assessment can be carried out at any time before or during a project, the sooner it is done the lower the overall level of uncertainty surrounding the project. Risk assessment must precede risk control in order for the control phase to be effective. There is a common tendency to believe that the production of a full and detailed risk assessment is sufficient. Project managers often spend a great deal of time and effort on the risk assessment element of risk management and completely ignore risk control. Figure 3.1 shows the basic structure and components of a project’s proper risk-management programme. As shown in Figure 3.1, the two principal activities of project risk management are the assessment and the control of risk. Within each of these categories there are four elements.

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Project risk management

Project risk assessment

Figure 3.1

3.3.2.1

Project risk control

Identify risk

Measure and control risk

Analyse risk

Respond to risk

Classify risk

Mitigate residual risk

Prioritise risk

Establish contingencies

Effective risk management

Elements of Risk Assessment Risk assessment is about identifying and assessing all potential risk areas within the project. It is probably the most difficult phase of the project risk-management process. Risk has been defined previously as a combination of uncertainty and constraint. Constraints are generally difficult to remove, but it is important that they are recognised and understood. For instance, a constraint that the project must be finished in time to reflect a new piece of legislation is easy to understand. Manpower constraints such as the availability of skilled staff at the critical phase of the project, are often more uncertain. The essence of project management is planning, forecasting, budgeting and estimating, which implies that very little in the project is certain. Thus, determining the uncertainty in a particular project could just about include every aspect of that project. This is highly impractical because the cost and time required to carry out such an assessment would be prohibitive; common sense must therefore be applied to ensure that the process of risk assessment is restricted to attempting to select only those areas of the project with the most severe constraints and the greatest uncertainty. The elements are shown in Figure 3.2 as separate branches of the same tree. It is nevertheless important to remember that the process is in fact an iterative one and that risk assessment is only complete when the assessors and project manager are satisfied that all undetected risks are insignificant. The assessment process allows the risk taker to develop a risk typology. This can be based on probability and impact or on safeguard and hazard. The impact is the severity of the effect on either the budget, the schedule to project completion, the quality of the work, or the safety of the project. Whether the severity of impact of the risk or the probability of the risk occurring at all is high or low is a matter for the judgement of the risk assessor and the project manager. It is

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difficult to make this anything other than subjective, but practice and experience will increase a project manager’s skill in forecasting the probability and impact of risk.

Project risk assessment

Identify risk

Analyse risk

Classify and prioritise risk

Propose risk response

Analyse residual risk

Figure 3.2

3.3.2.2

Elements of project risk assessment

Elements of Risk Control Risk control involves the thorough investigation of the entire project and will include reviewing the project’s plans, documents and contract to identify all possible areas where there may be uncertainty or ambiguity about what is proposed or the method through which objectives are to be achieved. The constraints inherent in the project must underpin all these investigations and should be considered. The performance of individual sections or activities where risks have been identified is then monitored to ensure that risk is being minimised and to gauge the magnitude of any changes in the risk status of the activity. Risk control is particularly important in monitoring the evolution of risks. Because risks change over time in terms of probability and impact, it is imperative that any such evolutions are monitored and controlled. In modern business, rabbits can grow into sharks if you don’t watch them carefully! Activities on the project’s critical path (see Module 5) should come under particular scrutiny because any risk to the successful and timely completion of these will impact on and compromise the completion schedule of the whole project. The risk assessment should include non-critical branches of a draft master schedule as well, but the consequences of an occurrence on these branches is less than it would be for a critical activity.

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3.3.2.3

Risk Identification Risk identification requires different approaches and considerations by different people within the project. Any person’s perception of risk depends on numerous factors, including: • • • •

where the individual is in the organisation; the power level of the individual; the immediate area of authority of the individual; the responsibilities of the individual.

The risk itself, as an occurrence or event, will have a source and an effect. For any given event, there could be numerous potential sources and numerous different effects. Control requirements will vary depending on the criticality of the risk element and on the relative power and importance of the activity as part of the greater whole. For example, the risk event could be failure of a server-based network within an office. The sources could be: • • • • • • • •

power failure; defective hardware; defective software; infection by malicious virus; lack of back-up and stand-by provision; absence of key IT support staff; internal malicious damage; use of outdated protection systems. The effects could be:

• • • • • • • • • •

loss of system records; interruption in operational capability; delays in making or receiving payments; interruption of web page; loss of orders; loss of future work because of the interruption; loss of reputation; requirement to purchase replacement equipment; requirement to re-train staff; disruption of related services.

Some of the sources are easier to see beforehand than others. For example an interruption to the power supply could be avoided by the provision of a back-up power supply. Defective equipment is more difficult to protect against, but could still probably be detected early by the provision of proper inspection and maintenance procedures. The possible effects will also vary and can to some extent be provided for ahead of the event. Loss of all system records could be Project Management

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allowed for by ensuring accurate back-up of all files on a regular basis. Loss of future work as a result of loss of reputation is more difficult to guard against. Some risks are more controllable than others, in that people can make varying efforts to try to avert them. Some events can be prevented to some extent, such as avoiding car crashes by regularly maintaining a vehicle. Others, such as accidents caused by other drivers, are very difficult for an individual to prevent. It should be clearly understood that statements such as ‘the project will run over budget’ is not a result or impact of a risk and is not the risk itself. The risk assessor will consider all aspects of the project to identify the risk that may have the impact of a budget overrun. The risk may be that ‘Task A has been underestimated’. Examples of uncertainties leading to the conclusion that task A has been underestimated include the following: • • • • • • • • •

the estimator may be new and therefore unfamiliar with company practice; the estimator may be optimistic; the estimator may have made incorrect assumptions; the estimator may have made errors; the information used as the basis for the estimate may be incorrect; changes may have occurred that render parts of the estimate obsolete; the cost of individual resources may have increased; the time required (and therefore the cost) to complete an activity may have increased; the allocated resources may be unsuitable or lacking.

Risk identification can also be linked to project life cycle phases. Generally, total project risk will diminish as the project progresses. This is because more and more information becomes agreed and the scope for changes resulting in risk diminish. However, late changes do still occur, and they tend to be increasingly expensive as the life cycle continues, simply because any required changes tend to become more and more expensive as more and more project information becomes agreed and fixed. 3.3.3

Project and Strategic Risk There are various risk classifications. There is a clear distinction between project risk and strategic risk. Project risk is limited to those aspects of risk that are considered entirely in relation to the project. The project itself is one component or element in the overall strategy for the organisation. The project faces one set of risks through its life cycle. These risks will generally be of a different nature to those faced by the organisation as a whole in executing its strategy. These strategic risks are long-term and affect the company as a whole rather than individual projects. Examples of project risks include: • • •

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delays caused by bad weather; errors in specific contract documents; cost increases caused by changes in individual supplier prices; Edinburgh Business School

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• •

day-to-day breakdown of plant and equipment; individual absenteeism and labour problems.

These would be allowed for as part of the overall project risk-management process. Possible delays caused by bad weather could be included as a contingency because the event is reasonably foreseeable and one accepts this risk when starting on any weather-dependent project. Errors in contract documentation would generally be covered by some kind of specific provision within the standard contract conditions. Strategic risk is generally more difficult to manage than project risk. There are several reasons for this. Strategic risk tends to be applicable over the long term. Most small to medium-sized projects are designed and implemented within a relatively short time scale, and so they are unlikely to be affected by long-term changes in the political or economic environment. Strategic risks also tend to be more complex and difficult to model and assess than project risk. It is relatively simple to analyse attendance records for employees and from that make a prediction on likely sick and absenteeism rates through the course of a project. It is much more difficult to assess the likelihood of occurrence of a significant change in the level of competition that is characteristic of a given sector. This depends on a whole range of complex and long-term variables, which are very difficult to consider in a form that can be used for modelling and extrapolation. Examples of strategic risk include: • • •

variations in competitor behaviour. changes in the economy. impact of IT and new technology.

In considering strategic risk management, the organisation is looking to move from (for example) current position A to desired position B, as shown in Figure 3.3.

A

Figure 3.3

Risks

B

Current and desired positions, and intervening risks

Point A is the current position, where the company is now. The position is determined by a number of factors including market position, size, vulnerability, gearing, asset base and so on. Point B is the desired position, where the company directors want to be in X many years time. Again, this position can be determined and described using a wide range of variables. The direct route to B represents the course upon which the company wishes to progress. In charting this course, the strategic risk manager can appreciate that there will be a range of both foreseeable and unforeseeable risks that will impinge upon this course. Some will be large risks; some will be small. Some may occur and some Project Management

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may not. Each one that does occur will affect the course of progression of the organisation from A to B. The organisation’s strategy to get from A to B is really the collective management of these numerous competing risks. The risks that stand between position A and position B in Figure 3.3 cannot be accurately determined. They may affect the achievement of the strategy more in some areas than in others. Wholly unforeseen events might affect the whole viability of navigating between A and B. The net result is that the company evolution suffers deflections as it attempts to implement the strategy or stay on course. Some risks have a greater impact than the strategy foresaw; some have a lesser impact. The net result is a general divergence or ‘set’ from the desired course, as shown schematically in Figure 3.4.

D C A

Figure 3.4

Risks

B

Strategy displacement/divergence

The effect of those risk impacts is that the strategy course A to B no longer applies. The evolution of the company has been driven off-course by risk occurrences that were greater or less than expected when the strategy was designed. They are presumably also beyond the limits of correction that are available through the use and application of management reserve or contingencies. In addition, new strategies may be formed within the organisation. These may serve to reinforce or deflect the original strategy. In order to allow for these variations, most strategies allow a variance envelope. This allows for divergence up to a certain limit, after which a warning is sounded. The variance envelope typically contracts as a function of time. As the company nears desired position B, the allowable margin of error must diminish. In Figure 3.5, the early shifts from course are acceptable as they remain within the overall limits of acceptability for the variance envelope. The later divergences – in this case C3 and D – move outside the limits of acceptability. Strategic risk management is concerned with the identification and management of these risks in order to ensure that the organisation finishes up within an acceptable distance of the original goal.

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D Variance limits

C3 C1

3.4 3.4.1

Risks

A

Figure 3.5

C2 B

Strategy implementation variance envelope

Types of Risk Generic Risk Headings There are of course many types of risk. In addition, risks take many forms and they impact on the organisation in a range of ways. The literature on risk management identifies a number of different primary headings. Some writers use different names for different types of risk. However, the broad headings are: • • • • •

strategic risk; operational risk; financial risk; knowledge risk; catastrophic risk.

Each is described further below.

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Strategic risk. Strategic risk includes risk relating to the long-term performance of the organisation. This includes a range of variables such as the market, corporate governance and stakeholders. The market is highly variable and can change at relatively short notice, as can the economic characteristics of the country or countries in which a given organisation is operating The corporate governance risk of the organisation includes risk relating to the ethics within which the organisation operates. Examples include the reputation of the organisation and its desire to maintain that reputation, perhaps at the expense of innovation or new developments. Stakeholder risk includes the risk associated with the shareholders, business partners, customers and suppliers. Shareholder attitudes can change quickly if dividends fall.

•

Operational risk. Operational risk includes the process itself, the asset base, the people within the project team and the legal controls within which the organisation operates. Project risk is one type of operational risk, although it could be argued Edinburgh Business School

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that risk management on longer-term projects should be considered in terms of strategic project risk management. The process of operational risk management includes the product itself, its suitability for market demand, marketing, sales and delivery. People risks include risks associated with human resources and staff development. Legal risks include contractual issues, together with statutory obligations and liability. •

Financial risk. Financial risk includes market, credit, capital structure and reporting risks. This particular risk heading is easily the most heavily covered in the literature on risk management. Financial risk, which is comprehensively covered in other MBA electives from the Edinburgh Business School (and elsewhere), is outside the scope of the current work.

•

Knowledge risk. Knowledge risk includes IT hardware and software, information management, knowledge management, and planning. IT is an increasingly important area for many organisations. Most modern companies could not operate without complex computer support; the risk of a major IT failure is the nightmare scenario for many large organisations.

•

Catastrophic risk. Catastrophic risk includes risk that cannot be predicted effectively and therefore cannot be quantified accurately. The usual precaution is to cover such risk with some kind of contingency sum or reserve.

These risk types are all linked to some extent. Operational risk is linked to catastrophic risk. Operational risk includes areas such as the risk of failure of a production line. This could be precipitated by a power failure (catastrophic risk). The power failure could be caused by internal problems such as bad cabling or circuit breakers, or external problems such as a general power failure. Within these broad headings for risk types, there are several specific subdivisions that can occur. These are discussed in sections 3.4.2–4. 3.4.2

Market Risk and Static Risk Within the broad generic categories listed in section 3.4.1, risk can be considered in terms of outcomes. Some risks produce the possibility of both positive and negative outcomes, such as the risk associated with buying company shares. The value of these shares could go up or down, and the end result could be a net gain or loss for the purchaser. Other types of risk can be less dynamic, and may be concerned only with losses. An example is insurance. A company with insurance cover loses less than a company without insurance, but both companies lose money; the difference is the amount of money that is lost. These two classifications are sometimes summarised as market risk and static risk. Each is described below.

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•

Market risk (business risk or dynamic risk) Market risk is dynamic. It is concerned with both positive and negative values, or potential gains and losses to the organisation. Market business risk is primarily concerned with the risk to all the stakeholders within the company, while market financial risk is restricted to equity holders. Market risks can change over time and can shift between likely positive and negative values. Market risk is measured by changes and variations in the general marketplace. It is unavoidable, since it relates to factors that are outside the control of the decision maker and could result in positive or negative impacts. Market risk therefore provides the organisation with the potential for both profit and loss on trading. Obvious examples would include: • share flotations; • competitor activities; • investment in research and development; • release of new products; • general economic activity. In addition, market risk can be split into two primary components. These are business risk and financial risk. Market Business Risk (MBR) arises from the company trading with its assets. MBR is a risk to the company as a whole, and is therefore distributed among the shareholders, creditors, employees and all other stakeholders. Market Financial Risk (MFR) arises from the gearing ratio, which is a measure of the financing of the organisation. MFR is the risk of the annual dividend falling to zero, so that equity holders make no return on their shareholdings.

•

Static risk (specific risk or insurable risk). Static risk considers losses only. It looks at the potential losses that could occur and seeks to implement safeguards and protection in order to minimise the extent of the loss. The obvious example is an insurance policy. Like market risks, static risks can change over time, and the level of protection provided by countermeasures can also vary. Static risk refers to risks that only provide the potential for losses. Considerations of specific risk are therefore generally concerned with making sure that the company performs at a given level. It is most concerned with making sure that losses or problems are minimised. Obvious examples would include: • fire insurance; • third party and public liability (consequential loss) insurance; • tortious liability (professional indemnity) insurance; • personnel insurance; • other optional forms of insurance.

Clearly, static risk can be reduced and controlled to some extent. However, market risk will always remain. One of the components of portfolio theory holds that risk takers cannot expect to gain reward for taking risks that can be Project Management

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avoided. Reward can only be expected from taking market risks. In other words, an efficient market will not offer reward for specific risks. The best strategy, therefore, if appropriate, is to diversify. The organisation can reduce the effects of specific risks by insuring against them (where relevant) and by diversifying. Acquisitions and mergers provide a means of allowing the organisation to evolve into new areas. By expanding the range of new areas within an organisation, the organisation spreads the specific risk and makes the system more resilient against market-risk shocks, such as a sudden change in statute or a change in government fiscal policy. Market and static risk types overlap with the generic headings discussed in section 3.4.1. Opening a new production line would be an example of a strategic market risk. A company’s all-risks insurance policy to cover injury to persons and property would be an example of an operational static risk. 3.4.3

External Risk and Internal Risk Risk can be further classified over and above the generic values given in section 3.4.1 and the market and static values discussed in section 3.4.2. The next obvious classification system would relate to whether the risk originates inside the organisation or outside it.

3.4.3.1

External Risk External risk originates and operates outside the organisation. As a consequence, the organisation has virtually no control over it and has to predict possible eventualities and move in advance or respond once the external factors have occurred. External risks could originate from other organisations, the government, changes in consumer and client demand, and so on. The organisation has no alternative other than to respond to the risks as they appear. Some obvious external risks are listed below: •

•

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Competitor risk. This includes the actions and strategies of ‘new kids on the block’ and established competitors, either of whom might develop and release a new product that is a direct threat to the established sales base of the company. In the worst case, it could threaten the ability of the company to survive. An obvious example would be the emergence of Sony’s Playstation in the games console market and its effect on the then established market leaders Sega and Nintendo. Sony is now a $20 billion company, and more than a third of its turnover is generated from Playstations I and II and the games that go with them. Market demand risk. The demands of the customer base change and alter rapidly. This applies more in some markets than others. Good examples would include the popular music industry and teenage clothing. These sectors have a reputation for being fickle, and demand can change greatly with little or no warning. Other examples might include a requirement for a different type of product as a result of government policy or pressure groups, such as an increasing Edinburgh Business School

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•

•

•

•

•

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demand in the UK for unleaded and low sulphur petrol as a result of the publicity and tax changes related to global warming. Innovation risk. Increasingly, fast-track change and innovation are affecting risk strategies. Again, this is more pronounced in some industries than in others. A good example is the PC market in the UK. Customers have been ‘educated’ to expect constant change and improvement in processor speed, memory storage, games handling, etc. Computer manufacturers have to be able to deliver constant improvement and development or they will be unable to compete. Mobile telephone manufacturers have adopted a similar strategy. Exposure risk. All companies are exposed to different levels of risk, and different risks will affect them in different ways. Factors such as borrowing and gearing ratio will affect the firm’s exposure and its ability to survive changes in the environment, such as interest rate changes. High levels of borrowing could result in problems if interest rates are suddenly increased as a result of government concerns about inflation. Shareholder risk. A firm that depends on shareholder equity has to keep the shareholders happy. If shareholder confidence declines, the effects on the company can be significant. In particular, it can affect the company’s ability to raise capital. Companies sometimes have to put shareholders in an elevated position when it comes to declaring the dividend. An example is Railtrack in 2001. The company made a significant profit in 2000 and declared a dividend of around 21p per share in that year. By 2001, as a result of extraordinary items involving major investment in the railways infrastructure, Railtrack made reduced profits but still paid the same 21p dividend to shareholders. One could argue that this dividend was simply not justified by the performance of the company. Political risk. The government of the home country and of overseas countries where the company has expanded can represent a major risk. Government fiscal policy and the consequent performance of the economy can make the difference between success and failure in a new venture. Typical examples would include the decision of the UK government to retain the pound and not adopt the euro. This, coupled with a strong UK pound, has had an effect on manufacturing companies that export manufactured goods. The strong pound has similarly had an effect on the tourism industry, as tourists can get fewer pounds for their own currencies. This effect was multiplied in the UK in 2001 by the outbreak of foot and mouth disease, which further discouraged both UK and overseas tourists and had other negative effects on the UK tourism industry. Statute risk. Governments constantly change existing statutes and introduce new ones. These can affect the profitability of affected organisations. In some cases, these statutes can be one-offs, which are aimed at a specific problem or Edinburgh Business School

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•

3.4.3.2

issue. However, they could also be general and could affect all areas of industry. An example would be changes in environmental legislation affecting items such as pollution emissions, waste disposal, water standards, etc. Companies that are investing in electricity generation in the European Union in 2001 more or less have to opt for gas-powered boilers, as the alternatives are not viable on cost (oil) or environmental (coal and nuclear) grounds. The effects in terms of gas reserve depletion are largely ignored. Impact risk. Some companies are better than others at withstanding big ‘hits’. This can depend on a lot of variables, including the degree of diversification. The ability to withstand risk impact depends essentially on the degree of exposure of the company risk profile, and the sensitivity of different sectors of the company to that impact. Sometimes companies might be exposed to financial risk and reputation risk equally, but might be far more sensitive to reputation risk. These companies would be able to meet the financial consequences of a big impact (compensation, reinstatement etc.), but may suffer grievously from the damage to the reputation of the company (future loss of consumer confidence, falling sales etc.). Examples of big hits that have effectively destroyed companies include Ratners, White Star Line and Pan American Airways.

Internal Risk There are very many possible internal risks. These are risks that originate from within an organisation and over which, at least in theory, the company should have some control. Some examples of this category are listed below.

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•

Operational processes risk. This includes such factors as: – human resources availability risk; – production capacity risk; – time-based competition risk; – variations in customer demand risk; – process failure risk; – health and safety compliance risk; – tactical response risk; – change risk.

•

Financial risk. This includes such factors as: – borrowing risk; – cash flow risk; – equity risk; – concentration risk; – collateral (security) risk; – opportunity loss risk; – opportunity cost risk; – exchange rate risk. Edinburgh Business School

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3.4.4

•

Management risk. This includes such factors as: – management error risk; – leadership risk; – outsourcing risk; – strategy implementation risk; – communications risk.

•

IT – – – – – –

and Technology risk. This includes such factors as: system obsolescence risk; breakdown and failure risk; fraud risk; malicious virus risk; system compromise risk; capacity limit risk.

Predictable and Unpredictable Risks There are numerous other classification systems for risks. The last major classification considered here relates to the predictability or otherwise of the risk. Predictable risks are ‘known unknown’ risks, such as changes in interest rates during times of fluctuations in the economy. They can be predicted with some accuracy although not with certainty. Unpredictable risks are the ‘unknown unknowns’. These cannot be predicted with any accuracy. An example would be the economic instability in US markets caused by the close-run presidential election in December 2000, or the terrible events of 11 September 2001. A dynamic internal unpredictable risk could therefore be a project status change. The organisation might start a project and give it top priority. However, another project might start up immediately afterwards and this new project might be given top priority. This is a dynamic risk in that it could increase or decrease the overall performance and effectiveness of the project. It is clearly internal as the status relates only to the company portfolio. It is unpredictable as it could not have been foreseen at the time that the initial project was implemented.

3.5

Risk Conditions and Decision making Risk assessment and control are really tools for decision making. They allow the decision maker to consider the various types of risk that apply to a particular case and weigh up the situation before a decision is made. Risk is intrinsically linked to decision making. A decision maker instinctively thinks over the risks associated with a decision that he or she is evaluating. Managers have to make decisions all the time and in doing so they evaluate risk. Some of these decisions are made under different circumstances or conditions than others. The conditions under which a decision is made is crucial to the success of the outcome. There are generally three main conditions under which decisions can be made. These are:

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• • •

conditions of certainty; conditions of risk; conditions of uncertainty.

Each is discussed further below.

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•

Conditions of certainty. Conditions of certainty apply where the outcome is known. If a person throws a stone in the air, it can be forecast with certainty that it will always fall back to Earth. One could argue that there are other possible outcomes. Theoretically, if one could throw the stone hard enough it would go into orbit, but this would be outside the limits of what is reasonably feasible. It would therefore be reasonable to say that if a person threw a stone out over a very large glass roof, the stone will hit the glass at some point and damage will occur. This is a ‘known’ event. It is foreseeable from the information that is available to the decision maker and its occurrence can be forecast with certainty.

•

Conditions of risk. Conditions of risk apply where there is a reasonable probability that an event will occur and where some kind of assessment can be made. These are the ‘known unknown’ events mentioned in section 3.4.4. An example would be a cricket captain considering the weather. In England it will definitely rain at some point – probably soon. ‘Soon’ means different things to different people. It also means different things in different seasons and in different parts of the country. The captain therefore knows that it will rain (known) but he or she does not know when (unknown). This is therefore a risky event, and is a ‘known unknown’. It can be forecast with reasonable accuracy but it is not a certainty. Most risk management and decision making take place under conditions of risk. The degree to which the information available constitutes a risk will vary depending on the nature of the application. It is generally possible to transfer some risk associated with conditions of risk by taking out some form of insurance policy.

•

Conditions of uncertainty. Conditions of uncertainty apply where it is not possible to identify any known events. Decision making under conditions of uncertainty is therefore concerned with wholly ‘unknown’ events. Considering the weather, this would apply to the likely occurrence and impact of a wholly unforeseeable and unparalleled storm, such as the great storm of 1987 in southern England. Under conditions of uncertainty it is not possible to predict outcomes with any accuracy. In general terms, most actuaries would say that risks are insurable while uncertainties are not. In order to calculate an insurance premium, an actuary has to be able to evaluate the risk in some way. If he or she cannot make an evaluation, the insurance may be refused. The main difference between the two is knowledge about the situation. The more knowledge one has, the more chance there is of being able to determine a risk as opposed to an uncertainty. Edinburgh Business School

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It is generally not possible to transfer risk under conditions of uncertainty through insurance, because the events concerned are not reasonably foreseeable and therefore cannot be forecast with any degree of accuracy. Some insurance policies will cover minor storm damage, but most do not cover major storm damage, simply because it is generally too difficult to predict the consequences with any accuracy and therefore to calculate a level of risk for the insurer. So what is the relationship between conditions of certainty, risk and uncertainty? The same decision may have to be made under each of the conditions and the outcome may be different depending on the nature of the condition. Under conditions of certainty, there is no risk and therefore the decision is easy. Under conditions of risk, the outcome is not clear, but the risk can be evaluated in some way. Under conditions of uncertainty, risk cannot be evaluated with any accuracy. Under the last set of circumstances, the decision maker can either adopt some kind of strategy that depends on the nature of the condition, or he or she can attempt to convert the conditions of uncertainty into conditions of risk by some kind of subjective assessment. This process is discussed in more detail in the examples shown below. 3.5.1

Conditions of Certainty Decision making under conditions of certainty implies that the decision maker knows with 100 per cent accuracy what the outcome will be. In other words, all the necessary decision-making data and information are available to assist the decision maker in making the right decision. Table 3.1

Pay-off matrix for decision making under conditions of certainty Profit for each strategy and state of nature Possible states of nature N1 = up

N2 = even

N3 = down

Strategy S1 = A

£100 000 000

£80 000 000

S2 = B

£150 000 000

£100 000 000

£60 000 000 £80 000 000

S3 = C

£200 000 000

£160 000 000

−£100 000 000

Conditions of certainty can be represented using a pay-off matrix, as shown in Table 3.1. The pay-off matrix simply shows alternative strategies (S1, S2 and S3) against different states of nature (N1, N2 and N3). In this case the strategies relate to different states of the economy. The decision maker has no control over the states of nature as these are wholly controlled by external forces. The decision maker therefore cannot influence them; he or she can only foresee them and develop a strategy to be implemented in each case. The strategies are therefore really a statement of the risks that the decision maker is prepared to tolerate. In Table 3.1, strategy S3 will bring in a return of £200 million if the economy goes up; it will bring in £160 million if the economy stays level; and it will result Project Management

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in a loss of £100 million if the economy falls. Strategy S3 therefore delivers the best return in conditions where the economy increases or remains level. A pay-off matrix based on decision making under conditions of certainty requires two primary assumptions: first, that there will be one dominant strategy or risk that will produce larger gains or smaller losses than any other risk, for all states of nature; and, second, that there are no probabilities assigned to each state of nature (equal likelihood of occurrence). 3.5.2

Decision Making under Conditions of Risk In most practical situations, there is no single dominant strategy for all eventualities. In general terms: • •

higher profits = higher potential risks. higher profits = higher potential losses.

In the absence of a dominant strategy, a probability is assigned to each individual state of nature. This is shown in Table 3.2. Table 3.2

Pay-off matrix for decision making under conditions of risk Profit for each strategy and state of nature Possible states of nature N1 = up

N2 = even

N3 = down

Probability = 25%

Probability = 25%

Probability = 50%

Strategy S1 = A

£100 000 000

£80 000 000

£60 000 000

S2 = B

£150 000 000

£100 000 000

£80 000 000

S3 = C

£200 000 000

£160 000 000

−£100 000 000

The expected payoff for each strategy now is the sum of the payoffs for each state of nature multiplied by the probability of that state occurring. Thus: S1 = (100m × 0.25) + (80m × 0.25) + (60m × 0.50) = 25m + 20m + 30m = £75m S2 = (150m × 0.25) + (100m × 0.25) + (80m × 0.50) = 37.5m + 25m + 40m = £102.5m S3 = (200m × 0.25) + (160m × 0.25) + (−£100m × 0.50) = 50m + 40m − 50m = £40m

Thus, for the probabilities stated, strategy S2 gives the best potential return. 3.5.3

Decision making under Conditions of Uncertainty The difference between conditions of uncertainty and conditions of risk is that under risk there are assigned probabilities that relate to the ‘known unknowns’. Under conditions of uncertainty, these probabilities do not apply. All possible outcomes can be identified and the related probabilities can be assessed to the best of the firm’s knowledge, but the decision maker simply does not know which event will occur, nor when. A firm does not know in advance the magnitude and direction of change in the value of a key variable (e.g. competitor behaviour). Changes in variables

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create uncertainty for the enterprise only when its sources of value are exposed. It is therefore essential to be able to identify the sources of uncertainty that relate to each of the firm’s exposures. There are several obvious sources of uncertainty. These might be externally driven (environment), internally driven (process) or decision-driven (information) sources. Externally driven (environment) sources would include all external factors such as inflation, the general level of economic activity, changes in interest rates, demographic changes, competitor changes, revisions of statute, and so on. Internally driven (process) sources would include employee attitudes, motivation, loyalty, the implementation of new technology and changed working practices, new products, innovation, changes in the supplier and client base, etc. Decision-driven (information) sources would include typical elements of corporate strategy and strategic planning such as new market analysis, mergers and acquisitions, research and development, investment, etc. Under conditions of uncertainty, it is not possible to predict what state of nature will apply. One of several uncertainty criteria may then apply, as described next.

3.5.3.1

Hurwicz Criterion The Hurwicz criterion is sometimes referred to as the maximax criterion. In this scenario, the decision maker is always optimistic and seeks to maximise profits by an all-or-nothing approach. The decision maker is not concerned with how much he or she can afford to lose. Table 3.3

Pay-off matrix for decision making under conditions of risk Profit for each strategy and state of nature Possible states of nature N1 = up

N2 = even

N3 = down

Probability = 25%

Probability = 25%

Probability = 50%

Strategy S1 = A

£100 000 000

£80 000 000

£60 000 000

S2 = B

£150 000 000

£100 000 000

£80 000 000

S3 = C

£200 000 000

£160 000 000

−£100 000 000

Using the data presented in Table 3.3, a decision maker using the Hurwicz criterion would elect for strategy S3 as this gives the maximum possible profit from any scenario. The maximum profit using strategy S3 is £200 million. However, strategy S3 is risky because there is a 50 per cent probability that state of nature N3 will apply, in which case strategy S3 will actually lead to a loss of −£100 000. The Hurwicz advocate would ignore the fact that strategy S3 also gives the greatest potential losses. Hurwicz is therefore based on maximising profits at the risk of maximum loss. It might be used by large corporations with a lot of assets that are seeking to make maximum short-term gains on investments. Fund managers might use the Hurwicz criterion in some of their short-term share transactions. Use of the Hurwicz criterion is obviously high-risk and should be used as part of a balanced portfolio. Project Management

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3.5.3.2

Wald Criterion The Wald criterion is sometimes referred to as the maximin criterion. Here, the decision maker is pessimistic and seeks to minimise losses. The decision maker is concerned with how much he or she can afford to lose. He or she will consider only minimum profits (not losses) and choose an option that maximises that value. Using the data given in Table 3.3, the decision maker using the Wald criterion would opt for strategy S2. In any state of nature, S2 still makes a minimum profit of £80 000. This figure represents the best value of minimum profits that any strategy makes under the scenario of the worst state of nature occurring; the other strategies can both return less than this in the worst case. In choosing S2, the decision maker has disregarded the potentially high profits offered by strategy S3, because the choice of S3 incurs a risk of a loss. The Wald criterion does not consider losses, only minimum profits. The Wald criterion would be selected by a person or an organisation that cannot make a loss. Potentially higher profits from more risky options are disregarded in favour of security from making a loss.

3.5.3.3

Savage Criterion The Savage criterion is sometimes referred to as the minimax criterion. Here, the decision maker is a ‘bad loser’. He or she therefore attempts to minimise the maximum regret. The maximum regret is the largest regret for each strategy, and the largest regret is the greatest difference within a state of nature column in the pay-off matrix. Table 3.4

Pay-off matrix for decision making under conditions of risk Profit for each strategy and state of nature Possible states of nature N1 = up

N2 = even

N3 = down

Probability = 25%

Probability = 25%

Probability = 50%

Strategy S1 = A

£100 000 000

£80 000 000

S2 = B

£150 000 000

£100 000 000

£60 000 000 £80 000 000

S3 = C

£200 000 000

£160 000 000

−£100 000 000

Using the data presented in Table 3.4, for N1 the largest value = £200m. Therefore: S1 regret = £200m − £100m = £100m S2 regret = £200m − £150m = £50m S3 regret = £200m − £200m = £0.

The regret values for each strategy under each state of nature are set out on the same basis in Table 3.5. In total, the following apply: S1 = £100m + £80m + £20m = £200m S2 = £50m + £60m + £0 = £110m S3 = £0 + £0 + £180m = £180m

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Table 3.5

Regret table for decision making under conditions of risk Profit for each strategy and state of nature Possible states of nature N1 = up

N2 = even

N3 = down

Probability = 25%

Probability = 25%

Probability = 50%

S1 = A

£100 000 000

£80 000 000

£20 000 000

S2 = B

£50 000 000

£60 000 000

£0

S3 = C

£0

£0

£180 000 000

Strategy

These total regret values represent the difference between the maximum possible outcome and the minimum possible outcome within the given states of nature. Strategy S2 gives the minimum maximum regret at £110 million. A Savage criterion decision maker would therefore elect for strategy S2.

3.5.3.4

Laplace Criterion The Laplace criterion attempts to convert decision making under uncertainty into decision making under risk. It will be recalled that the main difference between the two conditions is the inability to predict probabilities in conditions of uncertainty. The Laplace criterion attempts to address this by assigning equal probabilities to each possible outcome. It does this by using subjective probabilities. Objective probabilities are based on long-term frequencies of occurrence. By recording the frequency of occurrence of past events, it may be possible to predict formally the occurrence of future events. Subjective probabilities are based on the degree of belief or confidence as experienced by the decision taker. Subjective probabilities can be deduced by comparing the required risk with a hypothetical risk. This can be illustrated by example. Assume that a company is considering the risk involved in opening a new department at a set-up cost of £0.5 million. The department might be a success or it might be a failure. If it operates successfully for a year, it can be assumed that it will make £1.0 million in fees and the company will make a return of £0.5 million on the deal. If it makes no fees, the loss to the company will be £0.5 million. This is the sort of consideration that might be developed in assessing the real-world risk. In order to develop a subjective probability for these events, the decision maker might go to experienced risk takers and ask them to evaluate the probability of success in terms of an analogy. The decision maker might offer the risk taker two options. Either go ahead and develop the new office or take another risk instead. The other risk is the hypothetical or variable risk. This could be anything so long as it has a reasonably clear probability. One example could be a bag filled with ten balls coloured black or white. The risk taker can draw one ball. If it is a white ball, the risk taker wins £0.5 million; if it is a black ball, the risk taker loses £0.5 million. Assuming there are five balls of each colour in the bag, the probability of winning is 50 per cent and the probability of losing is 50 per cent.

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The risk taker can now either pick a ball or commit to developing the department. If he or she opts to draw a ball rather then commit to the development of the new department, the perceived probability of success with the department development must be less than 50 per cent. The next stage would be to change the ratio of black to white balls. If one white ball is replaced with one black ball, the probability of success in drawing a white ball drops to 40 per cent. If another white ball is replaced with a black ball, this drops to 30 per cent, and so on. There will come a stage where the risk taker would go for the department option rather than draw a ball. At this point, the perceived (subjective) probability of success in developing the department is greater than that perceived in drawing a ball. This process allows the decision maker to engineer a variable with a known probability of success as a measure of the perceived subjective probability of success in another unknown condition. The Laplace criterion assumes that Bayesian theory applies, which states that if the probabilities of each state of nature are not known, they can be assumed to be equal. The probability of each state of nature is therefore the average pay-off value. Table 3.6

Pay-off matrix for decision making under conditions of risk Profit for each strategy and state of nature Possible states of nature N1 = up

N2 = even

N3 = down

Probability = 25%

Probability = 25%

Probability = 50%

Strategy S1 = A

£100 000 000

£80 000 000

S2 = B

£150 000 000

£100 000 000

£60 000 000 £80 000 000

S3 = C

£200 000 000

£160 000 000

−£100 000 000

Using the data given in Table 3.6, the probabilities relate to the payoffs. Therefore: P(S1) =

(100m + 80m + 60m)

=

£240m

= £80m 3 £330m P(S2) = = = £110m 3 3 (200m + 160m − 100m) £260m P(S3) = = = £87m 3 3 3 (150m + 100m + 80m)

Using the Laplace criterion, the decision maker would go for strategy S2 because this gives the greatest pay-off based on the average pay-off in terms of equal probabilities of each individual pay-off.

3.5.3.5

Summary The chosen strategies for each criterion are: • • • •

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The decision maker would therefore, in our example, go for strategy S2 every time, with the exception of the decision that is made on the basis of seeking to maximise profits. 3.5.4

The Need for a Risk Management Strategy Risk management is becoming increasingly important as the business world changes. Companies have changed considerably since the early 1980s; the risks and opportunities that they face have changed in proportion. Competition and the demands for efficiency are far greater than they have ever been. Companies are now cut right back to the bone. Every possible area for outsourcing and risk transfer has already been exploited. Companies are as efficient, more or less, as they can be. New competition areas, such as concurrent engineering and time-based competition, are becoming the new corporate battlegrounds. They demand a new approach to risk taking and consequently to risk management. There is now, more than ever, a need for risk management as a collective corporate strategy. Such a risk management system needs to align strategy, production, human resources, technology, leadership and knowledge. It needs to cross functional and project boundaries and unite all sections of the enterprise in the envelope of Total Strategic Risk Management (TSRM). As with Total Quality Management (see section 7.5), TSRM has to reach all sections of the enterprise. It applies as much to packaging and delivery as it does to process and manufacturing. It needs to be holistic and pre-emptive. It has to be forward-looking and predictive rather than reactive. It is far better suited for strategic planning than for tactical response. It has to consider all the key performance indicators of the organisation, both static and dynamic. Above all, TSRM must be developed alongside, and be integrated with, strategic planning and management. It must be an integral part of the business plan. The TSRM aims and objectives must be communicated throughout the company and be disseminated through the whole organisation in whatever relevant forms are necessary.

3.6 3.6.1

The Concept of Risk Management Introduction Risk can be a good thing. Without risk there is no reward, and risk breeds innovation. Risk is therefore to be encouraged within an organisation, but it is also dangerous and so has to be managed. A risk management system aims to identify the primary risks that an organisation is exposed to, so that an informed assessment can be made and proper decisions made to safeguard the organisation. This concept is not new, nor is it radical in its philosophy or scope. We all evaluate risk in our everyday lives – for example, whether or not to overtake another vehicle. The brain considers the information that is provided by the senses and, based on past experience and on the risk attitude of the decision

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maker, decides whether or not to go for it. In this case, the process is largely intuitive. In fact, most risk assessment is intuitive. It is often sufficient to be aware of a risk (e.g. running out of petrol in an automobile), because of the consequences of a similar event in a different context; other forms of risk have to be modelled (e.g. running out of petrol in an aircraft). It is important to appreciate that risk management does not embrace all the risks that face a particular enterprise; it is concerned only with those that are most appropriate in the given scenario. In general terms, a risk management system must be: • • • •

practical; realistic; compliant with internal and external standards; cost-efficient.

There are numerous types of risk management system in use. They tend to be perceived something like quality management systems. People often see them as being impractical, bureaucratic and expensive. In order for one to receive popular support, a risk management system must be practical – people have to be able to see that it is straightforward and effective, and above all, that it works. Like quality management systems, risk management systems can soon become extremely expensive. It is also very important that they are seen to be cost-effective as far as is possible. Most risk management systems contain five distinct areas: 1 2 3 4 5

risk risk risk risk risk

identification. classification. analysis. attitude. response, control, policy and reporting.

This sequence is represented diagrammatically in the central portion of Figure 3.6 and each is described further below. 3.6.2

Risk Identification The idea of risk identification is to find out all the risks that are likely to impact on a given project and to explore the linkages and interdependencies between them. This builds up a picture of the risk ‘profile’ that applies to a particular project and enables the decision maker to make an informed response with due consideration for the relevant risks, including both current risk and risks that are likely to occur during the course of the project life cycle. Risk identification involves the identification and assessment of all the potential project risk areas. It may include a survey of the project, customer and users’ concerns and probable areas. It should be stressed that this process must be detailed and thorough. Risk identification is the starting point for the entire risk management process. The effectiveness and validity of the risk management system will therefore depend on the accuracy of the identification process.

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Analysis Work breakdown structure

Risk identification

Risk checklist

Internal

Risk classification

Controllable

Probability of occurrence

Risk analysis

Impact of occurrence

Management Risk attitude

Risk-averse Risk-neutral Risk-seeking

Risk response

Risk management strategy

Risk holder

Figure 3.6

Risk management

There will always be some degree of risk in any application. The extent to which risk is accurately identified depends on a number of variables. Principal among these is the philosophy or risk attitude of the decision maker. Risk seeking decision makers may adopt an approach assuming that all goes according to plan (AGAP) while risk averse decision makers may adopt a more cautions what happens if (WHIF) approach. In addition, there will be individual project risks such as time limits, cost limits, specification, resource availability, project status, etc. There will also be technical risks, including research and development risk, implementation risk, time-scale risk, and so on. There can also be production risk, which includes risk to the effective performance of the production line, maintenance, down time, power interruption, component deliveries, packaging and product delivery. There may also be engineering risks, which relate to the reliability and maintainability of the system, together with the product quality and defect rate of the finished product. It should be remembered that not all risks are high-impact and high-probability. Project Management

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However, the cumulative effect of a lot of small risks can have a similar effect to a high-impact risk. There are several established risk identification typologies. An obvious classification system for purely project risk would include the following. •

•

•

Internal risks These can generally be identified by breaking the project up into separate work packages using a work breakdown structure (WBS). In most cases, the development of a three- or four-level WBS will allow identification of most obvious risk areas. External risks These originate from outside the project and relate to factors such as interest rates and levels of economic activity. They are obviously more difficult to identify and evaluate. Project risks These overlap internal and external risks. They are a feature of the specific project and of the administration and control techniques that are applied both within the company and by other organisations that impact on the project team. Obvious examples include the organisational breakdown structure (OBS), team membership, leadership, communications and so on.

Overall risk can therefore be considered as a combination of these three sources, as shown in Figure 3.7.

Overall risk identified Project

Controllable risks

Uncontrollable risks

Internal

External

Risk with adequate project control

Figure 3.7

Risk identification overlaps

Risks sources can often be identified in terms of objective and subjective sources. Objective sources are the sum total of past experience of past projects in relation to the current project. This source is sometimes referred to as ‘experience’. Subjective sources are the sum total of current knowledge based on current experience. An example would be PERT analysis (see Module 5). Estimates of current performance are made based on optimistic, likely and pessimistic estimates, relevant to current estimates. 3/36

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Any risk has to be clearly assessed and the identification has to focus on the source of the risk rather than on the effect of the risk. The event at the centre of the risk is therefore intrinsically linked to both the source and effect. It is important that the identification process is concerned with the source of the risk rather than the event itself or the effect. This is because the risk taker can do something about the sources of the risk, but not really do very much about the event or the effects. For example, it is possible to eliminate the source of ‘badly maintained vehicle’ simply by following the prescribed maintenance manual. However, it is never possible to eliminate the event itself or the effects that a car crash can have, for these depend on external variables and consequences over which the risk taker has no control. Some risks are controllable (e.g. choosing to drive a car); some are uncontrollable (e.g. exceptionally bad weather). Some are dependent (e.g. engine size as power output requirement increases); still others are independent (e.g. paint thickness as power output requirement increases). The most obvious and widely used method for risk identification is brainstorming. The idea is that as many people as possible look at the project scenario and try to identify as many risks as possible. These include internal and external, controllable and uncontrollable, and all other forms of risk that could theoretically affect the project.

3.6.2.1

Brainstorming In brainstorming methodology, a co-ordinator or facilitator is generally appointed. This person chairs the brainstorming session. He or she steers the discussion and tries to keep the group focused on the problem (to identify risks). Brainstorming sessions are prone to becoming sidetracked and diverted away from the original objective. The co-ordinator therefore needs to be strong, aware, and perhaps have a sense of humour. It is important that unusual or even apparently silly ideas are at least put forward. A lot of good practice started with ideas and concepts that might have looked doubtful or even absurd initially. How could we put a person on the moon without complex navigational computers? Some of the instruments on the Apollo 8 spacecraft were powered by clockwork. Most brainstorming session have a number of distinct phases: •

•

Project Management

Phase 1: Creative phase. The idea of phase 1 is to invite as many ideas as possible from the brainstorming team. The team itself should include as many project team members as possible, and also other individuals who have an impact on the project or who act as stakeholders. The co-ordinator usually extracts one idea at a time from team members. It is important that any risks or risk areas are identified. People are encouraged to think outside their own specialisation. Apparently crazy ideas should be positively encouraged. The ideas are generally written down as they are extracted from the session. No criticism or discussion is allowed at this stage. Phase 2: Evaluation phase. Once the list of ideas is complete (at least for this particular session), each one is evaluated by all members of the team. Technical expertise and experience can now be applied by individual members in order to identify Edinburgh Business School

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those ideas that have potential and those that do not. It is important that ideas are not linked to individuals, so that free and open criticism and evaluation can take place. Each idea is considered in detail and a final list is formulated of those ideas to do with project risk that are regarded as having real potential and that are worth further development. It is essential to be aware that the final list is the product of collective group effort rather than a list of individual contributions. Brainstorming is widely used as a risk identification technique in high-impact areas such as nuclear power station and aircraft design. Teams of specialists are used to try to identify all possible areas where faults could occur or where problems could arise. They might also use special techniques to try and find collective agreement on where common areas for problems could lie and on what combinations of possible problems could occur at particular times. The specific methodologies for brainstorming using the Delphi technique, nominal group technique and SWOT analysis are considered in more detail in Module 7. 3.6.3

Risk Classification Once the various risks have been identified, they then have to be classified in some way. Most work on classifying risk is linked (at least in part) to so-called portfolio theory. This considers risk classification from a financial point of view. A reasonably detailed methodology from portfolio analysis has developed, based around the portfolio theory’s beta coefficient. Generally, a share with a 10 per cent beta coefficient will on average move 10 per cent for each 1 per cent move in the market. In addition, portfolio theory considers that risk can be considered in terms of different classifications. Risk can be primarily classified in terms of whether it is market risk or static risk (see section 3.4.2). It can also be classified in terms of its area of impact or the extent to which it will affect the organisation. Some risks could only affect the company at an individual project level. Other risks might affect the whole company. Still larger risks might affect the whole sector in which the company operates, while the largest risks of all could affect the whole economic environment. The largest risk – for example a collapse in oil supplies – could have an affect right across the whole range. Risks can also have different impacts. These could relate to the extent to which they affect the organisation, or they could relate to other variables. This suggests a three-level classification system for risk: 1 2 3

risk type; risk extent; risk impact.

This idea is summarised in Figure 3.8. 3/38

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Risk classification

Risk types Specific risk (insurable risk)

Market risk (business risk)

Potential losses

Potential gains and losses

Share value Sales Profitability Acquisitions

Fire Flood Breakdown Theft

Risk source and scope Environmental risk Specific market or sector risk Specific company risk Specific company project risk Scope extent

Risk impact High impact risk Medium impact risk Low impact risk Impact extent

Figure 3.8

Risk types and impacts

Risks that affect the general environment include uncontrollable ones (such as the weather) and partially controllable ones (such as oil prices). The consequence or impact of a risk is an important consideration, expressed as: • • Project Management

maximum probable loss; most likely cost of the loss; Edinburgh Business School

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• • •

likely cost of covering the loss (if uninsured); cost of insuring against the event occurring; reliability of predictions about the event.

Risks can be conveniently classified using this approach. 3.6.4

Risk Analysis Once the risks have been identified and classified, they have then to be analysed. Risk analysis is based on the identification of all feasible options and data relating to the various risks and to the analysis of the various outcomes of any decision. Most risk analysis methodologies comprise six basic steps.

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•

Step 1. Evaluate all the options. All the various options should be considered. It is important that all the factors that affect the risk are considered. The brainstorming or other form of risk identification should be exhaustive and all factors that could possibly affect the impact or likelihood of the risk should be identified.

•

Step 2. Consider the risk attitude. The risk attitude of the decision maker is an important consideration. Different people will evaluate risks differently and will make different decisions using the same data. Some decision makers are more or less risk-averse than others and will make different subjective appraisals of the likelihood and impact of the risk from the data given.

•

Step 3. Consider the characteristics of the risks. Consider the risks that have been identified and are controllable and what their impact is likely to be. It may be possible to apply controls to some of the risks that have been identified (e.g. internal controllable) while not to others (e.g. external uncontrollable). It is important to ensure that all possible characteristics of the risk are identified.

•

Step 4. Establish a measurement system. The risk has to be measured and evaluated in some way, using a qualitative or quantitative (or combined) approach. Some approaches use established modelling techniques where the characteristics of the risk and the situation can be input and a prediction can then be made based on past experience.

•

Step 5. Interpret the results. The data produced by the measurement require interpretation. This can again be quantitative or qualitative. The results of the measurement process provide an indication of a prediction or possible outcome, but these are still open to interpretation. Two different interpreters might look at the same data and results and make different appraisals. The interpretation might involve extrapolation from observed data to try to make a prediction of a future outcome. Edinburgh Business School

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•

Step 6. Make the decision. The final stage in the process consists of deciding which risks to retain and which to transfer to other parties. The risk profile that is acceptable for retention will depend on the nature of the organisation and the attitude of the decision maker. Other methodologies adopt a slightly different approach.

• •

Step 1: Identify and source the risk and extract all relevant information. Step 2: Identify all possible threats and opportunities (SWOT analysis) and map the risk drivers. Identify and brief risk holders where appropriate. Step 3: Assess the probability and impact of each risk and develop the actual risk map. Step 4: Consider all available options and develop a target risk map. Step 5: Assess the value added to the company by taking the recommended risk response action. Step 6: Set up monitoring and reporting systems to ensure effective evolution of the risk map.

• • • •

3.6.4.1

Risk Map A risk map simply shows individual isolated risks on an axis of probability of occurrence against impact. An example is shown in Figure 3.9.

High impact High probability (Red zone)

Low impact Low probability (Green zone)

Low impact High probability (Yellow 2)

Impact

High impact Low probability (Yellow 1)

Probability

Figure 3.9

Basic risk map

The process of risk mapping is sometimes referred to as risk profiling or even risk footprinting. It is basically a process of showing the relationship between risk probability and impact for a range of given risks as a function of time. A basic risk map has four quadrants, although it is relatively easy to expand this to more sectors (see also section 3.3.2.1). In a basic risk map, the quadrants are as follows: Project Management

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•

Quadrant 1: Red zone (high impact and high probability). These are the dangerous risks. No business can survive accepting these risks at this critical level over the long term. They have to be addressed at once and immediate action has to be taken. They are strategically important, and appropriate action is immediately required. Generally, a risk manager should be established and a specific strategy formed. If the firm cannot manage these risks effectively over the long term, then avoidance strategies should be considered. Everyday examples would include flood damage to housing located on flood plains during a time of global warming.

•

Quadrant 2: Upper Yellow zone (high impact and low probability). These risks are not as crucial as those in the red zone. However, they require close attention as they include the severe effects of extraordinary events. Typical examples would be the effects of a severe storm on an agricultural enterprise. They are relatively unlikely, but if they occur they could destroy an entire crop. These risks are often typically driven by external or environmental factors beyond management control. Contingency planning is particularly appropriate for these risks. They may be generally insurable.

•

Quadrant 3: Lower Yellow zone (low impact and high probability). These risks often relate to day-to-day operations and compliance issues. Typical examples would include basic plant and machinery breakdown, such as individual buses breaking down in a large bus fleet. The net effect of these risks, if left unmanaged, is as great as the risks in quadrant 2. Cost control procedures fall into this category. These are based on monitoring and detection, and they identify a defect downstream from the risk. Cost overruns are virtually certain to occur.

•

Quadrant 4: Green zone (low impact/low probability). These are low severity / low likelihood. They are not of sufficient stature to allocate specific resources. They are generally insignificant and are acceptable at their present level. They represent areas that may be outsourced. They include items such as blocked toilets and vandalised windows in a station. The best solution is to outsource the maintenance function for a fixed price so that the problem is transferred to another organisation.

A risk map can be produced for any level or sector of a company’s operations. Individual managers can rank impact and probability in terms that they are familiar with and understand. In addition, the time frame or time scale for consideration can be adjusted depending on the level of the organisation that is being considered. The idea is that the risk map is dynamic. It shows the migration of certain risks over a period of time. In Figure 3.10, the three risks shown have migrated over a period of time. Risk A has moved from being of low impact and low probability to high impact and high probability. This is clearly a very worrying transition. An example could be a major change that is required because of new legislation. Generally, external uncontrollable risks would produce this kind of transition. Risk B has increased in impact while retaining the same probability of occurrence. 3/42

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High impact Low probability

High impact High probability

Impact

C

Low impact Low probability

Low impact High probability

A B Probability

Figure 3.10

Risk map and risk migration

An example of this could be a change in market demand, perhaps caused by a competitor launching a major new product that is in direct competition with the firm’s own long-standing product. Risk C has remained high probability but has reduced in impact. An example could be the replacement of a disgruntled senior manager. He or she may still leave the company but having been replaced, the impact is much lower. Risk maps can be used as planning tools. Some risk management systems use an actual risk map and a target risk map in terms of establishing a baseline and current status methodology. The target risk map shows the risks as we want them. The difference between the actual risk map and the target risk map identifies areas where actions are needed to meet the requirements of the risk management system. In order to get from the current risk map to the target risk map, a strategy would be developed and risk holders put in charge of each major risk area. The selected risks would be those that are controllable and internal. The largest single risk, for example, might be that of a ‘strong pound’. However, there is nothing that the organisation can do about this, other than change its sales strategy completely. This risk has therefore to be retained. The target risk map has to reflect those risks that are internal and controllable. In the example shown in Figures 3.11 and 3.12, the largest internal controllable risks are product obsolescence and production capacity. Product obsolescence could be addressed by market research, leading on to the development of new products. Production capacity could be increased by the phased introduction of new working practices or perhaps by a redesign and re-tooling of some or all of the production processes. Each of these would form a separate project and would be under the control of a separate risk holder. Given the importance of each, they would have to be incorporated into the firm’s business plan and be regarded as priority areas. Risk mapping is a fundamental tool. Its usefulness lies in its flexibility. It is by far the most widely used tool for risk classification, and to some extent, risk identification. It can be closely linked to the organisational breakdown structure Project Management

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Major plant failure Power failure Impact

Competitor innovation

Production capacity

Strong pound

Labour problems Product obsolescence Day to day errors

Minor debt default

Minor equipment failure Probability

Figure 3.11

Current risk map (example)

Production capacity

Competitor innovation

Power failure

Strong pound

Impact

Major plant failure Labour problems Product obsolescence Day to day errors

Minor equipment failure

Minor debt default

Probability

Figure 3.12

Target risk map (example)

(OBS) for the company and to the work breakdown structure (WBS) for the project. It effectively links to the task responsibility matrix (TRM) that acts as the link between the OBS and WBS at the operational and strategic levels (see Module 5). Like a TRM, a risk map can be developed upwards or downwards to virtually whatever level of detail is required. Entries on a risk map may also be shown as areas or regions. These areas represent ‘windows’ of variation limits within which the specified risks can vary. This kind of representation would be used where the probability of occurrence or impact of the risk could vary within certain known limits. An example is shown in Figure 3.13, where the boundaries represent limits within which that particular risk could vary depending on circumstances. For example, risk A always stays in the ‘caution’ zone, because the probability of occurrence is fixed; however, the impact of risk A varies. An example of this 3/44

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could be a defect in a tyre. The effects could vary depending on the position of the vehicle on the road or the position of the defect in the tyre. In the case of risk B, the probability of occurrence can vary significantly, and by a sufficient extent to allow the risk to pass from the ‘caution’ zone to the ‘danger’ zone. Risk C is the most variable, with progression between all four zones depending on the variability that can occur within the impact and probability limits. This type of risk is the most difficult to define and address. Risk D has very small variability limits, and remains of low consequence within the defined limits.

A Impact

B

C

D

Probability

Figure 3.13

Risk map with variability limits

Impact

Variability limits for individual or groups of risks can be set by various techniques. It is usually possible to model boundaries using established statistical techniques. Boundaries and limits can be set within specified confidence limits or sub-probabilities of occurrence. These can sometimes be useful in analysing different levels of variability.

C3 C2 C1

Probability

Figure 3.14

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Risk map with variability limits

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In Figure 3.14, the overall area contained within risk C is the same as before. However, the individual likelihood of variations within that overall limit is shown. For example, there might be a 99 per cent probability that the actual risk value will fall within the area C1; in more extreme cases, variations might take place within the area C2; and in the most extreme cases, full variation might occur up to and including the limits defined by C3. The actual shape of the envelopes will vary in relation to the nature of the risk and the impact and probability characteristics that affect it. Some risks may vary more or less in terms of probability of occurrence (such as poor weather conditions), while other risks may vary more in terms of impact (such as a faulty tyre).

3.6.4.2

Risk Grid A risk grid is an alternative to a risk map. It would be prepared where a company is looking at a range of activities and deciding on the specific risk cover that is required. This depends directly on the probability of a risk occurring and the impact of the risk if it occurs. The format of the risk grid will also depend directly on the attitude of the risk taker. One possible format is shown in Table 3.7. Some works are to be retained; others are to be partially or fully insured. The company strategy might be to cease activity in areas of high impact and high probability risk unless there are good reasons to the contrary. Table 3.7

Risk grid

Probability

Low

Medium

Negligible

Retain

Retain

Retain

Retain

Unlikely

Retain

Retain

Part insurance

Part insurance Full insurance

Severity

Average

High

Catastrophic

Retain

Part insurance

Full insurance

Likely

Part insurance

Full insurance

Full insurance

Cease activity

Inevitable

Full insurance

Cease activity

Cease activity

Cease activity

The risk grid can be further developed to provide data for risk-factor calculations. Risk can be modelled in its simplest form as the relationship between the probability of occurrence and the consequences. In turn, the consequences can be measured in several different ways. The most obvious ones are time, cost and quality (quality is often referred to as performance). 3.6.5

Risk Attitude The attitude of the risk taker is clearly an important element. Much risk evaluation is subjective, and therefore the perceived level of risk involved with a course of action depends on the attitude of the risk taker. One poker player might decide to take a specific risk during play. A second poker player might do things differently, even if dealt the same hand. Additionally, the same poker player might react differently to the same hand at different points in the game, especially in relation to whether he or she is winning or losing. In general terms, risk takers can be either neutral, risk-averse or risk-seeking. A risk-averse attitude errs on the side of caution, while a risk-seeking attitude

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leans towards encouraging risk. These characteristics can vary according to the company under consideration, the attitude and personality of the risk taker, and so on. The risk-averse decision maker will only increase effort once the impact is very high, while a risk-seeker will increase effort at a much earlier stage. This concept is shown diagrammatically in Figure 3.15.

Seeker

Effort

Neutral

Averse

Impact

Figure 3.15

Attitude of risk taker

In Figure 3.15 the word ‘impact’ refers to the maximum reward or opportunity available to the risk taker. As this potential reward increases, the averse risk taker becomes more and more inclined to risk making a move, whereas the risk seeker is happy to increase his or her level of effort at a much earlier stage. The use of the word ‘impact’ in this context should not be confused with the use of the same word in other areas of this text, such as in Figures 3.12 and 3.13, where ‘impact’ refers to the potential damage which a particular risk could cause should it occur. Once the attitude has been considered in some way, the risk has to be plotted or put in relation to other risks and to the various determining factors that can affect the outcome. Different types of people and even professions characteristically exhibit different standard risk attitude characteristics, and some examples are shown Figure 3.16. For instance, bomb-disposal expert faces a great deal of risk when defusing a bomb. However, the chances are that he or she will do everything strictly by the ‘book’ as there are standard approaches and procedures to be adopted. This approach is adopted because it allows learning from one disposal to be passed on in the form of safe procedures and it gives a traceable clue to what went wrong if the bomb inadvertently explodes. The bomb-disposal expert therefore exhibits relatively little creativity. In contrast, fighter pilot takes high combat risks but also has to be very creative. There are standard operational manuals and guidelines for aerial combat, but the actual manoeuvres and turns in attack and defence have to be original as they depend on the characteristics of each Project Management

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Emergency surgeon

Artist Researcher Police person

Creativity

University lecturer

Fighter pilot

Lawyer Nurse

Venture capitalist

Machine operator Scaffolder Accountant

Hight street banker

Bomb disposal

Risk

Figure 3.16

Creativity and risk inherent in some job types

combat situation. The fighter pilot therefore has to be inventive, as well as accepting high risk. Risk attitude in relation to a project varies in relation to the characteristics of the project team. Individuals tend to take less risky decisions than teams. In addition, multidisciplinary teams tend to make more risky decisions than unidisciplinary teams. All teams tend to make more risky decisions the longer they are together as a team. 3.6.6

3.6.6.1

Risk Response Response Considerations Once the risk has been identified and analysed, there is still the question of response. The response depends on the nature of the risk, the detail of the analysis and the attitude of the risk taker. One may assist or obstruct the other depending on configuration. There is also a range of other variables that can affect risk response, including: • • • • • • •

company policy; lack of relevant information on cause and effect; length of time of exposure to the risk; individual versus team interests; involuntary risk (forced on the risk taker); voluntary risk (risk that the risk taker is prepared to accept); alternatives (cost-effective and non-cost-effective).

Risk response basically centres on risk distribution. Some external risks, such as bad weather, are always there. If a ship is chartered to deliver a given cargo on a certain date, it may be delayed by bad weather. This is always a possibility and there is nothing that anybody can do about it. The probability of bad weather will presumably be higher in winter than summer, although even 3/48

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this might not be the case with some bad weather such as hurricanes. There will always be the risk of weather-induced delay, and in the end this risk has to be accepted by the parties to the contract. The question of risk allocation generally revolves around a test of reasonableness. In our example of a ship, the ship owner will undertake to make the delivery on time. Delays caused by reasonably foreseeable weather would be his or her liability, as this weather is part and parcel of working at sea. However, exceptionally adverse weather, such as a cyclone, may be the client’s liability because it could not have been reasonably foreseen. The contract is the tool by which the risk is allocated and shared out according to its terms and conditions; the contract will therefore usually determine the risk response. If a probability of bad weather is identified, the contract will determine whose risk this is, and (if shared) the extent to which it is shared between the parties to the contract. If the project does not use a standard form of contract, then specific terms and conditions to define risky events and risk liability may be inserted in the document. The distribution of risk will depend on a number of non-contractual considerations. These include:

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•

Is the outcome of the project worth the risk? The best way of avoiding the risk involved in the project is to avoid the project itself. This may or may not be feasible. Some projects are cancelled or stopped early in the project life cycle because the risks associated with the project are too large in relation to the potential gains. There have been numerous examples of this over the years. A good UK example is the Advanced Passenger Train, which was partially developed at great cost and then cancelled as the development risks escalated.

•

Who has the greatest risk control? Most European legal systems require that the majority of the risk is assigned to whichever party has most control over it. A contract between a supplier and a client will therefore put the risk of late delivery solely on the supplier. Where control is not possible, such as in bad weather conditions, risk may be split, or more usually set on the client, as the client should be aware of this risk when ordering the project.

•

Who has the greatest risk liability? Over and above the control consideration, most EU legal systems put the onus of risk on the party who would be least affected by it occurring. An employer is probably liable for the negligent acts of an employee because the employer is more likely to be able to settle a large damages claim. This gives rise to the concept of vicarious liability, where one party (such as an employer) can have an implied liability for the actions of others (such as employees).

•

What incentive does each party have? It is generally considered prudent to maintain at least some interest in the risk for both parties. An insurance company will probably insist on an Edinburgh Business School

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excess (where the policyholder has to pay the first so many pounds of any claim) so that the insured retains some interest in not making unnecessary claims. If one party has no interest in the risk at all, this could put the other party in a vulnerable position. Most forms of contract require a more or less collaborative approach to the equitable sharing of risks.

3.6.6.2

Response Options Risk responses include: • • • • •

risk retention; risk reduction; risk transfer; risk avoidance; seeking additional information about the risk.

Each of these is described further below. •

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Risk retention. Ignoring the risk is obviously itself a high-risk strategy. The example would be a householder deciding not to insure the contents of his or her house. Everything is OK provided nothing goes wrong. Uninformed risk retention is therefore a high-risk strategy in that the consequences can be significant. Informed risk retention is an alternative approach. This is most suited to risks that are characterised by small and repetitive losses. Obvious examples would be car insurance claims. Most people are willing to accept a £50 excess on car insurance. This keeps the premium down and discourages minor claims. Some people will be happy to bear £200 in return for a smaller premium. Another example would be third-party insurance rather than comprehensive insurance. The level of retention is dictated by financial circumstances and by the likelihood of loss. It may be uneconomical to transfer some risk, in which case it has to be retained. Most projects have to carry some risk; the obvious ones to carry are the low-probability lowimpact ones, if we have this as a choice. In general, risk retention normally applies to relatively low-probability lowimpact risks. It is rarely prudent to retain a high-probability high-impact risk unless there is no choice. An example of this might be driving on a flat tyre to try and reach the garage because there is no spare tyre in the boot. The flat tyre is going to disintegrate at some point. When it does, the driver could lose control of the vehicle. The driver therefore hopes that the flat will not shred before he or she reaches the garage. In any manufacturing process, there will generally be some risk of a defective product being produced. This probability can only be completely eliminated by improving quality standards to such an extent that the manufacturing cost becomes too high for the goods to remain competitive. The solution to this problem is again retention and risk transfer. The manufacturer accepts that (say) a 5 per cent defect rate is inevitable, and covers Edinburgh Business School

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the likely 5 per cent defect range with suitable warranties and guarantees. This allows the manufacturer to retain the risk of a defective product by allowing the purchaser to transfer the risk back to the manufacturer. Most purchasers will accept a 5 per cent chance of buying a defective product if it is cheap enough and they can get it replaced or fixed free of charge if it turns out to be a dud. •

Risk reduction. Risk may be reduced by a number of means. It may be possible to engineer risk out of the equation. In addition, risk may be reduced by training and development, or by redefining the aims and objectives of the project. If it is not possible to reduce the incidence of car crashes, it is still possible to reduce individual risk by designing vehicle bodywork to withstand impact more effectively. This was the philosophy of some automobile makers through the 1970s and 1980s. More modern automobiles are designed to incorporate crumple zones. This philosophy is still a type of risk transfer as it seeks to increase the potential damage to the vehicle in order to reduce the potential damage to the occupants.

It is sometimes possible to assemble a risk-reduction matrix. This lists the common risks on a project and suggests how both probability and impact can be reduced. •

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Risk transfer. Risk transfer involves transferring the risk to others. There are numerous ways in which this can be done. Liability could be transferred through contractual clauses or through negotiation. Probably the most common way of transferring risk is through an insurance contract. An early example of this was the Lloyd’s syndicates, where groups or syndicates of Lloyd’s ‘names’ worked together to provide insurance cover for shipping. Syndicate members had to be able to demonstrate that they had a reserve of cash to meet claims from insured parties. The syndicates than agreed on a level of cover and a premium. If the insured ship was subsequently lost, the syndicate was liable to the owners for the cost of the ship and its cargo. Insurance is obviously an important consideration in risk retention. The relevant factors generally applicable when considering insurance are described next. – The insurability of the risk. Not all risks can be insured. In order for a premium to be calculated, there must be some basis for making a calculation. In order to be able to make a calculation, there have to be some data available and it has to be possible to evaluate the risk of the event occurring in some way. Risks may be extremely high, such as insuring an aircraft that is flying into a war zone, or extremely low, such as the risk of a piece of an aircraft falling off and damaging a stated property. In both cases, it may not be feasible to calculate the probability of the risk event occurring. Edinburgh Business School

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–

The cost of the insurance premium. Insurance premiums are generally a small proportion of the insured loss. For an automobile, depending on model and age, premiums are typically 5–10 per cent per year. On lower risk items such as buildings insurance, the premium can be less than 0.5 per cent per year. – The maximum probable loss. The maximum loss includes the totality of what is likely to be lost as a result of the risk occurring. In an office building, this would include everything that is lost if the building burns down. It can sometimes be difficult to evaluate everything that will be lost in such a case. – The likely cost of the loss. The likely cost of the loss includes the full cost of reinstatement to original condition. – The likely cost of paying for the loss if uninsured. In some cases it can be cheaper to accept the loss and cover it, rather than to insure one’s assets. An example would be military supplies in wartime. The UK Ministry of Defence has a general rule that it does not attempt to insure equipment that is used by the armed forces. In 1982, a British Fleet sailed to the Falkland Islands in order to repel the Argentine Army that had occupied the islands. A total of 11 ships were sunk, and more were seriously damaged. None of these ships was insured as the cost of the premiums would have been extremely high. Risk transfer through insurance transfers the risk to the insurance company in return for a premium. Risks can also be transferred through damages clauses within contracts. Most standard forms of contract transfer risk to some extent by both insurance clauses and by transfer terms and conditions. For example, a client normally has to maintain fire insurance, but a contractor is required to provide evidence of a suitable all-risks policy that covers for items such as poor workmanship (retention) and latent defects (warranties) – these are not insurable and are therefore covered by contract terms and conditions. These measures are a way of transferring non-insurable risk from the client to third parties, and are summarised in Table 3.8. In most legal systems, damages are generally available as a remedy for breach of contract. In some legal systems, they are also available for tortious (or equivalent common law) liability (e.g. negligence). Damages generally cover the actual losses suffered by parties to the contract. They tend to be liquidated and ascertained (based on actual loss). Damages sometimes may be punitive under the Unfair Contract Terms Act 1977, for instance. Not all risks can be transferred and there may be some risks where it is not economical to do so. In addition, transferring one risk may give rise to another risk, and there may be no net benefit. In such cases, it may be cheaper to retain the risk and act accordingly. An example of this is retention. A client may insist on a 10 per cent retention on all works completed by a contractor. This amount is retained by the client to protect against contractor default. If the contractor does default, the retention sum is used to make good, insofar as is possible, the default. 3/52

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Table 3.8 Client

Contractor

3.6.7

Common insurance and transfer clauses Insurance clauses

Transfer clauses

• • •

Fire insurance

• •

Damages

• •

All-risks policy

• •

Retention

•

Third-party insurance (damage to property)

•

Determination

• •

Undermining (where appropriate)

• • •

Performance bond

Flood insurance

Determination

Perils (e.g. civil commotion)

Third-party insurance (damage to persons)

Escape (where appropriate)

Damages

Warranty Collateral warranty

•

Risk avoidance. Risk avoidance means removing the risk in all forms from the project. Risk avoidance is synonymous with refusal to accept risks. It is normally associated with pre-contract negotiations; however, it might also include rescission (or determination) following a fundamental breach of contract. Another example would be exemption clauses. Risk avoidance is essentially the philosophy of avoiding risk by negotiations or deals to get rid of it completely. Alternatively, it might be possible to redefine the scope and boundaries of the project so as to omit the area that is most risky.

•

Seeking further information. Risk may sometimes be avoided or reduced by seeking additional decisionrelevant information. Some uncertainty is caused by a lack of relevant information, and the level of perceived risk may be reduced if more information is made available. In addition, the accuracy of the chosen forecasting or modelling technique may need to be improved in order to ensure that the risk can be properly addressed. Bias may be another issue and may need to be counteracted by seeking further information.

Risk Control, Policy and Reporting Risk control is the process of using the information that has been learned on a project to assist in the later development of the project. This information may also be used in other projects. This storage and classification of learned information is crucial to any good risk management system. The risk identification and analysis systems may be incorrect or items may have been missed. It is very important that all assumptions and evaluation processes are recorded and then measured in some way in order to see whether or not they are working correctly. In addition, the probability and impact of identified risks may change over time. It is important that identified risks are constantly monitored and reviewed, so that their evolving status may be

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established. This applies especially in cases where risks have been identified but where no action has been taken. The analogy would be a slow puncture in an automobile tyre. The driver knows that there is a problem but, for whatever reason, he or she has decided not to replace the tyre. Provided that the driver keeps an eye on the tyre and keeps on refilling it with air, it may be allright for some time. However, if the rate of air escape increases, the previous decision to do nothing may no longer be appropriate. Experience with risk and risk management is often documented into a risk handbook. This may be incorporated into the organisation’s best-practice documentation. In addition, there must be regular reporting on red-quadrant ‘lion’ risks (see section 3.3), with constant review of the programme for handling these risks. Risk reports should be produced to a timetable and be controlled by an overall strategy. The level and frequency of reporting will depend on the significance of the risk. Once the overall risk strategy has been developed and assessed, it is sometimes adapted and formulated into an overall risk policy. This is simply a statement of the policy of the organisation in terms of risk and risk management. Over and above the identification of risk holders and risk strategies for ‘red’ quadrant risks, the risk policy establishes a number of elements, as follows: •

•

• •

•

Overall aims and objectives Based on the overall objectives of the risk management system, the policy should clearly show what the required outcomes for each section or control unit are. The aims and objectives could relate to the treatment or handling of specific risks as identified on the current and target risk maps, or they could relate to specific risks isolated in the identification and sourcing processes. Accountability for individual managers This is normally established through some kind of task responsibility matrix (TRM) in which individual objectives and obligations are laid out in relation to the policy as a whole. Formalised reporting channels The policy sets out the reporting frequency, circulations, membership and individual responsibilities. Risk tolerances Risk management is not an exact science and it is not possible to meet and achieve all targets with total accuracy. Acceptable deviations and tolerances should be stated in the form of a direct variance envelope. This establishes the limits of acceptable practice and sets an alarm ringing if overall performance moves outside these limits. Authorisation The policy sets out the authorisation procedure. This is important in large complex projects, where it may not be immediately obvious who can authorise what. There will generally be some kind of authorisation filter in place that defines the financial limits (or other measure, such as identified and quantified risk, as appropriate) that apply to authorisation at each reporting level.

Any risk policy should initially develop individual targets for individual sections within the organisation. Once this has been completed, the policy is developed and worked up as a strategic document.

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3.7 3.7.1

Risk, Contracts and Procurement Introduction A contract is a classic way of managing risk. It is simply a formal agreement between two parties. As such, it records the rights and obligations of each party to the contract. It is a tool for risk transfer and mitigation. A contract also allows risk to be controlled. In addition, it provides guidance for each party in the event of a dispute or conflict. Because projects include an element of disagreement and conflict, contracts are a way of transferring the risk implied by these events. Most of all, a contract sets out the liabilities and obligations of each party and establishes the recourse that is available to each party in the event of a default. A contract allows a party to transfer liability for a risk. Risk can be transferred to an insurance company in return for a premium; it can be apportioned to suppliers and subcontractors as part of a subcontract or supply contract (with damages resulting in the event of non-compliance). Where the risk is high, the tender price will be higher to reflect this risk absorption. Different contract types cover different aspects of risk. The general and specific conditions of contract are the primary determinants in evaluating the risk that is borne by the tenderer and therefore in determining the likely tender price. The characteristic of non-performance or non-compliance is conflict. A contract is to some extent a protection against disagreement and conflict. Reasons for disagreement and conflict include the examples listed below. • • • • • • • • •

inadequate and defective contract documentation; inappropriate contractual arrangements; incorrect estimating and pricing; unreasonable risk as allocated by the contract; breakdown in personal communications; insolvency; interface management system problems; vague or unclear contractual terms; ambiguous specification.

The purpose of the contract is to define the rights, dues, obligations and liabilities of each party. Contracts are particularly appropriate in defining and allocating risk. The main risk consideration in terms of contracts and contract law is commensurate risk. Commensurate risk is an obligation when accepting a contract. Commensurate risk is the risk of being unable to fulfil the obligation or duty because of one’s own inadequacy, incapacity, inadvertence or error, or because of interference from outside events or sources. A supplier might find himself or herself unable to deliver a consignment of goods because of a late delivery from a third party. Project Management

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Other possible reasons could include labour disputes or changes in practice or statute, or the death/insolvency of one or both of the contracting parties. With any contractual arrangements, the contract defines only the ground rules. The execution of the contract depends on goodwill, intent and the relationship between the parties. Some contracts, such as insurance contracts, depend on uberrimae fidei, or utmost good faith. This includes an obligation to disclose all information that is relevant to the contract. An example would be the implied obligation to declare all previous claims when entering into an insurance contract. Contracts are deemed to be executed in good faith where there can be no intention to deceive or mislead the other party. 3.7.2

Basic Contract Theory Companies generally have to compete for work. They provide services based on the specifications or requirements of individual tenders that are submitted by client bodies. They usually seek to provide these services on the basis of some form of competitive bid or tender for services. A company might bid to supply components to a car manufacturer for the next five years. The bid might include a guaranteed maximum unit price for the component and possibly some form of guarantee on delivery dates and frequency etc. The bid or tender depends entirely upon the wording of the associated contract conditions. These are the documents that are generally issued with the form of tender. Typical contract documents include items as follows: •

•

•

•

•

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The signature block and project title identify the project and the parties to the contract. This may seem obvious but it has important implications if any part of the contract subsequently becomes the subject of a claim, arbitration or litigation. The definition of contract terms and scope summarises the terms and conditions used and describes the range and extent of the works in sufficient detail to identify the limits of the project. Information and facilities to be provided by the client details the additional obligations of the client under the contract. This could include items such as access to premises while works are carried out and commissioned. Project approvals relate to the various levels of consents and approvals that are required at various stages throughout the project life cycle. It is common practice for reporting stages to be subject to approval. The client may be required to approve each report before the project team can move on to the next phase of the process. In some cases approval may be required from external sources such as local authority or regulator approvals. Payment systems are usually included within the standard or specific conditions of contract. These are generally based around a monthly valuation, where the client and contractor agree on the extent and value of the works that have been completed and add reasonable allowance for agreed variations, materials delivered, legally committed funds and allocation of provisional and overhead percentages. This sum is then paid to the contractor as an interim payment. Such systems go on right through the contract, with Edinburgh Business School

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• • • •

•

•

•

•

•

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a balancing payment at the end of the contract when the works are finally measured and agreed. This is sometimes referred to as the final account. Working drawings show the full design information for the product. The specification describes the technical performance of the product or service being provided. Schedules describe and summarise the various component and assembly requirements. General conditions are standard forms of contract. They are sector-generic and are designed to cover the primary duties and obligations under the contract in most applications. Typical examples would include payment methods, treatment of variations, under which country’s laws the contract is subject to, etc. Specific conditions are drawn up specifically for that particular application. Clients often want to add specific terms and conditions to suit their own circumstances. Typical examples would include restrictions on noise, working times and access. Provision for change and variations is usually included within the general and specific conditions. On a large and complex project, it might be treated separately and be included as a separate document. It would contain provision for the ordering and execution of variations, together with procedures for valuing variations and payment systems. The form of tender constitutes the legal offer to carry out the works and appendices contains a summary of any additional contractual information such as fees and contingencies. The tender usually states the project title and parties involved and acts as an agreement to carry out the works as described for the stated sum. The bid or tender depends on risk: where the risk is low, the tender price can be accurate Dispute resolution is the process for dealing with disputes and arguments. Most contracts call for a first recourse to arbitration, followed by recourse to litigation if arbitration proves to be unsuccessful. This is important as it prevents the wronged party from going directly to court and involving the dispute within a costly and long-term hearing process. Arbitration provides a quicker and cheaper alternative, provided that it is written down as first recourse within the contract and provided both parties agree to it. Increasingly, contracts are calling for the inclusion of Alternative Dispute Resolution (ADR) systems, which involve prescribed procedures to be adopted in the event of a dispute occurring. The procedures are designed to allow reasoned and informed discussion, sometimes chaired by a facilitator, in an attempt to resolve the dispute without the need for it to be taken further. Bonds and warranties specify what provision is required and how this is to be executed. Contracts involving public finance often require detailed bond cover, which is usually required up to a stated percentage of the contract sum – perhaps 10 per cent. Guarantees and warranties may be required over and above this. The bond covers contractor performance up to practical completion and hand-over. The warranty guarantee covers the quality and reliability of the finished product after hand-over and during Edinburgh Business School

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use. The conditions of contract may require that the warranty is secured in some way, perhaps by being insurance-backed. The documents may require a collateral warranty that is transferable in the event of the finished project being transferred or sold to a new owner. In order for a contract to exist, there must be: •

•

•

•

•

Offer and acceptance The offer should be distinguished from an ‘invitation to treat’. A price on a good in a shop window is an invitation to treat. The offer is made when the prospective vendor goes into the shop and offers to buy the good for the stated price. Acceptance occurs when the vendor accepts this offer. When a contractor completes a bid in the form of a tender, that is his or her offer. When the client accepts that bid, that is the contractual acceptance. There are a large number of established rules that apply to offer and acceptance. One example in the UK is the ‘postal rules’, such that acceptance is made when the acceptance is posted to the offeror – the acceptance, if mailed, does not have to reach the offeror, so long as the person who made the acceptance has posted it within the Royal Mail system. Consideration Consideration may or may not be appropriate, depending on the legal system under consideration. It is the exchange of something of value (usually money). This could be the full sale price, or it could be an instalment or a deposit. For the contract to be valid, something of value must be exchanged. An obvious example of consideration would be a deposit paid by a purchaser of a new automobile upon order. Capacity This relates to the ability of parties to perform their obligations under the contract. The contract can be void if one or more parties has agreed to it while knowing that they do not have the capacity to deliver. An example would be a manufacturer who contracts to supply 1000 units per month while his manufacturing limit is 250 units per month. Legal relations The contract itself must be legal and there must be an intention to create legal relations. For example, a contract cannot exist where the consideration or the goods under the contract are illegal. A contract for the supply of banned narcotics would thus be void from the outset. Communication Generally, acceptance has to be communicated to the offeror. There can be no contract if the offeror is unaware that the acceptance has been made. This is limited by a number of considerations such as the ‘postal rules’ mentioned above. With this and some other exceptions, it is generally necessary that acceptance is communicated to the offeror before a contract can exist.

A contract can be successfully performed, or it can be terminated in a number of alternative ways. For performance, all parties must complete their liabilities and duties under the terms and conditions of the contract. Alternatives to performance include the following: •

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•

•

• •

•

3.7.3

and instead delivers a motorcycle. This is breach of contract as the supplier has failed to deliver the goods as detailed in the contract of sale, and a motorcycle is not the same as an automobile in any reasonable consideration or sense. The usual remedy for breach is damages. The supplier would have to refund the full cost of the automobile or supply another one of equal value. The purchaser should not lose out; neither should he or she profit from the damages. Frustration – where a contract cannot be performed, even if both parties wish to do so. An example would be a contract for the supply of goods that have ceased to be available on the market, or where there have been changes in regulations or statute to restrict the sale or distribution of an item that was previously freely available – for instance, a contract for the delivery of depleted uranium shells to a country just before an international standard is agreed banning the use of these weapons. Any contract could not then be performed legally, and therefore becomes frustrated. Rescission – where there has been an error or misunderstanding in the preparation of the original contract. The courts can elect to rescind one or more contract terms if they are not acceptable. Obvious examples would include contradictory contract terms, where one clause says one thing and another clause contradicts it. The court can amend this by rescinding one or more terms, so that there can be only one interpretation. Rectification – where a contract term has been wrongly worded or phrased. The court can rectify the term to make the meaning clear and unambiguous. Void – A contract can be void where, for example, the contract goods are illegal. A contract for the delivery of handguns in the UK would be void from the outset. Termination/determination – most standard forms of contract allow the contract to be determined under certain circumstances. Determination means that both parties can cease their works under the contract, and the party that has determined the contract has a right to seek reimbursement against the party who has been determined. Obvious examples would be determination by the contractor because the client has not paid the contractor within the stipulated time period, or determination by the client because the contractor has failed to make reasonable progress with the works. Most standard forms allow determination and list clear circumstances under which each party can determine and the rights and obligations of each party in the event of this taking place.

Procurement Procurement is the process by which goods and services are acquired. It is the process of the two (or more) different contractual parties, who have different aims and objectives, interacting and agreeing on a contract within a given market sector. Procurement is a very important function. It is the process by which the organisation can attract and contract good quality services. This is important because good procurement leads to good suppliers and this in turn leads to increased performance and improved profitability.

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In most organisations, procurement and contracts preparation and processing is centralised. Most large organisations have a ‘Legal Services’ or similar department which is responsible for procurement and the preparation and execution of contracts. This section typically comprises lawyers and other procurement specialists who act as an interface between the organisation and the outside world, as shown in Figure 3.17.

The organisation

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Functional unit

Functional Manager

Functional Manager

Project team member

Project team member

Project Interface Manager

Legal Services Section

External main contractor

Nominated subcontractors

External suppliers

Domestic subcontractors

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Figure 3.17

Internal legal services section as internal/external interface

Procurement can operate at a strategic level or at a project level. Strategic procurement is involved with the corporate strategy of the organisation. Project procurement is restricted to the procurement options relevant to the specific project, or programme of projects. For instance, the company as a whole might have one single supplier for stationery (strategic procurement), while each individual project manager might have authority for individual choice for procurement of security services (project procurement). 3/60

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Procurement options are also affected by the environment in which decisions are made. There is an internal (micro) environment and an external (macro) environment. The former includes company policy and strategy. The external (macro) environment includes all external variables that can affect procurement options, including general economic activity, interest rates, inflation, statute etc. Procurement generally includes a number of individual life-cycle phases. These vary from country to country and from company to company, but generally there will be a number of common phases, each described next:

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Objective phase. During the objective phase, the objectives of the procurement process are established and reconciled with the objectives of the project (project procurement) and with the overall objectives of the company (strategic procurement). The phase will involve a detailed scrutiny of the project and an analysis of the distribution of authority within the system. Typical considerations would be on choice of contract term. In some cases it is appropriate to form a one-off contract for the supply of goods and services. In other cases, it might be better to form a term contract to run for (say) five years. This would be appropriate for long-term supply contracts or maintenance.

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Exposure phase. It is necessary to produce some kind of listing of possible sources of supply. This may be done by some kind of standardised selection process, where suitable sources are identified from past experience and reliable ones are listed. Alternatively, the project and the procurement options and availability might be advertised. Expressions of interest may be invited. The exposure phase may be individual to the company or may in some cases be set by statute. For example, in the European Union, it is a legal requirement that clients must advertise projects that involve public funds above a certain threshold figure (about ¤1 million in 2001).

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Alternatives phase. The alternatives phase usually involves a scrutiny of the various alternative sources available. It sometimes includes an analysis of each expression of interest, backed up by a testing or evaluation procedure that often involves the submission of accounts, references, confirmation of plant, and manufacturing capability. For larger procurement considerations, and with new applicants, on-site inspections may be carried out in order to verify claims. The alternatives phase also involves a decision on the type of contract to be adopted. It might be decided that the best alternative is for a straightforward competitive tender involving sealed bids that are to be opened by someone in authority at a particular time. Alternatively, it might be considered acceptable to enter into a negotiated contract in order to fix a price, where the work is highly specialised or where there are only one or two suppliers or contractors capable of complying with the requirements of the contract. Negotiations are used frequently in extensions to existing contracts. A supplier might agree to extend the duration of the contract provided that unit rates are increased by (say) 1 per cent per year for the Edinburgh Business School

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next five years. This reduces risk to both parties and saves the client money, in that the advertising and tendering phases can be omitted and the cost of the supply for the next five years becomes fixed.

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Documentation phase. The client (or its consultants) prepares contract documents which describe the works in some way, and to such a level of detail that all ambiguity, or as much as is possible, is removed. This is important because it allows all bidders to bid on the same basis. The idea is to produce true parity of tender. The works are generally described using some form of specification – either a design specification where the designer produces full working drawings of what is required, or a performance specification where the client specifies the end performance characteristics that are required – and the contractor then designs the product and implements it. There is an important distinction in terms of risk here. Generally, the onus of risk lies with the client in a design specification, whereas much of this liability is transferred to the contractor in the case of a performance specification. A good example of this is the 2001 introduction of ‘Turbostar’ trains in Scotland. British Rail used to design and build all trains itself. After railways privatisation during the 1990s, individual train operating companies no longer owned the means of production and had to invite tenders from private locomotive manufacturers. In doing so, they opted for performance specifications in order to transfer risk to the manufacturer. The result was the Turbostar class.

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Tendering phase. Once applicants have been scrutinised, those selected to proceed may be invited to tender or bid as the preferred source. This involves the client in preparing a formal document that usually describes the liabilities and obligations of each party and sets out the terms and conditions of the tender contract. The various short-listed bidders complete these documents and tender their offer. The various tenders are then returned and a tender report is prepared.

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Award phase. The various bids are scrutinised, usually by a legal expert and by a cost expert. It is essential to check that no contract terms or conditions have been amended and that arithmetical or calculation errors have been eliminated. Different standard forms require different actions in the event of any changes or errors being detected. In some cases, the bidder has to be notified and be given the opportunity of correcting the error or amendment; in other cases, the bidder has to be informed but has to stand by the changes or amendments or else withdraw. The award phase can involve a number of additional sub-phases. Examples would include the scrutiny of insurance cover (such as third-party or contractors’ all-risk policies) and the placing of insurance bonds and/or guarantees and warranties. Bonds are again often required on projects that use public finance. They involve a bank or insurance company providing surety, which can take anything from days to weeks for the tenderer to set up. Edinburgh Business School

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Contract administration phase. Having awarded the contract, the client or its consultant professional advisors administer the contract in order to ensure that both parties comply with its terms and conditions.

Characteristics of Contracts Controllable and Uncontrollable Risks The level of risk in any contract depends on the degree and extent of controllable and uncontrollable risks. Controllable risks include such factors as human error and decision making. These risks are internal to the project and are controllable by good management and good quality-control procedures. Controllable risk can generally be foreseen and therefore adequate provision can be made against its occurrence. Uncontrollable risks include factors that are outside the immediate control of the project, such as exceptionally adverse weather conditions. These risks are generally outside the control of the parties to the contract. It may be possible to cover or reduce some such risks by some form of insurance. In all cases there will be some fundamental contractual risks. These include the examples listed next:

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Adequacy of design: latent and patent defects. All designs can contain errors, particularly in items such as the selection of materials. Defects can be patent (obvious) or latent (hidden). The liability for defects can often depend on how the choice or selection of materials has been specified within the contract documents.

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Project eventual cost. Cost limits or targets may be stated as part of the overall contract documents, but there is generally no guarantee that the project will cost the target sum or even fall within a target window. The risk for cost overruns may be client- or contractor-based.

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Safety and indemnification for accidents. Most standard forms of contract incorporate specific provisions for indemnity; they can take many forms. One example is professional indemnity insurance, where professional people such as doctors or solicitors indemnify themselves against negligent acts.

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Third-party insurance. There is often a general requirement for insurance against damage to third parties. Most production processes include some risk to adjacent properties or people. Third-party insurance covers this risk.

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Fire, flood etc. Most manufacturing and production processes take place within an environment that is to some degree susceptible to fire or flood. There are very few exceptions, and most projects will require this type of insurance cover. Edinburgh Business School

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Completion deadlines: liquidated and ascertained damages. Most projects have to be competed by a specific and stated deadline. If the project is competed late, the contractor and the client are both likely to lose money. As a result, most standard forms of contract include specific clauses to protect against late completion. Damages for late completion may be punitive, or (more likely) liquidated (i.e. cash) and ascertained (based on actual losses incurred).

Express and Implied Terms Contracts contain both express and implied terms. Express terms are those that are clearly expressed within the wording of the contract. Implied terms are those that can be implied from the wording of the contract or from common usage. Fundamental risks are generally covered by express terms. Liabilities (such as reasonable duty of care) are generally covered by implied terms. The difference between express and implied terms is important. Most contracts for goods and/or services comprise clear and precise terms and conditions, which are written down and which clearly and accurately define the rights and obligations of each party to the contract. If either party fails to fulfil these precise requirements, that party is in breach of contract. A contract for the sale of an automobile will describe the make and model and give a delivery date. These are clear conditions and it is easy to see whether they have been met. However, there are contractual situations where it is inappropriate to try to write down every single right and obligation under a contractual agreement. An example might be a contract for professional services. If a person visits the doctor, he or she does not sign a formal contract. Neither is there a list or schedule of what questions the doctor will ask or how the doctor will arrive at a diagnosis; the patient leaves it up to the doctor because the doctor is a professional ‘consultant’. There are clear implied terms, however. The patient has a right to expect the doctor to act professionally and to provide services of an adequate standard. If the individual doctor fails to meet those implied contractual standards, that person could be disciplined by the General Medical Council (or equivalent) of that country. These implied terms are very common in contracts for professional services. The appropriate professional body sets out the main codes of practice and practice standards for its members. When a person hires a professional, the professional has an implied duty to act in accordance with those standards. In most cases, consultants and other professionals are required to carry professional indemnity insurance (PII). Large employers, such as health trusts, usually carry block PII insurance to cover all the doctors that they employ. The same goes for large architectural practices or legal firms. If there is a negligent act, the hirer might successfully claim compensation. In a medical case, this could be a substantial amount of money covering lost earnings, career damage, inconvenience, compensation etc. The sums involved may be beyond the limits of individuals or even small companies, and so the PII cover is very important. In many professions, PII claims are becoming more frequent and PII premiums are consequently becoming very expensive.

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3.7.5

Transfer of Risk in Contracts Contracts are vehicles for risk transfer. Risk can usually be transferred to whatever degree is considered necessary by the person who is drafting the contract. In general, the greater the transferred risk the greater the cost of the project because the suppliers or contractors (or whoever else is accepting the risk) will increase prices and mark-up to allow for the increased risk. Risk is sometimes transferred through indemnity clauses. These are sometimes called ‘hold harmless’ clauses. An indemnity clause seeks to transfer specific risk for specific events onto a named party. In general, case law suggests that the courts may be unsympathetic to parties who try to contract out an unreasonable proportion of overall liabilities. (e.g. the Unfair Contract Terms Act 1977). Reasonable transfer of risk through a contract also depends on the ability of the risk bearer to absorb any damages. In general terms, the person who accepts a given risk must have the ability to pay the costs that are incurred if the risk is realised.

3.7.6

Variation Orders and Change Notices Contract terms and conditions define the obligations of each party under the contract. The contract documents, including the working drawings, specification etc., describe the works in detail and allow accurate pricing and parity of tender. However, no matter how well the contract documents have been prepared and how advanced the design is, there will always be some information that is missing at the tender pricing stage. In addition, once the work actually starts, there will always be some unforeseen events – maybe design changes, or external factors such as code of practice changes – that require changes to the specified design or production processes and therefore to the contract itself. There has to be some system in place for allowing agreed changes or variations to what was agreed in the contract. In addition, there is generally a need for strategic change management. A given project might only be one of a whole series in operation at any one time. Individual project priorities might change over time. There is therefore a need for some kind of change control and change management system. Variations allow for changes to be made to a contract without invalidating it. Changes can be technical, such as changing a type of wiring in a computer, or administrative, such as extending the date for delivery. The main requirement for a variation order or change notice is that it is fair to both parties to the contract. Any variation has obvious time and cost implications and might have performance or quality implications. In order for the variation to be valid, it must be possible to price it in some way and then reimburse or compensate the affected party.

3.7.7

Claims Risk If variations occur, or if the project is delayed or changed for other reasons, the parties to the contract might seek reimbursement from the party that has caused the delay or change. This is usually done through the assembly and submission

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of a direct claim. If this is disputed, the party might seek recourse through litigation, in which case the claim would be converted into a claim for damages. If a contractor causes a delay and this leads to an extension of time for completion of the whole project, then the contractor will reasonably have to compensate the client for this delay. Compensation will usually take the form of some kind of liquidated and ascertained damages, based on the client’s actual loss. If the client causes the delay so that the contractor has to take longer to finish its work, then the client will reasonably have to compensate the contractor. This will usually involve indirect damages and direct loss and expense, where the contractor builds up a claim. The claim will include everything that the contractor incurs costs for, such as labour, plant hire, overheads, insurance premiums etc. Large contractors employ teams of claims specialists, who develop and exploit claims of this kind. Most standard forms of contract list items that are acceptable as the basis for a contractor claim. These are items that the contractor has no control over and that therefore have to be classified as client risk. Typical examples of client risk include: • • • • • • • • • • •

failure to provide information within a reasonable time of the contractor requesting it; late instructions; errors or omissions in the contract documents; delays caused by nominated subcontractors; delays caused by client consultants; changes in statute; non-availability of labour; civil commotion and disruption; declaration of war and/or war damage; exceptionally adverse weather (where appropriate); determination of contract by contractor.

These occurrences would allow the contractor to claim an extension of time. Some of them would also allow the contractor to claim direct loss and expense (i.e. reimbursement of costs incurred as a result of the delay). Some items, such as exceptionally adverse weather, only allow the contractor to claim an extension of time, not direct loss and expense. Other items, such as errors in the contract documents, allow the contractor to claim both an extension of time and direct loss and expense. The precise classifications and listings will, of course, vary from contract to contract. A contractor or client might be able to claim reimbursement on other grounds. Examples would include external uncontrollable risks such as fire and flood. Generally it is an obligation for the client to insure against such risks. If they do occur, they are usually claimable by the contractor. Examples include: • • • 3/66

fire (within limits); flood; lightning; Edinburgh Business School

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impact of aerial devices or objects dropped therefrom; ionising radiation.

These are events that cannot reasonably be foreseen by either party, and it is therefore the responsibility of the client to insure against them if they are likely to affect the progress and well-being of the client’s project. Fire insurance may sometimes not be necessary, depending on the type of work involved and whether or not the contractor’s actions affect the probability of a fire occurring. An example might be where a contractor is carrying out works that involve welding and that are carried out inside the client’s premises. The contractor is generally also required to carry some insurance in relation to events or occurrences that could affect the project. Examples include: • • •

employer’s liability for employees; liability for damage to third party persons and property; escape of potentially harmful or hazardous materials

Large contractors generally cover these risks with some kind of all-risks policy. All employers have to carry insurance cover against compensation claims by employees or others who might be injured as a result of works, including damages to both persons and property. Undermining risk might be appropriate where large excavations or tunnelling is involved in built-up areas. Escape could be appropriate where any potentially harmful substances are used.

Learning Summary The Concept of Risk • • •

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Risk is all around us and plays a part in virtually everything that we do. Risk management originated in the US and the UK during the design of the first nuclear power stations. Risk management has to consider both individual risks and also the overall collective effect of other risks. The net impact of individual and collective risks can be quite different. Risk is a measure of the probability and consequence of not achieving a specific project goal. It therefore depends both on the likelihood (probability) of an event occurring and on the consequences (impact) of that event should it occur. Risk is a function of the probability of an event occurring and the consequences of the event if it does happen. Risk = f (event, uncertainty, consequences). Risk is also a function of the level of hazard represented by an event and the degree of safeguard that is put in place to counter it. Risk = f (event, hazard, safeguard). An organisation’s sensitivity to risk is a function of three elements. These are: – the degree of exposure (or vulnerability) to particular risk impacts. Edinburgh Business School

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the significance (or severity) of the enterprise’s exposures to the realisation of different events. – the firm’s ability to manage the implications of those different possible events, should they occur. Sensitivity is therefore a measure of likelihood and impact, modified to some extent by the ability of the organisation to manage these variables. The use of risks to create value is changing. The profile of risk management and the risks defined by organisations in decision making are also changing. This is an uncertain world. Very few things are certain apart from taxes and death. In such an environment, all investments must be subject to some degree of uncertainty and therefore risk. Risk management is a key element of the management of investment and the generation of return. Risk and opportunity go hand in hand. Everybody is on the lookout for a good opportunity. Opportunities exist within an uncertain world and are therefore subject to uncertainty and risk. The relevant risks have to be effectively managed if opportunities are to be exploited. Risk intimidates competitors. It prevents them from taking advantage of market opportunities that exhibit hazard above a certain level. Risk and risk management should not be seen as purely static. Risk management is not just about identifying potential negative events and then taking precautions against them. It is about looking at the complex world of business and analysing the myriad opportunities that present themselves and then making an informed decision on which are the best ones to commit to. In order to succeed, companies have to take risks. They have to commit scarce and expensive resources to uncertain business activities. The more research and analysis that can be put into the risks that underlie those activities the better. Risk is therefore both a good thing and a bad thing. It is the driving force behind innovation and enterprise, but it is also a threat if not properly evaluated and managed. It is particularly significant in a project context, where the work is typically complex and does not form part of a repetitive cycle.

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Decision making and risk are fundamental elements of the human cognitive process. People make decisions in relation to perceived rewards and risk; the decision-making process is largely dependent upon perceived rewards and risks. Perception of risk varies from person to person and in relation to the potential effects of the risk event. Most aspects of the human cognitive process make a subjective evaluation of risk. This ability is a basic survival tool and has been essential for human development. Edinburgh Business School

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Pattern recognition is where the brain takes incoming information and stores it temporarily at a superficial level, and then compares that information to previously stored information in order to make an assessment of what the new information represents. Bounded rationality is based on the philosophy that a being will generally opt for rational behaviour within constraints. The relationship between possible actions and acceptable outcomes determines what actions are to be considered as part of the decision-making process. Possible actions are subject to the constraints of acceptable outcomes, and satisfactory outcomes are not necessarily optimal outcomes. ‘Prediction momentum’ allows forward projections based on current events and past experience to be made. Any forecasting technique is only as accurate as the data that are used in developing it and operating it. The primary determinants of prediction model development and application are time scale, cost of production, and lack of bias about future events. Intuition can be both individual and organisational. Companies store and use collective experience in much the same way as individuals do. Most researchers would agree that the analysis and synthesis of a problem is a four-stage process. These stages are framing, formulation, evaluation and appraisal.

Risk Handling • •

Risk control is particularly important in monitoring the evolution of risks. Risks change in terms of probability and impact over time; it is imperative that any such evolutions are monitored and controlled in modern business.

Types of Risk • •

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Market risk is dynamic. It is concerned with both positive and negative values, or potential gains and losses. Static risk considers losses only. It looks at the potential losses that could occur and seeks to implement safeguards and protection in order to minimise the extent of loss. External risk originates and operates outside the organisation. Typically, the organisation has little or no control over external risk. Internal risks originate from within the organisation; at least in theory, the company should have some control over them. Predictable risks are ‘known unknown’ risks, such as changes in interest rates during times of fluctuations in the economy. Unpredictable risks are the ‘unknown unknowns’ such as the collapse of a major bank. These are unforeseeable.

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Risk Conditions and Decision Making •

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In general terms, there are three possible circumstances under which decisions can be made. These are conditions of certainty, conditions of risk and conditions of uncertainty. Decision making under conditions of certainty implies that the decision maker knows with 100 per cent accuracy what the outcome will be. In other words, all the necessary decision-making data and information are available to assist the decision maker in making the right decision. There will be one dominant strategy or risk that will produce larger gains or smaller losses than any other risk, for all states of nature. There are no probabilities assigned to each state of nature (equal likelihood of occurrence). Decision making under conditions of risk implies that the level of risk can be assessed and quantified in some way. The difference between conditions of uncertainty and conditions of risk is that under risk there are assigned probabilities. These relate to the ‘known unknowns’. Under conditions of uncertainty, it is not possible to predict what state of nature will apply. There are several uncertainty criteria that can be considered. These are Hurwicz, Wald, Savage and Laplace. The Hurwicz criterion is sometimes referred to as the ‘maximax’ criterion. The decision maker is always optimistic and seeks to maximise profits by an all-or-nothing approach. The decision maker is not concerned with how much he or she can afford to lose. The Wald criterion is sometimes referred to as the ‘maximin’ criterion. The decision maker is pessimistic and seeks to minimise losses. The decision maker is concerned with how much he or she can afford to lose. He or she will consider only the minimum profits (not losses); losses are not considered to be an option. The Savage criterion is sometimes referred to as the ‘minimax’ criterion. The decision maker is a ‘bad loser’. He or she therefore attempts to minimise the maximum regret. The maximum regret is the largest regret for each strategy, and the largest regret is the greatest difference within a state of nature column in the pay-off matrix. The Laplace criterion attempts to convert decision making under uncertainty into decision making under risk.

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Risk can be a good thing. Without risk there is no reward, and risk breeds innovation. Risk is therefore to be encouraged within an organisation, but it is also dangerous and therefore it has to be managed. A risk management system aims to identify the primary risks that an organisation is exposed to, so that an informed assessment and proper decisions can be made to safeguard the organisation. Most Risk Management systems contain five distinct areas. Edinburgh Business School

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– risk identification; – risk classification; – risk analysis; – risk attitude; – risk response. Risk sources are often classified in terms of objective and subjective sources. Objective sources use the sum total of past experience of past projects in relation to the current project. This source is sometimes referred to as ‘experience’. Subjective sources use the sum total of current knowledge based on current experience. Estimates of current performance are made based on optimistic, likely and pessimistic estimates, relevant to current estimates. Risk identification often makes use of brainstorming techniques. Most work on classifying risk is linked (at least in part) to so-called portfolio theory. Risk can be primarily classified in terms of: – risk type; – risk extent; – risk impact. Once the risks have been identified and classified, they have then to be analysed. Risk analysis is based on the identification of all feasible options and data relating to the various risks, and to the analysis of the various outcomes of any decision. Most risk analysis approaches involve the identification of risk drivers. The risk drivers are all the factors that influence the impact and probability of the identified risk. The process of risk mapping is sometimes referred to as ‘risk profiling’ or even ‘risk footprinting’. It is basically a process for showing the relationship between risk probability and impact for a range of given risks, as a function of time. A basic risk map has four quadrants; it is relatively easy to expand this to more sectors. Quadrant 1 (red zone: high impact/high probability) represents the dangerous risks. No business can survive accepting these risks at this critical level over the long term. They have to be addressed at once and immediate action has to be taken. They are strategically important and appropriate action is immediately required. Quadrant 2 (upper yellow zone: high impact/low probability) represents risks that are not as crucial as those in the red zone. However, they require close attention as they include the severe effects of extraordinary events. Quadrant 3 (lower yellow zone: low impact/high probability) represents risks that often related to day-to-day operations and compliance issues. They are the ‘unmanaged hurricanes’. Quadrant 4 (green zone: low impact/low probability) represents risks that are not of sufficient stature to allocate specific resources. They are generally insignificant and are acceptable at their present level. Edinburgh Business School

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The attitude of the risk taker is obviously an element in risk management. Much risk evaluation is subjective and therefore the perceived level or risk involved with a course of action depends on the attitude of the risk taker. Different types of people and even different professions characteristically exhibit different standard risk-attitude characteristics. Risk response basically centres on risk distribution. Obvious risk responses include: – risk retention; – risk reduction; – risk transfer; – risk avoidance; – seek additional information about the risk. Ignoring the risk is obviously itself a high-risk strategy. Informed risk retention is another consideration. This is most suited to risks that are characterised by small and repetitive losses. Risk may be reduced by a number of means. It may be possible to engineer risk out of the equation. In addition, risk may be reduced by training and development, or by redefining the aims and objectives of the project. Risk transfer involves transferring the risk to others. There are numerous ways in which this can be done. Liability could be transferred through contractual clauses or through negotiation. Probably the most common way of transferring risk is through an insurance contract. Not all risks can be transferred, and there may be some risks where it is not economical to do so. Risk avoidance means removing the risk in all forms from the project. Risk avoidance is synonymous with refusal to accept risks. It is normally associated with pre-contract negotiations. Risk may sometimes be avoided or reduced by seeking additional decisionrelevant information. Some uncertainty is caused by a lack of relevant information; and the level of perceived risk may be reduced if more information is made available.

Risk, Contracts and Procurement •

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A contract is a classic way of managing risk. It is simply a formal agreement between two or more parties. It records the rights and obligations of each party to the contract. A contract is therefore a tool for risk transfer and mitigation. A contract also allows risk to be controlled. In addition, it provides guidance for each party in the event of a dispute or conflict. In order for a contract to exist there must be: – offer and acceptance (mutual agreement); – consideration – i.e. some form of payment (depending on the legal system); – capacity; Edinburgh Business School

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– intention to create legal relations; – communication. Alternatives to performance include the following: – breach; – frustration; – rescission; – rectification; – illegality; – voider; – termination/determination. If variations occur, or if the project is delayed or changed for other reasons, the parties to the contract might have recourse to seek reimbursement from the party that has caused the delay or change. This is usually done through the assembly and submission of a direct claim. If this is disputed, the party might seek recourse through litigation, in which case the claim would be converted into a claim for damages. Most standard forms of contract list items that are acceptable as the basis for a contractor claim. These are items that the contractor has no control over and therefore have to be classified as client risk. Typical examples of client risk include: – failure to provide information within a reasonable time of the contractor requesting it; – late instructions; – errors or omissions in the contract documents; – delays caused by nominated subcontractors; – delays caused by client consultants; – changes in statute; – non-availability of labour; – civil commotion and disruption; – declaration of war and/or war damage; – exceptionally adverse weather (where appropriate); – determination of contract by contractor.

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Review Questions True/False Questions The Concept of Risk 3.1 Risk is necessary for innovation and added value. T or F? 3.2 The first level equation for risk links uncertainty with consequences of an event. T or F? 3.3 The second level equation for risk links hazard with safeguard. T or F? 3.4 Exposure is a measure of an organisation’s ability to manage risk. T or F? 3.5 Sensitivity is a measure of how much a particular risk impact affects the organisation. T or F?

The Human Cognitive Process 3.6 Perceptions of a given risk are constant for all people. T or F? 3.7 Bounded rationality assumes that an individual decision maker will opt for rational decisions within boundaries. T or F? 3.8 The human cognitive process generally works by making subjective assessments for risk. T or F? 3.9 Prediction momentum allows forward projections and predictions to be made, based on past experience. T or F? 3.10 The analysis and synthesis of a problem involves framing, formulation, evaluation and appraisal. T or F?

Risk Handling 3.11 Any risk management strategy comprises risk assessment and risk control. T or F? 3.12 The organisation has some control over internal risk. T or F? 3.13 The organisation has no control over external risk. T or F?

Types of Risk 3.14 Market risk is concerned with potential gains and losses. T or F? 3.15 Static risk is concerned with potential gains only. T or F? 3.16 Risks originate only within the organisation itself. All risks are internal risks. T or F? 3.17 All risks are to some extent predictable. T or F?

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Risk Conditions and Decision Making 3.18 Decisions can be made under conditions of certainty, risk and uncertainty. T or F? 3.19 Certainty applies where the outcome is known beforehand. T or F? 3.20 Risk applies where the outcome can be expressed in terms of a probability. T or F? 3.21 Uncertainty applies where the outcome cannot be predicted with any accuracy. T or F? 3.22 Risk is essentially the same as uncertainty. T or F? 3.23 Hurwicz is a pessimistic approach. The decision maker seeks to minimise loss irrespective of potential profits. T or F? 3.24 Wald is a pessimistic approach. The decision maker seeks to maximise profits irrespective of loss. T or F? 3.25 Savage is a bad loser approach. The decision maker seeks to minimise the maximum regret. T or F?

The Concept of Risk Management 3.26 Risk management as a concept comprises a number of separate areas. T or F? 3.27 Risk identification is the process of analysing a risk to evaluate its likely impact. T or F? 3.28 Risk classification is the process of identifying the origin of the risk. T or F? 3.29 Risk analysis involves the qualitative or quantitative analysis of the risk. T or F? 3.30 Risk response is the last stage of the risk management process. It can involve accepting the risk, mitigating it, transferring it or rejecting (avoiding) it. T or F? 3.31 An insurance contract is an example of a formal risk retention. T or F?

Risk, Contracts and Procurement 3.32 A contract is a way of formally allocating risk between the parties to the contract. T or F? 3.33 An insurance contract is an example of a partial risk transfer. T or F? 3.34 A contract requires formal offer and acceptance. T or F? 3.35 A contract generally comprises terms and conditions. T or F? 3.36 The only way to break a contract is through breach of one or more terms and conditions. T or F?

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Multiple Choice Questions The Concept of Risk 3.37 Risk that originates inside the organisation is known as: A

internal risk.

B

external risk.

C

market risk.

D

static risk.

3.38 Most risk management systems are concerned with the: A

environment.

B

sector.

C

company.

D

project.

E

all four.

3.39 Risk sensitivity is a function of: A

exposure.

B

significance.

C

ability to manage.

D

all three.

E

None of the above.

3.40 Dynamic (market) risk is concerned with: A

potential gains.

B

potential losses.

C

Both.

D

Neither.

3.41 Insurable (static) risk is concerned with: A

potential gains.

B

potential losses.

C

Both.

D

Neither.

The Human Cognitive Process 3.42 Human cognition analyses risk in terms of:

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A

subjective assessment.

B

objective assessment.

C

Both.

D

Neither.

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3.43 In human cognition, possible actions are subject to the constraints of: A

acceptable outcomes.

B

unacceptable outcomes.

C

possible outcomes.

D

All three.

3.44 Prediction momentum uses which of the following? A

Prediction modelling based on conjecture.

B

Prediction modelling based on future projections.

C

Past events and interpolation.

D

Past events and extrapolation.

Types of Risk 3.45 The risk of a fire on a project is an example of: A

external market risk.

B

external static risk.

C

internal market risk.

D

internal static risk.

3.46 The risk of a change in interest rates is an example of: A

external market risk.

B

external static risk.

C

internal market risk.

D

internal static risk.

3.47 The risk of the insolvency of a major debtor is an example of: A

external market risk.

B

external static risk.

C

internal market risk.

D

internal static risk.

3.48 The risk of a sudden change in customer demand is an example of: A

external market risk.

B

external static risk.

C

internal market risk.

D

internal static risk.

Risk Conditions and Decision Making 3.49 Rolling a dice and calling ‘five’ is decision making under conditions of:

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A

certainty.

B

risk.

C

uncertainty.

D

None of the above.

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3.50 A decision maker who is concerned primarily with ensuring that at least some return is generated would work under which of the following criteria? A Hurwicz criteria. B Wald criteria. C Savage criteria. D Laplace criteria. 3.51 A decision maker who is concerned primarily with maximising profits, irrespective of possible losses, would work under which of the following criteria? A Hurwicz criteria. B Wald criteria. C Savage criteria. D Laplace criteria. 3.52 A decision maker who is a bad loser (regret minimisation) would work under which of the following criteria? A Hurwicz criteria. B Wald criteria. C Savage criteria. D Laplace criteria.

The Concept of Risk Management 3.53 Most risk management systems contain a number of distinct phases. Which of the following is the number of phases? A Four phases. B Five phases. C Six phases. D None of the above. 3.54 The A B C D

most common method of risk transfer is by : negotiation. contract. performance guarantee. None of the above.

Risk, Contracts and Procurement 3.55 A contract is a way of: A avoiding risk. B transferring risk. C accepting risk. D mitigating risk. 3.56 Which of the following are the two key elements in the formation of a contract? A Intention and invitation. B Rescission and rectification. C Offer and acceptance. D Performance and breach.

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3.57 Standard conditions of contract contain primarily: A

implied terms.

B

express terms.

C

equal amounts of both.

D

neither.

Mini-Case Study Background Detailed risk management systems and especially risk assessment systems, are increasingly being used by police commanders when deciding on the overall risk classification to allocate to a particular major planned event. Police commanders tend to use detailed risk assessments in three main areas of the work they commend. These areas are listed below. • •

•

Everyday operations: including routine patrols and inspections. Planned major events: including events where a significant police presence is required such as big football games, international golf tournaments and major political events such as international conferences involving heads of state. Unplanned major events: including unplanned events where a significant police presence may be required such as a major terrorist attack or a major robbery or other form of crime.

It will be appreciated that a policing requirement such as a planned major event is clearly a project. The major event has clear start and finish times and has clear project aims and objectives, one of which, presumably, is to maintain adequate levels of security for the duration of the event. It should also be appreciated that a given police commander has to allocate his or her resources so that the demands of everyday policing, planned major events and unplanned major events can be met. In the worst case scenario, a force chief may find that he or she has to resource a planned major event as well as provide standard levels of everyday policing, and is then faced with a major unplanned event such as a large scale train crash or civil disorder. In the case of a planned major event, a particular police commander may be able to isolate a list of potential risks affecting the successful outcome of the police operation. These risks may be identified either following standard identification procedures or by using an initiative based on observed events. Having assembled the list of possible risks, the police commander can then assemble a risk map and decide on what action to take in response to the identified classifications of risk. The commander can also use the map together with updated current information to evaluate how the risk profile of the planned major event is changing over time. A commander may be given the responsibility for providing police security services to a major meeting of heads of state. The security implications of such Project Management

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an event could be considerable as the conference itself could be targeted by a whole range of different groups or individuals who may want to cause any kind of unfavourable outcome from minor disturbance to large-scale loss of life. Questions: 1 Identify a representative range of risks that the commander should consider 2 Draw a risk map showing the primary risks. 3 Consider how the risk profile could change over time as a function of external events.

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Module 4

Project Management Organisational Structures and Standards Contents 4/2

4.1

Introduction

4.2 4.2.1 4.2.2 4.2.3 4.2.4 4.2.5

Organisational Theory and Structures Introduction The Project within an Existing Organisation The Project External to the Existing Organisation Criteria for Selecting the Organisational Structure Summary

4/5 4/5 4/6 4/28 4/46 4/50

4.3 4.3.1 4.3.2 4.3.3

Examples of Organisational Structures Introduction Example of an Internal Project Management Structure Example of an External Project Management Structure

4/50 4/50 4/50 4/54

4.4 4.4.1 4.4.2 4.4.3 4.4.4 4.4.5

Project Management Standards Introduction The APM and the APM Body of Knowledge BS6079 PRINCE2 Summary

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Learning Summary

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Review Questions

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Mini-Case Study

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Learning Objectives This section discusses the various organisational structures that may be appropriate for organisations that are using project management. Organisations can be structured in many different ways, and project management structures can take numerous forms and can exist within or outside existing organisational structures. The organisational structure that is most appropriate for a given scenario depends on a range of factors; there may be no one specific organisational design that is most appropriate for the demands of a given application. These factors include project size, team size, production system and internal or external status. Project management structures and operational systems are also heavily influenced by standards. Project management as a global profession is regulated by Project Management

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these standards; they act as links or gateways into corresponding professional levels within other professional associations that have project management specialisations. Project management standards operate at a number of levels, from global to national to sector and even to company-specific. By the time you have finished this module, you should be familiar with the following: • • • • • •

4.1

the concept of project management organisational structures; the difference between internal and external systems; the organisational links that bind these systems together; the Association for Project Management Body of Knowledge and BS6079; the concept of the BS6079 Generic or Strategic Project Plan (SPP); the way in which these standards combine to establish operational procedures.

Introduction This module considers the various organisational forms and structures that can be adopted by an organisation in developing its project management systems. The organisational structure defines the arrangement of resources within an organisation. There may be no single specific solution for any given organisation. The manager of a football team might arrange his or her players in different ways depending upon the nature of the opposing team. More defenders might be needed in the face of a more aggressive opponent, whereas more attackers might be appropriate where a more defensive opposition is encountered. The organisational structure might change during the course of a particular game – for example, if the team scores a goal and subsequently wishes to defend that lead. Players who were previously attacking might be called back to midfield with midfielders pulled back into defence. The organisational structure of a given company or project is sometimes summarised in the format of an organisational breakdown structure (OBS). An OBS is a type of map. It is the same concept as a work breakdown structure or WBS (see Module 5). An OBS shows the main components of the organisation and how they relate to each other in terms of control and communication, and in terms of any other linkages or connections that cement the various components together. The main components are usually shown as boxes; and the communication or control links or other forms of linkages that hold the structure together are shown as lines between these boxes. Project management may appear in numerous different forms depending on the type of organisation that is being considered. There is no single project management structure, different versions or derivatives of different types of project management structure being found everywhere. A project manager must be able to look at the organisational structure that exists at any one time and be able to see how most effectively to initiate a project structure within the existing organisational structure. Alternatively, the project manager also has to be able to establish an external project management team and integrate it as fully as necessary within the existing internal structure of the organisation. Project

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management is therefore very much about looking at existing organisational structures, looking at the proposed or required project structure, and then adapting and modifying the two structures to produce a new project-containing structure that is a compromise between the two earlier formats. The most obvious initial choice is between an internal and an external structure. The project can be established using internal or external resources and in some cases it may incorporate both. This concept is summarised in Figure 4.1.

Existing organisation structure

Proposed project structure

The project

Existing organisation structure

Control system

Control linkage

Proposed project structure

Option 1. Project retained outside existing structure (external project management)

Existing organisation structure Proposed project structure

Option 2. Project established as an internal sub-system (internal project management)

Existing organisation structure

External consultant Proposed project structure

Control linkage

External consultant Option 3. Internal system with external specialist support in specific areas

Figure 4.1

Internal and external project management systems

Projects teams can therefore be established that are: • • • Project Management

wholly internal to the organisation; wholly external to the organisation; partly internal to the organisation but with external specialist support. Edinburgh Business School

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Whether internal or external, the establishment of the project team will also be dependent upon the structure of the organisation itself. As discussed in Module 2, organisational structures vary widely. Some organisations are structured according to functional divisions. In such cases, the organisation is split up into functional units or specialisations. Each division concentrates on a separate aspect of the organisation’s overall objectives. A university is split into separate faculties; each faculty is split into departments; and each department is split into teaching, research, administrative support and so on. Each department specialises in its own functional area. The department of civil engineering operates separately from the department of chemistry, the research and teaching interests being entirely different. The other extreme would be a pure project arrangement, where there are no functional specialisations. Individual group leaders use individual specialists to form project teams. These teams work individually to achieve separate goals and objectives. Once these have been achieved, the project teams dissolve and new project teams form. This form would be more appropriate to pure research and development applications, where functional divisions are unnecessary. A compromise between these two extremes is the matrix structure where functional groupings exist, but project teams are formed across the rigid functional boundaries. An example would be a research and development organisation where a pool of specialists is needed and where these resources can be allocated – and reallocated – in response to changes in the rate of progress of the research. Within the matrix system, there are several possible sub-forms for organisational structure. The two main sub-forms for projects are internal and external forms. These forms act as the basis for internal and external project management systems (see Figure 4.1 again). Internal project management is sometimes known as operational (or non-executive) project management, while external project management is sometimes known as executive project management. Internal project management is characteristic of larger organisations with constant high volumes of repetitive work. Examples would include central and local government, military and paramilitary organisations such as the police force, and educational establishments including schools and universities. External project management is characteristic of smaller more responsive project teams such as professional consultancies acting on behalf of a client. Workloads are more variable and so a flexible approach is essential. This module looks at these alternative structural forms in some detail. It then goes on to look at project management standards. All organisations are governed to some extent by standards. There are various generic national and international standards that apply to project management practice. The module considers the primary codes of practice and standards that apply to EU and global project-management practice. A basic understanding of these is important because these standards define what project management actually is and how it develops and operates within a particular organisation and sector. Project management practice is open to interpretation to some extent; nevertheless it is important that students of the subject are aware of the emerging global standards, such as they are, that apply.

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It should be noted that it is not necessary to develop a detailed knowledge of these standards. The student simply needs to be aware of what standards there are and what they attempt to do.

4.2 4.2.1

Organisational Theory and Structures Introduction The tools and techniques used in project management are becoming more and more refined and sophisticated. Complicated planning and control techniques are widely used in almost every aspect of project management. In parallel, developments in information technology have led to a proliferation of computer programs that assist in these and other aspects of the project manager’s responsibilities. It is now relatively easy to obtain and operate complex software that handles estimating, cost control, cash-flow modelling, planning, budgeting, monitoring and controlling. Relatively low-cost software will calculate variances, smooth out resources, define the critical path, project cash flows, and carry out any number of other complex tasks. Modern software can perform these tasks at the push of a button and provide today’s project managers with a level of effective support that was never dreamed of even ten years ago. If project management relied solely on tools and techniques, it would be a surprise if, given the quality of what is available, projects failed or were ‘too successful’ and it would be logical to assume that there was an urgent need for further development of the tools. So where does the unpredictability come from? The ‘joker’ in the project management pack is the people, and more specifically, how they are organised and managed. In most cases, it is people that make projects succeed or fail. People make decisions; they predict, plan for and control the progress. They make the correct decisions and they make the mistakes. Every project is unique and the people involved contribute more to that uniqueness than any other factor. It is largely the people and how they relate to the project environment that determines the project’s success or failure. People are usually more difficult to organise and predict, and therefore control, than schedule or cost performance. Costs can be easily classified as numbers, which are relatively easy to understand – numbers are impersonal and only react to physical changes in the project. People operate in a different way. They perform differently under apparently similar conditions, and individuals and teams can operate in different ways even when subjected to the same external stimuli. A project team can contain exactly the right combination of people, with exactly the right combinations of experience and qualifications, but the team might not work as well as it should. The problem could lie in a wide range of non-quantifiable ‘people issues’. A typical example would be personality conflicts. Two key team members might have a personality clash that has nothing to do with the project or the team itself; they may simply dislike each other as individuals. If not handled properly by the project manager, this clash could quickly affect the performance of the team and therefore of the

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project. Yet it was not predictable and it cannot be dealt with by using any quantitative tools or techniques. In most cases, the people themselves do not work randomly and without direction on the project; they are organised into teams. The teams work individually and collectively to meet the overall objectives of the project, sometimes making use of complex IT facilities. The people within an organisation work as part of the overall organisational structure of the system. This defines the position of each individual within the system in terms of authority, span of control and the other classic organisational variables. The organisational structure is therefore critical to the operation of the project. Different types of organisational structure are more or less appropriate for different types of project. There are numerous ways of forming project teams within and outside existing organisational structures. The most common project-management form is of a project team working within an existing functional organisation. The project team draws members from the various functional sections and uses them to work on the project until it is complete. However, not all projects can operate within an existing functional organisational structure. Some projects would have to exist within entirely separate organisational structures. Examples would include: • • • • • • •

upgrading integrated IT support within a large company; building an extension to a house; designing and developing a new model of automobile; introducing a new management control system to a large company; producing a new company magazine and newsletter; setting up a new course in a university department; executing an enquiry in a government department.

This section considers a number of different structures in which the project might exist within or outside the organisation. It also looks at the types of project that are best suited to each structure and examines the benefits and constraints. 4.2.2

4.2.2.1

The Project within an Existing Organisation Introduction The most common form of project management grouping is that of a project team set up within an existing organisational structure. This form could be an existing functional organisational structure or some other form of structure. An example would be a working party set up within an existing organisation to carry out upgrading checks on hardware. The working party is formed by the organisation. It works at its allotted task or project for as long as is necessary, then it is disbanded or absorbed back into the main organisation. The project therefore acts in addition to the normal functional processes of the organisation. It is to some extent, supplementary. For most organisations undertaking projects the fundamental consideration is how the project should exist within the organisation and what the relationship between the organisation and the project will be. The decision will be a function of many elements including:

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• • • •

4.2.2.2

the size of the project relative to the organisation; the relative status and importance of the project; the resources that are made available; the strategic fit of the project with the overall strategic objectives of the organisation.

The Functional Structure Most projects are carried out within the traditional organisation set out along functional lines. Figure 4.2 shows a typical organisational structure for a mediumsized manufacturing company and some of the areas of responsibility within each functional discipline.

Board of directors

Managing Director

HR Director

Marketing Director

Operations Director

Financial Director

IT Director

Recruitment

Sales

Processing

Salaries

Support

Training

Advertising

Maintenance

Payments

Updates

Development

Packaging

Production

Invoicing

Purchasing

Salaries

Promotions

Quality

Cost control

Figure 4.2

Security

Typical manufacturing company layout

Note: some sections omitted for clarity.

As discussed briefly in Module 2, most large organisations tend to evolve into some kind of functional structure over time. The need to specialise then leads to the concentration of particular skills in separate areas or divisions. Each division concentrates on a specific aspect of the organisation’s overall objectives. A manufacturing company might have production, research and development, finance, sales and marketing divisions. Each section or division makes a separate contribution, and the members of a division specialise in that particular function. In a functional arrangement, power or status is defined by a vertical hierarchy through the OBS. The most powerful people are at the top, the least powerful at the bottom. The top people tend to be in regular communication, but within a few levels down from the top, there are clear functional boundaries between the various specialisations. It is like a department store manager looking out from his or her office at the various departments within the store. The store manager is in regular contact with the various departmental managers, and he Project Management

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or she can see the individuals who are working within each department, such as cosmetics, soft furnishing or clothing. However, at lower power levels there are fewer contacts between the individuals working in the specific departments. At the lowest levels, there may be no formal contact at all. In larger organisations, self-contained non-matrix projects (see sections 4.2.2.4 and 4.2.2.5) can exist in this environment; for instance, where projects are undertaken entirely within the most appropriate department, as with a packaging redesign or product launch which would be the responsibility of the marketing department. A project to employ more mature people or carry out a training needs analysis would be done by the human resources department. These are all relatively easy projects to place within this structure, whereas a project to install a new company financial system may be supervised by the IT department but would require substantial input and support from the finance department. In Figure 4.2, limited projects could be executed within any of the departments or sections shown. A project to install a cost control system could be planned and executed within the maintenance department of the production system, or a project to modify and renew packaging could take place within the marketing section. Although projects carried out in this environment might be strategically important to the organisation, they are highly unlikely to be the reason for its existence. They are likely to be developmental in nature and would tend to be projects to improve systems, procedures, methods or products, and they would tend to be internal rather than external projects for the benefit of the organisation’s effectiveness. Alternatively, projects may be established for limited periods in order to address specific demands within the organisation for a multidisciplinary task group able to work on a specific one-off and unique task. In most organisations, this approach is not needed all of the time, but it is needed some of the time. The functional structure is very common with large organisations. Typical examples include: • • • • •

central government; local government; police forces; the armed forces. most large private companies.

The functional structure is typical of large organisations that have continuous rolling programmes of similar repetitive or semi-repetitive work. The most effective way of dealing with this kind of demand is to split the department up into specialist or functional sections, which can then concentrate on one or more aspects of the manufacturing or production system. Some of the benefits of the functional structure are the following: • •

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•

•

•

•

•

It is relatively simple and straightforward and is compatible with basic human instincts. People tend to specialise in a particular advanced area rather than try to develop a range of different advanced skills. Functional objectives tend to be somewhat repetitive so people can use their experience from one aspect of production on the next aspect. Knowledge transfer, even to a limited extent, allows production to take place much more quickly and efficiently as there is no requirement for progression through new learning curves each time production is changed. Specialist knowledge can be stored within the functional unit and shared around between the various functional members. The functional unit can build up a library of specialist knowledge. Different functional units can act as a control by having direct relationships with the various support services. The functional managers can agree works programmes and timetables directly with support services such as IT. Functional arrangements are preferred by highly inflexible organisations such as government departments, police forces and hospital services. These organisations can only work effectively where there are clearly defined roles and responsibilities operating within a clearly defined chain of command.

From a project perspective there are a number of disadvantages associated with the traditional functional structure, including the following: •

•

•

•

• •

•

Project Management

It is inflexible. The strict lines of accountability and specialisation tend to channel approaches and attitudes towards clearly defined functional roles. As a result functional units often find it difficult to innovate and respond to change. The functional outputs tend to be the primary objective of the organisation. Any project structure that attempts to operate within the functional structure will tend to be considered as of secondary importance. Cross-functional activities are discouraged. Functional people tend to prefer to stick to their own specialisation and may try to avoid being involved in cross-functional activities. This tendency can act as a brake on innovation. Functional people tend to see the function as their future. Their career path and individual aims and objectives are nearly always tied to the function rather than to any individual projects that they may be required to work on. Functional sections tend to develop sub-groups. These in turn tend to develop boundaries that can act as barriers to effective communication. Functional arrangements can only be justified where there is a continuous programme of work. Having large numbers of specialists working in defined areas means that there will be a large constant payroll and fixed overheads. This approach cannot easily respond to fluctuations in workload. As a result the structure can move quickly into financial deficit when workload diminishes temporarily. Functional structures tend to demand a greater degree of central support than some other forms of structure. A large complex functional structure creates a need for large centralised support functions such as administration, IT and human resources. Edinburgh Business School

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Senior management

Increasing authority

Operational island

Authority boundary

Operational island

Functional manager

Functional manager

Production unit

Production unit

Production unit

Production unit

Team

Team

Team

Team

Level 2

Team

Team

Team

Team

Level 3

Level 1

Function A Operational island function A

Figure 4.3

Functional boundary

Operational island function B

Increasing number of people

Organisational barriers to communication

The main drawback with a pure functional structure is the development of operational or organisational islands. These were discussed briefly in Module 1 (see also Figure 4.3). An operational island is a segment of the organisation within the overall organisational structure, and it tends to act as a semi-independent sector within the overall organisational structure. Control and communications tend to flow down through the various functional divisions, but there tends to be relatively little communication and co-operation across the functional divisions. This is inefficient, as cross-transfer of co-operation could allow the formation of horizontal production units as well as those that run vertically. Project and matrix structures (see sections 4.2.2.3 and 4.2.2.4) address this inefficiency by forming horizontal lines of authority and communication. These effectively double – or more than double – the degree of communication that is present in the system. Organisation members become accountable both horizontally and vertically and they effectively have two sets of objectives. They owe allegiance to both the functional (vertical) and project (horizontal) teams, and therefore have two lines of authority and accountability. ♦ Time Out Think about it: organisational islands. Organisational islands tend to form in any organisational structure that has strong functional subdivisions and strong authority levels; good examples are police and military organisations. These organisations tend to be split up into clear functional specialisations and also have a very clear chain of command based on specific power or authority levels within the structure. This makes them good at concentrating

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on specific functional tasks, but it restricts their ability to form internal teams so that existing team members can work on one-off projects as well as the normal functional objectives. Internal project-management structures tend to generate organisational islands because the functional divisions are naturally crossed by authority or power divisions. This means that people from within the same organisational specialisation can be separated from each other because they occupy different power levels. The end result is a series of semi-independent islands throughout the organisation. These are informal rather than formal islands, but they are very real and they have a significant impact on the operation of the organisation as a whole. They tend to lead to a greater overall sense of differentiation within the organisation and a general increase in the complexity of communications and authority. An internal project-management structure partially addresses these and other problems associated with operational islands and is therefore the natural choice for any special team or project within such highly structured organisations. Organisational islands would not occur in a pure project organisation, or other type of structure where there are no clear functional subdivisions. Questions:

•

What shape are operational islands? If you had to represent the grouping of organisational islands within a typical organisation, what would they look like?

•

What determines the number of organisational islands within an organisation?

♦

4.2.2.3

Pure Project Structure A pure project structure is more or less the antithesis of the functional structure. It is appropriate to an entirely different range of organisational types. However, a pure project structure could exist as a self-contained section or unit within an otherwise purely functional structure. A pure project structure could also be used for an entire organisation in cases where functional specialisations and subdivisions are not required. Pure project structures are typically used for projects that are difficult to plan accurately and where resource requirements and provision levels cannot be accurately established beforehand. There are numerous examples of projects where it is not possible to predict accurately how long the project will last and what level of resources will be required. Typical examples would include research and development projects and any other type of application where the work itself is new or innovative. In its simplest form a pure project system would appear as shown in Figure 4.4. In this arrangement, there may be a ‘pool’ of available labour resources that is maintained by the organisation as a whole. As projects are initiated, individual project managers can dip into this pool of available labour and draw a team of people together to become the project team. The team stays together until the project is finished, after which it is disbanded. The specialists then go back into the pool for use on the next project.

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Person G

Person A

Person J

Person H Person B

Person E

Project Manager

Person C Person K Person I Person D Person L Person F

Limits of resources available to the project manager

Figure 4.4

Example of pure project structure

In large research and development organisations, there might also be a ‘pool’ of project managers. Each project manager is assigned to one or more projects, and he or she makes use of the various resource pools that are available within the organisation. The whole set of resources would be under the control of senior managers at higher level. The pure project nucleus could also exist within a functional organisation as shown in Figure 4.5. Another example of this arrangement is a research and development pharmaceuticals organisation, carrying more than a hundred research scientists. These scientists are researchers and, by definition, their work involves researching into the unknown. For this reason, it is difficult to use them effectively within functional units. Research and development projects have to have flexible teams so that the team can respond to changes in the development of the project. A major breakthrough, or the discovery of a new item or process, might justify a sudden change in the resource distribution of the company’s project teams. A project manager might suddenly need three more biochemists so that a breakthrough in this area can be fully exploited. The project might last longer than originally envisaged, with resources having to be committed to it for a correspondingly longer period. A project team will generally be disbanded upon completion of its project and the individual project team members will return to the pool for use on other projects. In some cases, however, the pure project approach within the existing functional system can be permanent. Examples would include drivers within a large multifunctional haulage company, or word processors in a central typing pool.

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Central management

Functional manager (production)

Function manager (sales)

Functional manager (personnel)

Functional manager (testing)

Testing control

Resource

Resource

Project manager (product A)

Project manager (product B)

Resource

Resource

Safety Testing resource pool

Figure 4.5

Possible pure project structure within a functional system

Most projects within a functional organisation would tend to be internal projects for the sole benefit of the organisation itself. The pure project organisation would probably be set up to deliver a more visible project, such as clearance for market release or completion of clinical trials. Figure 4.6 shows another typical project organisation structure within a company. This arrangement could be used for large one-off projects split into different project areas. There may be a range of individual project managers responsible for different areas of the overall project. A pure project system could also be the satellite of a parent set up specifically to deliver projects and could be linked to the parent company by a reporting system. Project organisations often have total freedom within the limits of final accountability; others have functional support assigned to them by their parent company. The pure project organisation may have total responsibility and authority for the design of a new product, but the parent company may look after administrative functions such as paying the salaries of the project team members. Pure project structures can also exist as separate organisations. This type of arrangement tends to exist for relatively large, one-off projects where project team members have responsibility solely to the project. In addition, the project itself is usually of relatively long duration. It is common for such project organisations to be set up as joint-venture companies and often with governments as principal partners. Examples include working groups or parties that are set up by central government in order to carry out a specific investigation or piece of Project Management

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Board of directors

Managing Director

Program Manager

Marketing Director

Operations Director

Financial Director

IT Director

Project manager A

Marketing input

Operations input

Financial input

IT input

Marketing input

Operations input

Financial input

IT input

Project A Project manager B Project B

Figure 4.6

Typical project organisation structure

Note: some sections omitted for clarity. Shaded areas show project orientation.

research, or projects to build publicly funded constructions (such as the UK’s Millenium Dome). The benefits of a pure project structure include the following: • • • •

•

• • •

•

• 4/14

The system is flexible and responsive to change. Innovation and evolution are not restricted. The operational costs of the system can be quickly adjusted in response to variations in workload. The project manager in charge of any particular project is in sole charge of that project and has complete authority and control over the project resources. There is no requirement for negotiating with any functional managers or for interfacing through a project sponsor. Project staff have a clear reporting chain (albeit completely different to what might normally be expected in a functional system) and there can be no confusion about individual accountability and immediate reports. Formal communication lines are generally much shorter than in a functional structure. Informal communication lines are also much shorter and can develop more quickly and efficiently because of the lack of authority barriers. Authority is contained within the project. This allows the project team to analyse problems and make decisions without having to progress through functional reporting and authority systems. Project team members do not have any functional loyalties. They are not distracted from the project by preferred career paths or functional commitments. Centralised support is much simpler and the overall size of the support Edinburgh Business School

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• •

functions is generally much smaller than in a functional structure with the same number of employees. It is generally much easier to incorporate external consultants within a pure project structure. It may be possible to execute a series of related projects as a single programme. This may give rise to further opportunities for support efficiencies.

From the project’s point of view, the pure project system appears to be the best supporting structure. However the pure project structure does have a number of disadvantages, including the following: •

• •

•

• •

• • •

Several projects running concurrently may lead to a duplication of effort in some areas unless these projects can be executed and co-ordinated as a single formalised programme. Initial operating costs may be high as it may be a considerable time before any projects are actually completed. Some degree of centralised direction is needed and there has to be some form of command hierarchy. Higher levels of authority may have difficulty in interfacing with the various programmes and projects. Project managers (by definition) tend to think ahead. There is often a tendency for project managers to bring in key resources early in order to ensure that they will be available when required and with no delay. This may lead to increased early costs. A sense of competition can sometimes develop between the various project teams. Project team members tend to have an underlying concern about long term commitment. A pure project structure does not have the same sense of permanence as a functional structure. Project deadlines may create a culture where team members attempt to ‘cut corners’ in order to maintain good performance records. It can be difficult to compare the performance of individual projects where the projects are of a different nature. Most staff in a project structure will have some form of original functional specialisation. Prolonged absence from a corresponding functional section can lead to this specialisation becoming diluted over time. This phenomenon can be particularly pronounced in terms of continuing professional development and in keeping in touch with the latest developments in the specialist field.

♦ Time Out Think about it: organisational design for projects. Project organisational structures can exist in numerous formats. A pure project organisation has no functional subdivisions. A pure functional organisation has no project subdivisions. Most project management organisational structures exist somewhere between these two extremes.

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Questions:

• •

In what type of situation might a pure functional structure be appropriate? Where could a pure project structure be used?

♦

4.2.2.4

Matrix Structure (Internal or Non-Executive Project Management Structure) Organisations can have pure functional or pure project structures. Alternatively, pure project structures can exist within purely functional systems. Pure functional structures are appropriate for one type of operation; pure project structures are more appropriate for entirely different types of processes. Pure project and pure function really represent the extremes of organisational structure. They represent the limits of the appropriate format for operations ranging from mechanistic and repetitive (pure functional structure) to research and innovative (pure project structure). In reality, not all organisations exist at one of these two extremes. Most large organisations occupy the middle ground, where pure functional or pure project approaches would not make optimum use of organisational resources. One type of compromise between the two extremes, that still makes use of the characteristics of each, is the ‘matrix’ structure. A matrix structure represents a compromise between pure project and pure functional forms. It may be that the organisation cannot establish purely functional teams within its existing functional structure. Alternatively, the organisation might make wide and frequent use of project structures and therefore prefers to establish a number of project teams operating at different levels within the functional structure. This concept is shown in Figure 4.7. This arrangement is only one form of matrix. It represents a combination of the pure project and pure function extremes, and offers a more efficient use of project and functional resources within a functional structure. It encourages horizontal communication and accountability, neither of which is promoted in the pure functional arrangement. The matrix organisation has been a very popular structure for organisations undertaking projects. It is an attempt to combine the benefits of the functional organisation with those of the pure project organisation, whilst at the same time eliminating the disadvantages. The matrix structure is the pure project structure overlaid on the functional divisions of the parent organisation. The matrix structure is suitable for projects of all sizes and natures, where team members can be employed on, or assigned to, projects on either a full-time or a part-time basis whilst retaining their home in the functional discipline. This arrangement of each project team within an existing functional organisational structure is often referred to as internal, or non-executive, project management. It is ‘internal’ because all aspects are within the organisational boundary. It is ‘non-executive’ in that the project manager has limited (non-executive) authority within the system. Figure 4.8 shows a typical matrix structure for a company with different functional units, and with the number of people from each function assigned to each project clearly shown. Usually, the technical decisions on the project are

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Senior Managers

Resource pool

Resource Functional manager

Functional manager

Resource Project Manager

Resource

Resource

Resource

Resource

Resource

Resource

Pure project

Pure function Senior Managers

Functional manager

Functional manager

Project manager

Resource

Resource

Project team

Project manager

Resource

Resource

Project team

Functional team

Functional team Matrix

Figure 4.7

Pure function, pure project and matrix forms

the responsibility of the function whereas the resourcing, scheduling and cost decisions are controlled by the project manager. Project 1, managed by project manager 1, has 1 1/2 people assigned from the marketing department, 1 1/2 from production and corresponding numbers from both finance and human resources. Matrix structures may be very strong or very weak or anywhere in between, depending upon the nature of the projects undertaken. Strong matrix structures veer towards pure project structures and tend to be used on large projects where employees are assigned to projects on a long-term full-time basis, such as in large construction projects. Strong matrix structures would therefore be encountered in a large multidisciplinary construction company. Weak structures exist where the only full-time employee on a project is the project manager and everyone else Project Management

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Board of directors Managing Director

Marketing Director

HR Director

Financial Director

Production Director

Project manager

1.5

2.0

1.0

1.5

Project manager

2.0

2.5

1.5

0

Project manager

4.0

2.0

1.5

2.0

Project manager

0.5

0.5

0.5

3.0

Figure 4.8

Typical matrix structure

used on the project is commissioned on a short-term basis. This is common on smaller, shorter-term projects such as those carried out by advertising agencies. The strength of a matrix structure can therefore be considered as being a function of component project time scale and life span. Matrix or internal project management structures are generally restricted to large organisations with a constant and predictable workload. Typically, all the people in the system would be members of the overall organisation. Examples would include large multi-trades contractors, local authorities, government departments, army, police, colleges and universities. Internal project management is a solution to the problem of organisational segmentalisation, which tends to occur in all large and complex organisations. An internal project-management system has a number of important components, some of which also apply to other structural types. The typical boundaries within the structure are shown in Figure 4.9. Internal project-management systems have a number of other distinctive characteristics, and it is important that these are understood. The main characteristics of an internal project-management structure are: • • • • • • • • • 4/18

functional boundaries; power or status boundaries; organisational islands; a project sponsor; the project management chair; interfaces; interface management; the process of bidding; time recording and cost-centre charging. Edinburgh Business School

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Senior management

Power boundary

Functional manager

Functional manager

Project manager

Resource

Resource

Project team

Project manager

Resource

Resource

Project team

Functional team

Functional team

Functional boundary

Project boundary

Organisational boundary

Figure 4.9

Typical internal project-management organisational boundaries

Each of these is described in turn next. •

Project Management

Functional boundaries. Functional boundaries run vertically through the system. They define the areas of control of individual functions and are generally headed by an appropriate functional manager. Examples include university faculties or departments of a commercial company. These sections represent areas of specialisation (usually groups of similar departments, such as engineering), which are headed by a functional manager in the form (in the first example) of a dean of faculty. The functional boundary defines the border or line of delineation between the engineering faculty and the other faculties. Generally, all large organisations divide and subdivide into separate functional specialisations and they all therefore naturally evolve some kind of internal functional boundaries. The extent to which this occurs, and the number of levels over which the specialisations develop, depend primarily upon the size and complexity of the organisation. It should be remembered that functional boundaries act as barriers to communication. They are like invisible walls that run through the organisation from the lowest levels to a point somewhere near the highest level of the status hierarchy. Only the higher-level managers can see across these functional boundaries – like looking out of an upper floor window across a row of gardens where people are working on different gardening projects. The boundary walls and fences restrict the awareness of each gardener. It is only at higher power or status levels (upper-storey windows) that people at that level can see across these boundaries. The only gateways through these barriers at lower levels are through interfaces (see below).

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•

Power or status boundaries. Power or status boundaries run horizontally through the system. The system as a whole tends to develop a power structure that can be represented as a triangle. There are large numbers of individuals at the bottom of the power structure, with diminishing numbers of increasingly powerful individuals above them. At the top of the triangle, there are relatively few individuals in positions of great power and high status. The board of directors of a large multinational company may only comprise perhaps twelve members. However, the whole organisation may employ hundreds or even thousands of people. Taking a university as an example again, each department might contain a head of department, senior lecturers, lecturers and research associates. The head of department is the functional manager (at least at department level) and also at the tip of the power triangle. Power boundaries are those divisions that separate power levels within the system. For example, in a university there is a power boundary between senior lecturers and the head of department. One has executive authority, while the other does not. In real organisations there are also individual sub-power boundaries within individual subsystems. One university department has its own power distribution. However, the head of department may also be the dean or sub-dean of the faculty, where the faculty itself forms another power system. The departmental power system therefore exists and evolves within the larger faculty power system. This in turn operates within the largest collective power system, which is the university as a whole.

•

Organisational islands. Large organisations tend to be subdivided by vertical (functional) and horizontal (power) boundaries. Segments are created where two power boundaries and two functional boundaries define a specific grouping. In a university, typical segments would include lecturers in civil engineering and lecturers in mechanical engineering. These two groups operate at the same power level but within different functional boundaries. Another example could include research associates and senior lecturers in mechanical engineering. These groups operate within the same functional boundaries but at different power levels.

•

Project sponsor. In an internal system, the project manager and the functional manager are both using individual employees as a shared resource. This means that there is a risk of direct competition between the project manager and the functional managers over such resources. A particular person can have two bosses. The functional manager acts as one boss, while the project manager effectively acts as another boss. Competition within the organisation, provided that it is healthy and constructive, is to be encouraged. However, there is always a risk that this competition over resources could change to destructive competition, especially if either the project or the functional team is put under increased pressure for short-term results. Edinburgh Business School

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It is therefore important that this possible conflict and destructive competition between the project manager and the functional managers is monitored and controlled. This is done, in most internal systems, by introducing a project sponsor. The project sponsor acts as a moderator on any potential conflict between the functional managers and the project manager. In order to do this, the project sponsor must have executive authority over the project manager and the functional managers (see Figure 4.10). The project sponsor must be prepared to adjudicate in disputes and to allocate resources and make executive decisions as required. The project sponsor is often a senior director and usually reports directly to the next line of authority above the project manager and the functional manager. The role of project sponsor is sometimes extended to include that of ‘monitor’ of the project. In some organisations, each new project is developed up to a certain point by a sponsor. That person then introduces the project to the system and monitors the progress and development of the project over time. In this role, the project sponsor assumes a certain responsibility for ensuring that the project develops smoothly and according to plan. In such cases, the project manager sometimes acts almost as the sponsor’s deputy or even agent.

Project sponsor

Figure 4.10

Senior management

Functional manager

Functional manager

Project manager

Resource

Resource

Project team

Project manager

Resource

Resource

Project team

Functional team

Functional team

Project sponsor

♦ Time Out Think about it: the project sponsor. A project sponsor is a key component of the internal project management structure. The project sponsor is primarily there to ensure that there is no destructive competition or conflict between the functional and project groupings. In order to ensure that this does not happen, the project sponsor has to have authority over both the project manager and the various functional managers. He or she has therefore to

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be selected from the next authority banding up the organisational structure. The project sponsor therefore acts as the ‘fourth leg’ of the ‘project management chair’ (see Figure 4.11). He or she is essential to the effective running of the internal project management system. Most project sponsors would be directly responsible for ensuring the smooth operation of a number of different projects. A person could be both a project sponsor at one level and a project manager at another level, provided that the authority system within the organisation is configured for this. Questions:

•

In what principal ways are the responsibilities of a project sponsor different from those of a project manager?

•

Would a project manager or a functional manager make a better project sponsor?

The Project

The Project Management team structure

Project Manager

Functional Manager

Figure 4.11

Project Team

Project Sponsor

The Project Management Chair

♦ •

The project management chair. The project manager works within three levels of control and countercontrol. This involves working and communicating across three different organisational interfaces at any one time. Those interfaces are: project manager – project sponsor project manager – functional manager project manager – project team

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This arrangement puts the project manager in a relatively unusual position. All decisions and activities take place within a three-way continuum of accountability and reporting. The project manager operates at a peer–peer level with the functional managers; project and functional managers are equals and have to compete, to some extent, for resources. The project manager is directly responsible to the project sponsor. In addition, the project manager is the leader of the project team and therefore acts in a leader–subordinate role.

Project Management

•

Interfaces. The tendency of all large organisations to evolve into organisational segments creates a related tendency towards communication restriction. The horizontal and vertical boundaries running through the system act as barriers to communication and co-operation. In a university, there may be no obvious need for communication between lecturers in civil engineering and those in mechanical engineering. The boundaries of each subsystem act as an interface, and thus as a barrier to communication. These interfaces could be physical, in the sense of a physical distance between two university departments. They could also be psychological, in the sense of the development of professional sentience, or tendency to associate with, and relate to, a specific group. Interfaces are like gateways through barriers. The various boundaries within the system act as barriers to communication. The boundary itself has holes or gaps in it through which information can flow. These openings have to be controlled, and the type and characteristics of the various information flows vary in relation to the boundary. This affects the medium of the information flow and also the content. For example, communications between functional boundaries might be by telephone conversations or by email. Communications across the organisational boundary are likely to be more formalised, often for contractual reasons. It might be necessary to confirm all discussions in writing within a certain time, or it might be that change notices and other kinds of communication might have to be initiated in writing or using a standard form. The tool for controlling these various interfaces, and for monitoring all the communications that cross these interfaces, is known as an interface management system (IMS).

•

Interface management. One of the key requirements for an internal project manager is good interface management skills. Interface management is the management of the processes of communication and action across and within the various organisational interfaces. In its simplest sense, it requires that good communication systems are set up so that information flows rapidly and accurately between the various components of the project team. This may sound simple and straightforward; however, it can be a very complex operation where the project team includes large numbers of members, physically separated by large distances. On large international projects, different design team Edinburgh Business School

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members may be separated by large distances. The interface management system has to ensure that all information is identified and controls are put in place to ensure that all information goes to the correct people and within a predetermined time. The information is then monitored to make sure that any necessary actions are taken and the information is sent on to the next stage of the process. •

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The process of bidding. With internal systems, the most usual way of resourcing project teams is through some form of bidding. Individual project managers are allocated to projects and are invited to develop a resource allocation proposal. In this, the project manager usually has to calculate the approximate costs of the labour, plant and materials required for the project to be executed. The calculation often involves consideration of availability windows for key staff and of estimated person-hour requirements for individual sections of the project. For example, the project manager might estimate that the preparation of the scheme’s early design drawings for a particular project will take 250 mechanical engineer hours, 35 cost consultant hours and 12 electrical engineer hours. The project manager will have individual hourly rates for these staff and can therefore calculate individual and overall fees totals for internal staff. These hourly rates may or may not contain adjustments for overheads and profit. A similar process is applied to materials and plant. The bid is then presented to the project sponsor for relay to senior management. The bid may be accepted or rejected. If rejected, the project manager would have to go back and look at ways of reducing overall costs, which could include reducing overhead and profit allowances or reestimating person-hour requirements. In some cases, the project sponsor may be authorised to decide on the acceptability or otherwise of the bid. In other cases, a committee decision may be required and, in this circumstance, the committee is likely to comprise a number of people from a range of different sections within the organisation, such as human resources, finance, cost control, and so on. Project managers often become embroiled in arguments over individual people at this point. The bid often details individual identities as well as estimated time and costs. Most project managers attempt to have at least some kind of say in who is seconded to the project team by the various functional managers. It is common for functional managers to attempt to offload low-productivity staff, or ‘dead wood’, to the projects as this is a way of at least partially transferring or reducing the problem of bad staff. It is just as common for senior management to allocate people to the projects on the basis of functional manager recommendations. In practice, most project managers end up with a project team that is a compromise. It may contain some of the people that they asked for but not others. This is one of the reasons why project managers need to have good organisational and leadership skills.

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•

Time recording and cost-centre charging. Each individual in the system is a member of both project and functional teams. It is important that times spent on individual activities (and therefore costs) are charged to the correct project or functional cost centre – indeed, this is one of the most common causes of conflict between project and functional interests within the organisation, because functional managers might well get annoyed if they feel that their people are spending time on the project while still being charged to the function. This applies particularly when there are pressures on both the project manager and functional manager to control costs as much as possible. The problem becomes exacerbated as other production variables affect workload. There might be a sudden increase in activity on the project, resulting in less available time for functional duties, or sickness and absenteeism might suddenly jump, thereby increasing the pressure on individuals in terms of both project and functional responsibilities. Large internal project-management systems tend to control time charging by some kind of activity-based costing (ABC), controlled and reconciled by means of a computerised timesheet-recording system. Specialist software is being used increasingly for this function, using either desktop PCs or handheld organiser computers. These machines usually feature a button-activated time recording system. The hand-held computer features an organiser that recognises code inputs and automatically records time spent on individual activities within both project and functional activities. The organiser usually contains a download facility so that time records can be downloaded every week or month with times spent on individual activities recorded, costed and charged to individual cost centres. Project team members simply press a button when they are working on project information. As soon as they transfer to working on functional information, they simply press another button and the system records the times spent on each. At the end of each time period, the information is downloaded and the system keeps a running total of how much time has been spent in each area. This kind of approach is being increasingly used by professionals to record times spent on individual areas.

The good points of an internal project management system include the following. • • •

•

Project Management

The project operates as a self-contained unit and the project manager has executive control over its operation and development. The project has reasonable access to the various functional units and can use this access for specialist input to the project. The project retains flexibility and adaptability. It can respond quickly to changes in events even though it exists within the more rigid functional structure. The close links with the functional units means that the project stays in touch with the operational objectives of the functional units and also (to some extent) with the overall strategic objectives of the organisation. Edinburgh Business School

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• •

•

•

Internal project management within a matrix structure offers the best of both the project and functional systems to some extent. Internal project management effectively spreads the risk between project and functional profitability. Temporary failures in one aspect can be (to some extent) offset by the other. Internal project management allows efficient balancing of functional and project resources provided the necessary control systems are in place. Resources can be switched between one aspect and the other to absorb changes in demand. Internal project management promotes innovation and evolution within the organisation while retaining the functional foundation.

There are also some weaknesses in an internal project management structure including the following: •

• •

•

• • •

4.2.2.5

Balancing project and functional responsibilities is always a source of potential problems. The approach works provided the relationship between the project manager and the various functional managers is good. Conflict can occur where the relationship is not so good. Team members often do not like having two bosses because it can lead to confusion and conflict. The matrix overlap means that some responsibilities are effectively shared between the project and functional units. This can lead to a reduction in perceived accountability. For example the project manager is responsible for the success of the project but he or she will probably not have full control over the selection of the project team. This absence of full control can generate a tendency for people to take the view that ‘things are not their fault’. Project management is a complex area and project managers must have a specialist range of skills. Adding the matrix dimension, the requirement for negotiating with functional managers, and reporting to a project sponsor only makes the job more complex. Projects tend to be depleted of resources towards the end of the implementation life cycle. This can sometimes make completion very difficult. Project team members can sometimes have difficulty in re-adjusting to working back in a rigid functional unit on completion of the project. The requirement for a project sponsor introduces a new and additional level of authority and control. This will carry a cost implication and adds to overall control complexity.

Mixed or Hybrid Structure A special kind of organisation often develops in manufacturing industries when projects are housed in process divisions. For example, a project to develop new manufacturing methods might be based in the machining (functional) division. It could require the services of research and development personnel (project) and the structure could therefore have to be set up as a combination of matrix and functional forms as shown in Figure 4.12. Often, this type of organisation results in the project being spun off as a subsidiary company as it develops.

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Board of directors

Managing Director

Project A

Figure 4.12

4.2.2.6

Project B

Production

HR

IT

Mixed organisational structure

Summary Comment on Internal Projects There are many forms that the structure of an organisation may take to support a project. Commonly, a hybrid will be the most suitable option given the existing structure and working procedures. Choosing the most appropriate structure for a particular project depends on many elements and these should be considered before settling on the best organisation to succeed. These include: •

the project, its objectives, task, location and required resources;

•

the existing structure of the organisation;

•

previous experience of the type of project;

•

the client and the contract;

•

the project life span.

♦ Time Out Think about it: internal project management. Internal project management is the most common organisational format where the team is drawn from within the organisation. The project manager either bids for staff or (sometimes more frequently) is told what staff are available. In most cases, staff members are shared between the project and their parent functional departments. This format generates for efficient use of resources but it gives rise to potential communication and accountability problems. Internal teams can also exist with external elements such as contractors or consultants. Most internal systems make at least some use of external contributors. Questions:

•

What are the obvious disadvantages of an internal project management structure?

•

How does the provision of a project sponsor address the problem of project manager and functional manager conflict?

♦

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4.2.3

4.2.3.1

The Project External to the Existing Organisation Introduction Project management structures are not limited to those that can exist within existing functional structures. In the UK, there is an increasing number of specialist project-management consultants that can be hired on a consultancy or agency basis. Organisations that do not have the required in-house specialisation or experience can hire these specialist project managers to set up and run projects that are executed either wholly within, partly within, or completely outside, the functional organisation. In such cases, the project team may comprise: • • •

all internal people, but be managed by an external project management consultant; or a mixture of internal people and external consultants, all of whom are managed by the consultant project manager; or all external consultants, some or all of whom have been appointed by the consultant project manager.

The extent to which external people or consultants are involved, and the degree to which they make up the project team, depends upon the degree of surrogacy involved. Surrogacy in this sense refers to the extent to which the client wishes to delegate control or authority to running the project. Some clients want to hire a consultant project manager who will take over everything and run the whole project in return for a fee. In such cases the client wants minimum involvement and only wishes to see the end criteria met, with minimum interim involvement. An example would be a housing association giving complete control of a modernisation contract to a firm of consulting engineers. The engineers would act as project managers and manage all parts of the project from inception through to completion. The housing association might be happy if their involvement is limited to a development officer attending monthly site meetings. Other clients might want to retain more of a grip on the evolution of the project. These clients might have commissioned similar works before and know some of the problems that can occur. They may want to use this knowledge to influence the current project team to make sure that similar events do not recur. Typical examples would include a university that is setting up a combinedstudies course using external lecturers. The university might want all aspects of the teaching to be done by the externals, but might also wish to retain close control over the actual module content of what is delivered. The module descriptors, examination papers and assignments might therefore continue to be set inhouse. This kind of consideration is widely made by universities setting up distance-learning courses with overseas agencies. The long-term credibility of the course and the quality of the course will depend on the maintenance of quality standards. The university itself would almost certainly want to retain control over quality. Risk transfer is another major issue in external project management. In most cases, the appointment of an external professional consultant entitles the client 4/28

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to some degree of protection from non-performance or negligence (see below). However, this does not generally extend to cover non-performance or breach of contract on the part of suppliers or contractors. In most cases, contracts remain between these companies and the client, and are not formed with the project manager as a contracting party.

4.2.3.2

External (Executive) Project Management Structure External project management tends to be more applicable to smaller organisations. It is a far more flexible approach and is much more suited to organisations with variable workloads. External project management structures are sometimes referred to as ‘executive’ project management structures. The term ‘executive’ refers to the fact the project manager in this approach is the only team leader and has full authority and control over all components of the project team. He or she does not have to negotiate for resources with functional managers as is the case with internal systems. In an external system, different consultants act as agents on behalf of a client. Some or all of the consultants could work for different organisations. The external project manager, similarly, could work for a specialist project-management consultancy and could offer overall project management services, including control and co-ordination of the design team, as part of the management package. A typical external project management system is shown in Figure 4.13. In most cases, there would be a formal interfacing body to act as a buffer or gateway between the organisation and the outside world. This would apply particularly where formal contracts are involved, for example with external suppliers of goods. Formal contracts generally have to be written up and signed by legal specialists. These specialists are often employed in large organisations, working in a legal services or similarly titled section. It is their responsibility to draw up contracts and then monitor execution as the contracts are awarded. This section would also deal with any variations or formal changes to the terms and conditions of the contract. The project manager would generally interface with the externals through this legal services section, which offers professional legal service for all the projects that are contained within the organisation. There might also be a change control section, which would monitor variation orders and give various levels of approval for changes as required by internal regulations or contracts. An example of this arrangement is shown in Figure 4.14. Just as with internal project management systems, external project management systems have a number of distinctive characteristics and it is important that these are understood. They can be summarised as: • • • •

multidisciplinary and shared loyalty group characteristics; fee structures; external contractual linkages; external non-contractual linkages.

Each is considered further in turn next. Project Management

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Senior management

Interface manager

Functional manager

Functional manager

Resource

Resource

Resource

Resource

Functional team

Functional team

External project manager

External suppliers

Figure 4.13

Power boundary

Functional boundary

External consultants

External contractors

External subcontractors

Typical external project management system

Multidisciplinary and Shared Loyalty Group Characteristics An external project management system uses internal and external staff. With a high degree of surrogacy, virtually all the team members can be external, assuming that there will be at least some form of client representation or liaison. As a result, the project is a conglomeration of different companies and organisations that are in effect working together as an alliance to satisfy the project objectives. The reason that they do this is because they are paid to do so. They are usually paid in the form of fees for their external project management systems and therefore tend to be strongly multidisciplinary. They are also susceptible to shared loyalty characteristics. Each consultant and contractor is working for his or her own practice or company. The objectives of the practice or company are not the same as the objectives of the client. There will therefore sometimes be a conflict of loyalties between individual parts of the system. This tendency is an important element that the project manager must recognise and manage. The various groups are put in place as part of a project team for relatively short periods of time, working on relatively complex projects. External project management systems are therefore more susceptible to the problems of differentiation and sentience than internal project management teams.

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Senior management

Interface manager

Change control section

Legal services section

Functional manager

Functional manager

Resource

Resource

Resource

Resource

Functional team

Functional team

Power boundary

Functional boundary

External project manager

External suppliers

External contractors

Domestic subcontractors

External subcontractors

External consultant

External consultant

Nominated subcontractors

Other external service providers

Figure 4.14

Extended external project management system

Fee Structures External project management systems also tend to be subject to much more open and competitive fee structures than internal systems. Until recently, the main professional institutions for engineering and design used to provide detailed fee-structure guidelines, which were observed by both practitioners and clients. However, in over the past ten years or so, deregulation coupled with increased competition has reached such levels that it is no longer possible to adhere to strict fee scales. Negotiated fees are now generally accepted as normal for most applications. Increasingly, consultants are using a fee bid package approach. The client might require the various consultants to look at the project in an outline form and make a bid in the form of a plan or proposal. This plan or proposal shows the bidder’s intended method of executing the project, together with a fee breakdown showing what fees would be payable and on what basis. Project Management

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External fee structures can be based on either hourly rates or percentages. In the EU, most consultants on larger projects operate on a percentage basis. On smaller projects, it is more common to find fees based on an hourly rate. Total fees for a project could be agreed on a percentage basis where the consultant receives a fixed percentage of the contract total. Alternatively, a specific consultant might receive a fee that represents a percentage of the particular work element or package for which that consultant is responsible. In some cases, fees for a particular work package might be supplemented by a stated percentage for ‘management services’ or similar. Fees vary greatly depending on the type of consultancy, type of project, competition and other factors. Fees are often paid in blocks, or tranches, usually timed to coincide with major completion milestones within the project life cycle. Typical fee tranches would include: • • •

completion of pre-contract works; completion of post-contract works; completion of final account.

Pre-contract works involve all design work carried out up to the award of the contract to the main contractor. Typically, for an engineering design team, this would be all the works involved in preparing the detailed design of the project. In addition, this design has to be transferred into a form that can be issued to tendering contractors for pricing, which usually involves the preparation of formal contract documents including full working drawings, schedules and specifications. Post-contract work covers all implementation inspections, additional design works for variation orders, issuing variation orders (in some cases), issuing new design works, and so on, right up until the issue of a certificate of practical completion, when the project is finished apart from final checks and running-in. For most engineering teams, post-contract work is dominated by carrying out inspections of the works as they proceed, and dealing with variation orders and change notices through the course of the works. Changes can lead to a lot of additional calculations and design work for design consultants. The final account is the documentation produced when the project is completed. It confirms that practical completion has been achieved and that all defects have been made good to the satisfaction of the client. It also acts as confirmation that all monies or works due under the contract have been paid and discharged to the satisfaction of both parties. Percentage fees are usually based on some predetermined project cost total. Designer fees are often based on measured works totals. ’Measured works’ simply means works that are covered by drawings and described in the schedule of rates or bill of quantities (or whatever schedule or measurement system is used in the preparation of the contract documentation). The measured works that are considered as the basis for designer fees calculations are usually limited to the works that are actually designed by that consultant. Works designed by other designers or by the contractor or any of the suppliers would generally not be included, although there may sometimes be an allowance for overall management responsibilities in the case of a ‘lead’ consultant. 4/32

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Percentage fees may also be based on other totals, such as final account total. The final account total includes all measured works, and additionally includes elements such as variation order totals, expended prime cost and provisional sums, expended contingencies, and direct payments. On large projects, the final account total can be double the measured works total. It is therefore necessary to pay careful attention to which total is being used as the basis for the fees calculation. A typical professional fees build-up is shown in Figure 4.15.

Description of the professional services requirement This section will detail the basic terms and conditions of the appointment, covering such matters as the start and completion date of the commission, the items or end results to be generated by the professional, the maximum effort required and the appropriate professional services contract. This section would also generally refer to the appropriate form of professional agreement.

Statement of basic fees Basic fees payable in return for professional services as required. This section may also detail an outline of the standards of conduct required and the stage-payment systems that will operate.

Amount for additional works

Amount for expenses

Extra hours Extra work input

Travel allowance Extras allowance Nights away from home

Specific conditions Over and above the terms and conditions of the relevant professional services contract, this section sets out the specific requirements and appointment conditions that are applied by the client.

Figure 4.15

Typical fees build-up for a professional services contract

External Contractual Linkages With internal project management systems, the linkages tend to be within the organisation itself. Standard procedures operate within the overall framework of company standing orders and strategic management. External project management systems, in contrast, tend to have a much wider range of contractual arrangements. This is because the external approach has a wider range of external team members and therefore a higher degree of risk of non-performance. It is generally much easier to control individuals or groups who are part of the Project Management

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organisation than it is to control those outside the organisational boundary. As a result, the inherent risk involved tends to increase as a function of the proportion of external dependency that is involved. This could apply to a greater or lesser extent depending on the degree of ‘trust’ that is present. External involvement can be more or less risky depending on factors such as the amount of previous co-operation, or the presence of alliances and partnerships or less formal ‘bonds’ or co-operative working practices. Contracts are the most common approach to controlling risk where there is a significant external element. External project management systems can feature a wide range of contract types, from standard forms and supply contracts to professional services agreements. The types and range of contracts used will depend on the specific application within the external system. The contract between the client and the contractor will be different from the contract between the client and the project manager. The contracts address different risks and offer different levels and types of protection to each party. Generally, contractual linkages can take one of three primary forms, as follows: •

•

•

Completion contracts. Completion contracts are generally one-off contracts where the contractor agrees to supply the specified goods and services, usually at some kind of agreed cost and by a specified date. An example would be a standard supply contract, such as a contract of sale to supply a component for a new IT system from an external specialist supplier. Term contracts. Term contracts are long-term agreements. The supplier agrees to supply goods at an agreed rate to an agreed standard for a fixed term. A typical example would be a supply contract to supply all required IT components for the next five years. Term contracts are widely used for reasonably predictable routine and repetitive works such as maintenance and repairs to IT systems. They offer the advantage of fixed prices for works of a routine and reasonably foreseeable nature over an agreed period of time. Service-level agreements. Service-level agreements (SLAs) are contracts where the level of service is set rather than the performance of a specific outcome. An SLA for IT maintenance might specify that 99 per cent of all systems must be operational at any one time, and that individual breakdowns must be responded to within a maximum specified time. In return, the IT service provider would be paid an agreed fee. Sometimes this fee might vary in relation to workload or demand, but generally it will be fixed for the duration of the SLA. Most SLAs build in some form of protection, usually in the form of damages that are payable to the client by the service provider for gross time when the service level does not achieve the minimum levels stipulated.

Completion, term and service level agreement contracts can be priced and arranged in two primary ways, namely through a competitive contract or through negotiation. Competitive contracts are generally put out to tender by the client, with the competition either open or selective. Open competition usually involves bids being invited from ‘all-comers’. Selective tendering usually involves bids being 4/34

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selected from an agreed short list of approved bidders. Open competition obviously gives greater opportunity for savings, but it has the disadvantages of allowing in possible poor-performing organisations and requires the generation of large numbers of tender documents. Competitive contracts usually involve the submission of sealed bids in relation to accurate contract document specifications and descriptions. The bids are usually opened at an agreed time in an effort to negate any attempts at collusion. Negotiated contracts do not involve direct competition. The client negotiates price and conditions directly with a contractor or supplier. The obvious disadvantage is that the client does not have the opportunity to benefit from the lower contract price that could almost certainly be achieved by the use of competitive bidding. Negotiated contracts are often used as extensions to existing contracts or where the work is highly specialised or where there are only one or two suppliers or contractors capable of complying with the requirements of the contract. Within these classifications, individual contracts can take a number of different forms:

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•

Fixed-price contracts. Fixed-price contracts are those where the cost of the project is agreed and fixed in some way in advance. On larger projects, the usual way of fixing a price is by some form of competitive tender. The price could be completely fixed, in which case the contractor will almost certainly inflate the tender sum in order to cover the risk of price increases in the goods or services being supplied. The primary consideration is the risk for contract cost increases caused by supplier price increases. Cost increase risk can be spread between suppliers and clients depending on the type of contract being used. Some clients prefer fixed-price contracts (supplier risk); others prefer variable-price contracts (client risk). The compromise would be a fixed-price contract with fluctuations. The client would bear the risk of price increases across a schedule of pre-agreed items. The contractor or supplier bears the risk of any cost increases not covered in the fluctuations schedule. Fixed-price contracts might also be developed in association with an incentive fee. The fee is a payment direct to the contractor in relation to the extent to which the fixed price is met. This could include strict control of the expenditure of contingencies, reserves, provisional sums etc. A fixed-price contract clearly requires the contractor to measure all aspects of the contract carefully before making a bid. The level of contract information required is therefore much greater. Contractor estimating has to be very accurate because overall profit depends on accurately forecasting costs. In addition, there will inevitably be some unknown variables and the contractor will inevitably include higher contingencies to allow for these.

•

Cost or cost-plus contracts. Cost or cost-plus contracts sometimes use a fixed fee. In this case, it is the company profit that is fixed at the outset, rather than the price. The risk to the company is therefore low, with the obvious exception of uncontrollable commensurate risks. This type of contract is sometimes used where there is insufficient design or product information to allow accurate pricing. The contractor effectively contracts to Edinburgh Business School

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use its best efforts to do the work efficiently, but the fee is fixed irrespective of actual performance. The advantage of this system is that little or no design information is required, and bids can therefore be produced quickly and cheaply by contractors. In addition, the contractor bears relatively little risk. A cost plus percentage fee contract offers more flexibility. However, as the fee is a percentage of the overall cost of the project at final account, there may be little incentive for the contractor to reduce project costs. A cost plus incentive fee contract attempts to answer this problem by paying a fee that is derived from an agreed formula that compares actual cost to target cost at each interim valuation throughout the project. •

Reimbursement contracts. Reimbursement contracts are an alternative to the foregoing. In this case, the contractor performs the project at the contractor’s own expense and then claims this amount, plus a fee every month. The contractor is therefore reimbursed for this expense. Fees can be fixed or variable. A variable fee might increase in proportion to overall cost savings, while it might decrease as overall costs increase. This can take the form of a direct incentive where the savings (if any) might be shared between the client and the contractor.

•

Target-price contracts. Target-price contracts relate to a target price plus a fee. In this case, the client and contractor agree a target price. The contractor is paid this amount in instalments, plus a fee. In some cases, if the target is exceeded, the fee is reduced; similarly, if the target is not exceeded, the fee may be enhanced. This reduces client risk by giving the contractor or supplier an interest in achieving an economical project cost. In some cases, there may be a performance indicator or cost limit upon which the fee or variable fee is triggered. The target cost is generally the overall cost that the contractor would expect to incur in performing the contract under normal operational conditions. It therefore also acts as a measure for evaluating the true or actual cost at the end of the project.

Fixed price and cost contracts account for the vast majority of contracts issued in most industries. They represent the two extremes of risk for clients and contractors. The client’s risk is clearly greatest in the case of a cost-plus contract, while it is lowest in the case of a fixed-price contract. The contractor usually compensates for this by increasing tender prices. In addition, individual contract types can take a number of different forms, as set out next: •

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Standard forms of contract. Standard forms of contract have clear terms and conditions. They usually make specific provisions for default and determination and are designed for (usually) reasonably equal risk allocation. They have a definite statement of recourse for defaults (such as arbitration and litigation). The usual remedy is damages for breach. Standard forms of contract usually contain clear and systematic clauses that express the obligations of each party under the contract. These clauses often incorporate Edinburgh Business School

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feedback from case law and try to cover and allow for every possible eventuality. As a result, they tend to be large and complex. Standard forms of contract are often large documents and can contain large numbers of detailed and interrelated complex clauses. People tend to become familiar with these clauses because the contracts are standard forms. The same basic wording is used for clauses every time the contract is issued. Standard forms of contract are usually written by associations or tribunals that are intended to represent the interests of clients, contractors, subcontractors and anyone else who is likely to be a party to the contract. An example is the Joint Contracts Tribunal (JCT) Conditions of Engagement. •

Professional services contracts. Professional services agreements are typical of contracts for services, such as hiring a project manager. They contain mostly implied terms. Specific terms relate primarily to a few items such as fees and dates for partial or full completion. Performance is related to the professional standards of the appropriate professional body. The usual remedy is damages for negligence. This format is used because it would be inappropriate to attempt to define the obligations and duties of the professional services provider in too much detail. He or she is a professional, providing professional services, and it is up to that person’s professional judgement as to how those services should be provided. The only minimum standards are those that are set by the relevant professional association and/or the rights of the client under common law.

Professional services contracts are usually written by the appropriate professional body. An example is the Association for Project Management’s Conditions of Engagement.

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•

Supply contracts. Supply contracts are for the supply of goods. These typically specify the goods and give variables such as delivery dates and storage requirements. They usually stipulate the purchase price and any discounts for cash or early payments. They often refer to some kind of technical summary or specification, and provide some form of warranty or guarantee cover for the goods. Supply contracts are generally written by the suppliers themselves; they may contain ‘small print’ that has to be scrutinised where new companies are being used for the first time.

•

Subcontract agreements. A subcontract agreement is where a person who enters into a contract as a contractor sublets some or all of that contract work to a third party. This type of arrangement is very common; it allows the main contractor to adopt a management role that consists largely of managing teams of subcontractors. This means that the main contractor still tenders for the work and is paid for it, but that contractor is freed from the requirement to hire large numbers of operatives as direct employees. This in turn means that the main contractor is removed from the risk of associated overheads. Domestic subcontract agreements are those where the contractor is free to choose what work is subcontracted, and to whom these works are to be awarded. Nominated subcontract agreements are used where the client wants Edinburgh Business School

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a specific subcontractor or supplier to carry out a particular part of the project. Typical examples would include the supply and installation of high-quality or specialised components. Nominated supply contracts might be used where the client wants a particular supplier to supply a given material. This often happens with IT systems where the client wants a particular supplier or manufacturer for IT hardware. Nominated subcontract and supply contracts are often a three-way contract between the client, main contractor and subcontractor. There are often implied liabilities for defects (increased client risk). Generally, liability for performance of the main contract remains with the main contractor. Domestic subcontract agreements are generally written by contractors; subcontractors are obliged to accept the terms and conditions stated if they want to work for the main contractor. Nominated subcontract agreements are generally standard forms and are written by collective associations or tribunals in an attempt fairly to represent the interests of all parties. •

Pro-forma contracts. Pro-forma agreements are generally written by one party for imposition on another party. Typical examples are contracts for services by monopoly or near monopoly organisations. In pro-forma contracts, the terms and conditions are largely written up by the service providers. The onus of responsibility is therefore borne by the client. It can be very difficult to enforce performance. In some cases, risk avoidance can be by warranty and guarantee.

Typical contractual links within an external project management system would include a number of relationship links. Some of these are based on standard forms of contract with clear terms and conditions. Others are based on professional commissions which offer professional services based on codes of practice provided and maintained by the relevant professional bodies. There are other linkages within the system (see following sections) but contractual links are by far the most complex. Typical contractual links in an external system would include the following:

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•

Client to project manager and other design team members. These contractual linkages would be primarily professional services contracts. The project manager might be engaged under a specific contract such as the Association for Project Management’s Conditions of Engagement. The other professionals in the team might be appointed under the professional services contracts of their respective professional bodies. In other cases, standard professional services agreements might be used.

•

Client to main contractor. These are generally standard forms of contract. They have clear and precise terms and conditions of contract. The contract clauses set out the exact obligations of each party under the contract.

•

Client to service authorities. These are primarily supply agreements. Supply bodies often enter into contractual arrangements using pro-forma supply agreements. This is common with service suppliers such as gas, electricity and water infrastructure and/or supply companies; it holds to some extent Edinburgh Business School

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with telecommunications companies. These agreements tend to be biased in the supply company’s favour. As agreements, they have often been developed over several years, and in format they often date back to when most such service companies were operating as monopolies. They are notoriously difficult to enforce and the wording of the agreement tends to leave the service company with plenty of room to manoeuvre if anything goes wrong. These contracts are often relatively weak and represent a relatively high risk for the client.

Project Management

•

Client to nominated subcontractors and suppliers. These are primarily nominated subcontract and supply agreements. They apply where the client has named a given subcontractor or supplier. The subcontractor or supplier is nominated to the main contractor, who is then obliged to enter into a contract with that supplier. Standard forms are available, the most common being JCT-nominated subcontracts 1–4 (NSC1–4). In such cases, there are two contracts to consider. The nominated subcontractor signs a contract with the client and another with the main contractor. These tend to be relatively strong links as they have clear terms and conditions. In terms of contractual risk there are several issues to consider. Domestic subcontractors or suppliers are appointed by the contractor. The appointment is at the contractor’s discretion and therefore the contractor carries the risk of a default on the part of the domestic subcontractor or supplier. The standard form of contract between the client and main contractor usually makes clear the extent of the obligations and liabilities in relation to the domestic subcontractor or supplier. Nominated subcontractors are nominated by the client. The client therefore carries the risk of a default, provided that the default does not result from any actions of the main contractor that could be interpreted as a default under the terms and conditions of the standard form of contract between the client and the contractor. An obvious example would be the case where the main contractor is paid by the client where this includes monies due to the nominated subcontractor, and the contractor subsequently goes on to default on making the payment due to the nominated subcontractor.

•

Client to local authority. These contracts are primarily regulated by statutory requirements. They include requirements such as mandatory inspections and the issue of certification such as a safety certificate. Most construction projects, for example, will generate a requirement for some form of planning permission and other statutory consents. In most EU countries, there will be a requirement for the equivalent of building warrant, structural certificate, fire certificate and perhaps safety certificate for construction works. A building warrant, or its equivalent, shows that all aspects of the building have been designed in accordance with the requirements of that country’s building regulations or equivalent. The structural certificate is evidence that the structural calculations have all been carried out in accordance with the relevant design codes and codes of practice. The fire and safety certificates show compliance with specific fire and safety regulations. Edinburgh Business School

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Generally, local authorities have statutory obligations with regard to response times and fees. However, it can be very difficult to recover costs that have been incurred as a result of slow local-authority response times. The typical arrangement of contractual linkages in an external project management system is shown in diagrammatically form in Figure 4.16.

Senior management

Interface manager

Change control section

Legal services section

Functional manager

Functional manager

Resource

Resource

Resource

Resource

Functional team

Functional team

Power boundary

Functional boundary

External project manager

External suppliers

External contractors

Domestic subcontractors

External subcontractors

External consultant

External consultant

Nominated subcontractors Authority links

Other external service providers

Figure 4.16

Contract links

Typical contractual linkages arrangement for external project management

♦ Time Out Think about it: organisational linkages. Organisational structures are held together by linkages. These define the channels of communication, lines of authority, and locations of contracts within the system. The characteristics of the system will define the characteristics of the linkages.

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Generally, an external project management structure will require a greater number of contractual linkages than an internal project management system. The external system has a higher degree of heterogeneity and greater dependence on a range of different external organisations. The requirement for contractual ‘cement’ is therefore significantly greater. Authority links are different from communication links. The project manager might set up the control system to allow individual contributors to talk to (say) a subcontractor, but only the project manager or a designated authority is actually allowed to issue an instruction to that subcontractor. This may be considered necessary in order to protect against escalation in the cost of the project as a result of the issue of uncontrolled variation or addition notices. Any restrictions of this nature will have to be redefined within the contractual linkages. For example, the standard form of contract between the subcontractor and main contractor might specify that instructions can only be accepted through the main contractor. The main contractor’s contract with the client might in turn state that all instructions issued to the main contractor must be issued by the designated person and by no one else. Questions:

•

Why might it be important to restrict who can issue variation orders or changes to the contract?

•

Problems can arise if the project manager tries to centralise control of all variations. What are these problems likely to be?

•

Different levels of variation might require different levels of authorisation. How could this be rationalised within an overall project change-control section?

♦ External Non-Contractual Linkages Contractual linkages provide the framework for the operation of the overall system (both internally and externally). The contracts form the basic structure of the external system. They are essential in terms of allocating and managing risk. Without them, it would not be possible to run an external project management system as the risks would simply be too great. However, external project management systems cannot work effectively when linked by contracts alone. There are two other types of linkages that are essential for any external project management system. These are authority links and communication links, and each is described next: •

Project Management

Authority links. Authority links define the power and control structure that operates within the system. In most internal project management systems, authority links emanate from the top of the hierarchy and run downwards through the various power and control levels within the organisation. In most internal cases, the functional manager and project manager would operate at the same power level. The project sponsor would usually be one level up, so as to have executive authority over all members of the functional and project teams. Edinburgh Business School

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In most external project management cases, the client would be at the head of the structure, and would relay instructions directly to the project manager. The project manager would then interpret these instructions and in turn disseminate requirements down through the hierarchy of control. In some cases, the client might devolve all authority to the project manager, in which case responsibility for all authority would be transferred. In other cases, the client might transfer 90 per cent of authority, but retain strategic or milestone control over key stages. Authority links are not the same as contractual links, and they need not necessarily follow the same routes through the organisational structure. For example, a project manager in an external system acts as an agent on behalf of the client. There is unlikely to be any contractual link between the consultant project manager and any other external consultants. However, depending on the degree of surrogacy within the agreement, the consultant project manager will almost certainly be delegated with the authority to give the other consultants direct instructions. This arrangement is shown in Figure 4.17.

Client representative

Legal services section External consultant External consultant External project manager

Subcontractors External contractor Subcontractors

Authority links

External suppliers

Contract links

Figure 4.17

Possible authority and contractual links for external consultants

In this case, the project manager is given the authority to control the other external consultants. However, the contractual risk of the consultants making a mistake or acting incorrectly is still firmly borne by the client. This is the classic agency arrangement. Authority links reflect the authority distribution within the system. They are not necessarily backed up by any form of contractual agreement or arrangement. They are lines of control that are established by the client when deciding on the overall organisational structure for the project. Lines 4/42

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of authority that can be expected in internal project management systems are wholly different from those that can be expected in external project management systems. •

Communication links. Communication links are also very important but they do not necessarily reflect the layout of contractual links, nor of the authority links within the system. It should be remembered that an inadequate communications system is one of the main reasons for failures in projects. Communication links define the individual lines of communication in the system. Communication links, depending on the application, might follow the same paths as contractual and authority links, but they may also follow different paths. This situation can be illustrated by extending the example used above. Most project management configuration management systems (CMSs) define the authority and communication channels within a project system (see Module 7). A typical arrangement between a consultant project manager and the other external consultants might involve a number of different sections and channels. The actual professional services contract would probably be between the legal services section of the client organisation and the relevant consultant. In terms of authority, the CMS would almost certainly state that the project manager has the authority to request changes or issue instructions, but these must actually be issued through some kind of change control procedure, which could take place through an individual or a panel and apply to all instructions or only to those above a certain value. The change control section would issue the actual instruction. However, in order for the system to work, the CMS would almost certainly allow the consultant project manager to communicate directly with the consultants concerned in order to discuss the scope and objectives of the variation. In other words, the contract is through legal services. The variation or instruction is issued through change control, and the communication needed in order to arrange it is directly between the project manager and the consultants. This arrangement is shown in Figure 4.18 where, although the three lines follow different routes, they all centre on the project manager. The various contracts have to be drawn up and controlled by the legal services department. The project manager is therefore only party to the contract between the project management practice and the client body. However, the project manager is generally the focus of the authority and communication links. The project manager is therefore accepting limited risk in terms of non-performance by the other project team members. He or she is being paid a professional fee to manage the residual project risk and to ensure good performance from the other externals.

In most external project-management scenarios, the project manager would expect to retain communication and authority control over the other external team members. It would generally be inadvisable to allow a communication link to exist between the client and the other externals. This would give rise to the obvious risk of communications being made that bypass the project manager. Project Management

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Client representative

Organisational boundary Authority links Contract links Communication links

Legal services section External consultant External consultant External project manager

Subcontractors External contractor Subcontractors External suppliers

Figure 4.18

Possible authority, contractual and communication arrangements for external consultants

The classic result of this would be the introduction of creeping scope and cost escalation. It is also generally prudent to give the project manager authority over the various externals for more or less the same reasons. The client might issue variation orders or change notices directly to external consultants without the project manager being aware of them. Some organisational structures would introduce a change control section as shown in Figure 4.19 in order to eliminate this possibility. In this arrangement, the project manager can issue change authorisations up to a predetermined amount (say £10 000). More than this, the project manager has to refer the change request to the change control authority. Change control might be able to authorise increases up to £100 000 in value and signify approval directly to the project manager. Changes valued at greater than £100 000 might have to be referred directly to the client representative for a decision. This type of ‘filter’ control is very common on larger projects. It is really an essential component where costs have to be controlled within acceptable limits. It is widely encountered in public-sector projects and is often incorporated as a standard element in the authorisations control procedure for the project.

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Change control

Authority links Contract links Communication links

Client representative

Legal services section

Organisational boundary

External consultant External consultant External project manager

Subcontractors External contractor Subcontractors External suppliers

Figure 4.19

Possible authority, contractual and communication arrangement for external consultants, with change control

♦ Time Out Think about it: external project management. External project management is the usual form where an external consultant project manager is commissioned by a client. The normal organisational lines of accountability and communication are not present and the whole system is held together by different types and forms of contract. These structures are far more heterogeneous than internal systems, although they tend to be simpler in format and operation. In external systems, the project manager acts as an agent on behalf of the client and is appointed through some form of professional services commission. Questions:

• •

What does ‘agent’ mean?

•

What are the primary characteristics of each form of contract?

How does a professional services commission differ from a standard form of contract?

♦ External project management has a number of advantages and disadvantages. Some obvious advantages are listed below: • • •

Project Management

It is flexible and adaptive; It can respond rapidly to change; The use of external specialists can bring new ideas and approaches into the organisation; Edinburgh Business School

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• • • •

•

Areas of work where there is no in-house specialisation can be outsourced to appropriate external specialists. An appropriate structure can be established relatively quickly and easily and it can be staffed with the optimal range of specialists. The team can be disbanded quickly and easily if workload or demand changes. Specific specialism demands can be met. The team can be assembled from the range of external specialists that are available and the best fit of skills can be engineered to meet specific project requirements. Internal risks such as key people being unavailable can be avoided.

External project management structures also have a number of disadvantages. Some obvious examples are listed below: • • • • •

• • • •

4.2.4

4.2.4.1

External specialists tend to be expensive. External specialists have no loyalty to the organisation or commitment to the project. Recourse against poor performance can be difficult and the level of authority and control that can be exercised over external specialists is limited. A whole new administrative and control system is required as soon as external contracts are involved. More rigid and controlled communication systems are required where communications cross the organisational boundary. Communications with external specialist can have contractual implications. The involvement of additional internal sections (such as legal services) may be required. The risk profile of the organisation in general and of the project in particular changes significantly. The possibility of arbitration and litigation enters the risk equation. The already complex job of the project manager becomes more complex still.

Criteria for Selecting the Organisational Structure Broad Considerations The decision on the type of organisational structure to adopt depends on a range of factors. These include the broad considerations listed below. •

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Authority. The pure functional form uses a traditional reporting structure with a clear line of authority running down through the structure. Everybody has a clear set of objectives and there is a clear reporting line. Individual section heads control subsections through subsection leaders. It is relatively straightforward to set up a control system that can measure the performance of individual sections and units. These elements are retained in the matrix structure, but are clouded to some extent by the presence of Edinburgh Business School

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projects running across the functional boundaries. The projects introduce another level of accountability and individual team members have more than one reporting line i.e. more than one boss. There is an immediate risk of confusion and contradiction. This means that more stringent communication and co-ordination systems are required. A new level of control through the project sponsor is required. The performance of individual sections and units becomes more difficult to assess. A pure project system offers shorter lines of communication and immediate accountability, but it may be difficult to control a number of projects that are running concurrently.

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•

Communication. Formal communication is easiest in a functional structure but the informal communication network may encounter blocks in the form of functional boundaries. Authority boundaries may restrict both formal and informal vertical communication. A matrix structure reduces these blocks to some extent and particularly opens up formal cross-functional communications. Enhanced communication can be particularly useful where an element of innovation and evolution is required. A pure project structure makes the greatest use of informal communications and offers the most flexible communication solution.

•

Knowledge transfer. Functional knowledge is the easiest type of knowledge to store and use in future operations. A matrix structure allows functional knowledge to be used in projects, and the projects themselves can develop new knowledge that can be fed back into the functional knowledge store. Knowledge transfer in a pure project structure tends to be restricted to areas of commonality between individual projects. In some cases this is not a problem. For example, pure project structures tend to be used in research and development when the object of the research is to develop new knowledge rather than to use existing knowledge in order to manufacture a product.

•

Loyalty. A functional structure tends to develop the greatest individual loyalty, as employees tend to associate their career progression with the functional section. This can lead to situations where functional team members perceive their prime objectives as pursuing the goals of the function and the project may be seen as secondary. In a matrix structure this loyalty can be shared to some extent as individual project team members remain members of their appropriate functional sections. The situation is entirely different in a pure project structure. Individual progression may or may not be related to the success of individual projects and a different loyalty culture is required.

•

Technology. New technology and the use of existing technology impacts on all three systems. Functional sections tend to rely on the use of existing technology in order to manufacture or produce something. In a matrix structure the project teams are more likely to use existing technology to innovate. In addition, because project teams tend to look at problems in a different way they may generate a demand for new technological innovations or for the use of existing technology that has not previously been used by the Edinburgh Business School

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organisation. Pure project structures tend to produce the greatest demand for innovative technology. They may make use of appropriate technology specialists as part of their research and development function. •

Cost. Pure functional structures tend to have large fixed costs. They are inflexible to changes in workload and the structure can generally only be justified where a constant stream of similar work is demanded. The matrix structure is more flexible in that the project teams can be increased or decreased in size depending on workload variations. The pure project structure is the most flexible approach and can produce the lowest running costs.

•

Co-ordination. Pure functional structures have the most formal reporting systems and therefore the degree of co-ordination required is low. An efficient function-driven organisational structure reduces the co-ordination requirement to relatively low levels. A matrix structure generates a higher co-ordination demand. Enhanced co-ordination is necessary because projects run across functional boundaries and the potential for destructive competition and conflict is increased. Pure project organisations require similar high levels of co-ordination in order to avoid the possibility of duplication of effort.

•

Support functions. Pure functional structures require well-developed centralised support functions. The functional managers concentrate on functional objectives in the knowledge that decentralised support in areas such as IT and administration will be provided from the centre. Matrix structures have a similar requirement but some level of support may be devolved to the individual project managers. Large projects may have their own administration and IT support, especially if the project involves new technologies or approaches to production. Pure project structures may require little or no centralised support.

In terms of selecting the appropriate organisational structure for a project management requirement, some more detailed considerations are given below.

4.2.4.2

Project Objectives and Choice of Organisational Structure In most cases, the organisational structure of the company is pre-set, and the project manager has to design the project structure and then incorporate it into whatever is already there. It is more a process of re-engineering and adaptation than it is a question of designing a suitable project structure from first principles. The following listings are intended to provide some ideas for which type of project structure might be most appropriate, given a particular primary project objective. Furthermore, they are summarised in Figure 4.20. A pure functional organisational structure should be chosen in the following circumstances. • • •

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Where the workload is constant and only varies slightly; Where projects are required only infrequently; Where there are well developed centralised support functions; Edinburgh Business School

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Pure function

Matrix

Pure project

Infrequent projects Full outsourcing

Reduce overheads Multiple technologies Common use of resources

Complex production system Fast response times needed High degree of uncertainty Long term projects Large numbers of people committed to project

Figure 4.20

• • • • • • •

Where Where Where Where Where Where Where

Functional versus project structures

clearly defined authority structures are required; informal communication systems are not required; there is adequate back-up for key personnel; the functional objectives are the primary concern of the organisation; change is unlikely to be a major consideration; any projects are relatively small or insignificant; fast project response time is not required.

A matrix organisational structure should be chosen in the following circumstances. • • • • • • • • • •

Where Where Where Where Where Where Where Where Where Where

workload is variable; projects are frequently required; a degree of research and innovation is required; centralised support functions are present or partially outsourced; split authority structures are acceptable; informal communication systems are acceptable; projects are secondary but of significant importance; some degree of change has to be accommodated; any projects are small to medium sized; fast project response time is not generally required.

A pure project organisational structure should be chosen in the following circumstances. Project Management

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• • • • • • • • •

4.2.5

Where Where Where Where Where Where Where Where Where

the workload varies significantly; projects occur frequently or are dominant; a high degree of research and innovation is required; there is little or no centralised support function; authority can be almost entirely devolved to project managers; projects are the primary concern of the organisation; high levels of change are present; projects are large and involve a lot of resources; fast project response time is standard.

Summary Project management does not have any single organisational form. It can exist within and outside organisations, and it can operate at any level between the extremes of pure functional and pure project organisational structures. Within this range, project management can exist either internal to the organisation or outside it, or in a combination of both positions. The most common form of internal structure is the internal project-management matrix structure. This is typical of small working parties within large organisations. It is one example of a matrix organisational form. External systems are appropriate where the existing organisation is smaller and where more flexibility in the handling of operatives and consultants is required. The format adopted for any particular application will vary depending on the demands of the production system. Different combinations of structure offer different advantages and disadvantages.

4.3 4.3.1

Examples of Organisational Structures Introduction This section considers some possible project-management organisational structures. One example is based around an internal project management system for a university that is setting up a new multidisciplinary course. The other example considers the establishment of high-level courses for a non-university client, where an external project management system would be more appropriate.

4.3.2

Example of an Internal Project Management Structure Assume that a university wants to set up a new postgraduate multidisciplinary course in engineering project management. The university might have assessed the market in detail and subsequently decided that there is a genuine demand for courses in engineering project management at this level. The starting point would be for the university to look at its existing organisational structure. A typical OBS would be as shown in Figure 4.21.

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Court

Senate

Faculty Board (engineering)

Faculty board (management)

Faculty board (science)

Department A

Department B

Business School

Department C

Department D

Head

Head

Head

Head

Head

Staff

Staff

Staff

Staff

Staff

Staff

Staff

Staff

Staff

Staff

Staff

Staff

Staff

Staff

Staff

Figure 4.21

Typical OBS for the existing functional unit

The first thing to do after that be would to appoint a project manager and set up the project team. The team might be carefully selected by the project manager and the functional managers, but more likely the staffing would be arranged by senior managers. Selection would depend on a range of factors including: • • • • • •

the priority of the new course within the existing departmental five-year plans; the general availability and workload of staff; teaching vs. research staff specialisation and priorities; specialisations required on the new course; any verbal and written commitments already given; overall university policy.

The university would therefore allocate a team that would probably be based on discussions at Senate level. Each faculty has its own aims and objectives and will therefore view the new course differently. In turn, there may be a number of alternative forms of sharing out the fee income. Service departments (such as the faculty of science) might not receive cash; they might instead transfer the teaching time as full-time equivalents for overall university funding purposes. Project Management

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The project team will be identified probably at senate level, and with the involvement of the various faculty boards. This level of discussion would probably not consider specifically named individuals but would concentrate on specialisations. For example, it might be agreed that Department A would provide one qualified engineer while the Business School would provide one management specialist. The Senate would also ask for a project sponsor to oversee the development of the new course. This is a high-level position and a named individual, possibly at Senate level, might be appointed. This is important as there are several faculty boards involved. If only one faculty board was involved i.e. all the contributing departments come from the same engineering or science faculty, then the project sponsor could be appointed at a lower level, probably at faculty board level. The basic project team arrangement would therefore be something like that shown in Figure 4.22. This arrangement establishes the basic organisational boundaries and also the basic authority layout within the system.

Project sponsor

Project manager

Senate

Faculty Board (engineering)

Faculty board (management)

Department B

Business School

Department C

Department D

Head

Head

Head

Head

Staff

Staff

Staff

Staff

Faculty board (science)

Project boundary Faculty boundary

Figure 4.22

Basic layout and boundaries

The next consideration involves the inclusion of external consultants within the OBS. External consultants might be needed in this sort of arrangement where part of the new course’s syllabus is highly technical and very specialised, and where the university does not retain this specialisation in house. As soon as external consultants are involved, there is a need for a formal exchange of contracts. The university would probably arrange this through its own legal services section. The university would probably also establish an external interface section. This would operate at the university organisational boundary. There would be a need for a general communication link between these two sections, 4/52

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probably under the overall control of the project manager. This arrangement is shown in Figure 4.23.

Project sponsor

Senate

Faculty Board (engineering)

Faculty board (management)

Department B

Business School

Department C

Department D

Head

Head

Head

Head

Staff

Staff

Staff

Staff

Project manager

Faculty board (science)

Project boundary University central administration University client interface

University legal services

External consultant

Figure 4.23

Faculty boundary

Communications link Authority link Contractual link

Interface management

In this arrangement, the university has set up a client interface section to act as the interface at the university boundary. Such sections often have interesting names, such as ‘project interface management’ or whatever. The professional services contract is arranged through university legal services, though legal services would not normally communicate directly with the external, apart from offering assistance during the conclusion of the contract. This would typically involve duties such as answering queries from externals in connection with the tender documentation. The contract itself would probably be a professional services contract pro-forma, drawn up by the university legal services section and developed and refined over time. Both the university legal services and client interface sections would probably report directly to some kind of university central administration. They would not report to the project manager or to any of the project or functional team members. They would probably be in communication with: Project Management

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• • • • •

university central administration (formal); each other (informal); the project manager (informal); the external consultant (formal); the project sponsor (informal).

This network of formal and informal communications is very important. Communications with the central administration and the external consultant have to be formal. The internal formal links are necessary because the university interface and legal services sections are directly answerable to university central administration. Formal communications are necessary with the external consultant because of the existence of the formal professional services contract between that consultant and the university. Any changes or variations have to be formal as they have contractual implications. The informal communications system is just as important (if not more so). The various stakeholders use it to keep up to date on what is happening in order to try and detect any problems as early as possible. The senate project sponsor has to be in regular contact with the project manager and the functional managers, particularly in order to try to detect any ‘rumblings’ that could indicate dissatisfaction about resourcing or the times being allowed by individual team members for their project and functional duties. The various functional managers will probably communicate informally for the same reason. If one of them is concerned, his or her first response will usually be to sound out the other functional managers in order to see whether the feeling is general. In terms of authority, the project sponsor has to have executive authority over the project manager and over the various functional managers. He or she in turn reports directly to senate level. Any lower reporting level would clearly be inappropriate. The project manager will probably have informal communication with the external consultant; any formal variations or changes would have to go through either the interface section or legal services. 4.3.3

Example of an External Project Management Structure An external example along the same lines as that considered above might involve an external client in arranging for a series of high-level training courses that are to be delivered by a number of external consultants. The client might be a large public body – a local authority, for instance, or one of the major public services such as the police or fire brigade. The organisation itself may have its own training facilities to cover courses up to a certain level, but beyond this they outsource and go to external educational consultants. They may also contract various contractors and suppliers for the provision of works or goods. In large organisations, there may be an internal project manager who acts as liaison officer and co-ordinator for the various external consultants. The arrangement just described is shown in diagram form in Figure 4.24. The client’s legal services section sets up the contracts with the corresponding legal divisions or external legal advisers for the various external services providers. The client’s project manager co-ordinates the various external service

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ESP Project manager

Client project manager

External contractor

ESP Legal services

Client contracts and procurement

External supplier

External service provider

Client body Organisational boundary.

Organisational boundary

ESP Project manager

ESP Project manager

ESP Legal services

ESP Legal services

External service provider

External service provider

Organisational boundary

Organisational boundary

ESP: External service provider

Figure 4.24

External advisers External bodies (accreditation)

Steering groups

Communications link Authority link Contractual link

Typical external arrangement

provider project managers. Because the system is external, the service providers, contractors, suppliers and others have to be formally engaged through contracts. The external service providers will generally be engaged on pro-forma professional services agreements that have been developed by the client’s legal services section over a period of time. These typically describe the syllabus that is required, together with the total teaching hours involved, levels of attainment required, etc. They usually include a provision for the external service provider to insert a fee total or hourly rate, together with provision for extras such as subsistence, travel and so on. These can be substantial documents, and they are often incorporated into a larger document so as to form the tender documentation for the teaching contract. It is common to find such documents with a form of tender as the last page. The external service provider completes the form of tender and returns the entire document as his or her tender. Alternatively, less sophisticated clients might issue an outline description of what is required and then invite tenders with subsequent conclusion through a professional services contract that is relevant to the successful tenderer. Sometimes the choice of professional services contract is left to the successful tenderer. Contracts with external contractors are likely to be standard forms. These could be sector- or industry-specific, or they could be one of the new generation of generic standard forms such as the UK-based new engineering contract. This contract attempts to establish a set of generic conditions that apply to all Project Management

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engineering applications from construction to offshore installations. Supply contracts are likely to be pro-forma agreements produced by the supply companies themselves. The client may also be in contact with other external advisers and steering groups, with or perhaps without any formal contractual links. The external arrangement generally has fewer informal lines of communication and more formal ones. The general level of control required is greater than for the internal equivalent.

4.4 4.4.1

Project Management Standards Introduction It is essential that any student of project management is fully aware of the main European and international standards that apply to project management practice. In most cases, it is not essential to develop a detailed knowledge of the exact content of these standards, although it is important that anyone who is trying to develop an understanding of what project managers do is aware of: • • •

what project management standards exist; what the standards are meant to do; how the standards interrelate.

This understanding is important because different people have different opinions and take a different view of what project management is and how it works. One only has to look at the range of postgraduate project management courses that are available in universities around the UK. There is a very significant variation in the syllabi of these courses; ‘project management’ clearly means different things to different people. Some people see project management as being a purely ‘hard’ technical discipline, being concerned only with planning and controlling the physical development of a project. Others see project management as being a largely ‘soft’ or people-based issue. Some would argue that project management should embrace a number of other disciplines such as risk management and value management. The answer to this range of perceptions is to look at the standards. There are established national standards and international standards for project management. They act as national and international benchmarks for those individuals and organisations that subscribe to the various project management professional bodies around the world. True project management practice is to some extent anchored on these national and international standards. In the UK, there are three major standards that are used as the basis for professional project management practice. These are as follows: •

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The APM Body of Knowledge. The Association for Project Management (APM) has a so-called Body of Knowledge (BoK) that is the UK equivalent of the US project management institute (PMI) model. It is interdisciplinary and is applicable to all industries. It establishes the standards and areas of responsibility for project managers in all industrial sectors. As such, it is a generic document, assembled Edinburgh Business School

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and published by the APM. It mirrors the corresponding BoKs produced in other countries. The various project management professional bodies and the BoKs are in turn regulated and co-ordinated by the international project management association (IPMA). The IPMA includes members from the various national project management associations. The APM BoK must therefore be regarded as a national standard that is compatible with global project management standards. The UK APM BoK is very similar to the US PMI BoK and to others around the world. It is important to note that project management using the various BoKs is both international and interdisciplinary. It is international in that the various professional bodies in each country have produced their own BoKs in line with IPMA guidelines. The various countries have therefore all developed similar BoKs. This means that a UK and a US project manager adhering to the guidelines should work in similar ways and ‘speak the same language’. This is not the case with other professions such as medicine and law, where the codes of practice and professional requirements are very different. BoK project management is interdisciplinary in that the BoKs are generic documents. They are produced for general use in each country, rather than being designed for use by specific sectors or industries. A US project manager working in agriculture will therefore work in similar ways and again ‘speak the same language’ as a UK project manager working in process engineering.

Project Management

•

BS6079. BS6079 and the related ISO10006 are UK and EU benchmarks respectively for project management practice. They set national and international standards for practice while still being heavily based on APM approaches. BS6079 attempts to establish working guidelines for UK project management practice. The document covers everything from project management theory to direct applications. The various sections of the standard are discussed in more detail below. The most important single element within BS6079 is the strategic project plan (SPP). This provides a structure for organising and monitoring any project, irrespective of location or industry. It is a form of generic framework that can be moved from project to project, providing the basic structural elements for building a project plan for each separate project. The idea is that, by using this approach, project managers will all set up projects in the same way using the same basic framework. Strategic project plans will all become compatible and direct comparisons of performance will be possible.

•

PRINCE2. PRINCE2 is a stand alone methodology. It was originally developed to standardise project management within an IT or ‘controlled environment’. Hence PRoject management IN a Controlled Environment (PRINCE). As a methodology, it is very much based on information management and control. It is only suited to bureaucratic systems and is not intended as a methodology for ‘harder’ project management scenarios such as construction. As such Edinburgh Business School

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PRINCE2 is really an alternative to BS6079. An organisation or company that is setting up a project management control system for the first time would structure it around either BS6079 or PRINCE2, but not both. The hierarchy of standards for project management can be summarised as shown in Figure 4.25. The IPMA control international standards while the various national professional bodies control standards in their own countries through their respective BoKs. There are additional standards that address the details of practice, such as BS6079 and PRINCE2. Project managers should work and perform within the defining parameters of the APM BoK. If they do not, no matter how useful and successful their efforts, they are effectively not performing ‘project management’.

International Project Management Association (IPMA)

Association for Project Management (APM)

Project Management Institute (PMI)

UK and International project management standards

Industry-specific models

PRINCE2

Figure 4.25

Other national bodies

UK Project management practice

Generic benchmarks (BS6079, ISO10006)

Global project management standards systems

In addition to these generic international documents, there has been a recent proliferation of industry-specific responses, where professional associations or industrial bodies have attempted to produce industry-specific adaptations of these generic standards. Numerous large UK organisations, such as the British Broadcasting Corporation and British Telecom, have developed their own specific codes of practice and summaries of project management practice and application within their own organisations. This means that, for any given industry or profession, there are effectively three standards that govern project management practice. There is the international APM BoK, the national BS6079, and the industry-specific version. Anyone who is involved in project management must at least be aware of what these standards are and how they work together. These generic and specific standards therefore represent a tripartite standards system. This concept is shown diagrammatically in Figure 4.26. A project management system should therefore comprise a basic nucleus originating from the APM BoK and the APM standards of professional practice. 4/58

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This should then be extended to embrace the formal procedures contained in either BS6079 or PRINCE2. It should then be further extended to include sectoror company-specific aspects.

APM Body of Knowledge and professional standards. Generic components

Organisation project management system

BS6079

Companyspecific project management procedures

Figure 4.26

4.4.2

4.4.2.1

PRINCE2

Sectorspecific project management procedures

Specific components

Inputs in the form of standards to a new project management system

The APM and the APM Body of Knowledge Introduction The APM is the professional body for project management in the UK. It is part of the international project management association (IPMA), and it has strong links with similar and equivalent project management associations around the world. It is therefore an international body and is part of a larger global collection of project management bodies. The APM has established a body of knowledge that is intended to act as a standard for evaluation of project management expertise. It is also used as a selfassessment tool to enable project managers to measure their own professional competence when applying for different levels of membership. The APM Body of Knowledge (BoK) is split into several sections and subsections, each of which defines a different set or subset of essential project management skills. The idea is that the Body of Knowledge defines the four primary areas of expertise required of a certificated project manager, the sub-areas of expertise within these primary areas and the individual components of each sub-area. Other professional institutions have recognised the growth of project management and have made varied attempts to include it as an optional specialisation

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within their membership structure. However, the APM remains the one generic professional body for project management. The stated aims and objectives of the APM are: • • •

• •

•

to act as first point of contact: to be the national authority on project management through the Internet; to lead the development of professionalism: to further the professional development of practising project managers in the UK and western Europe; to champion interest representation: to represent the interests of UK project managers in all sections of industry, commerce and the arts, irrespective of individual discipline; to establish standardisation of qualifications: to standardise the academic and professional qualifications of certificated project managers; to develop a functioning national branch network: to establish and maintain a national branch network to facilitate participation by all members throughout the UK; to establish practice and procedures for training: to establish and maintain ongoing training programmes suitable for project managers of all levels of experience and competence.

The objective of this section is to develop an understanding of what the APM BoK is and how the association fits into the global system of project management professional standards. It also gives some idea of the main standards that apply to project management practice, over and above the professional standards that are published and developed by the professional associations and institutions. The AMP BoK is a standard document that runs in conjunction with practice standards such as BS6079 and also in conjunction with sector- or companyspecific standards.

4.4.2.2

The APM Body of Knowledge Profile The APM BoK lists four primary areas in which a qualified project manager must have relevant academic and experiential ability. The four effectively define those areas where a project manager must have a detailed knowledge and understanding of the theory and practical application. The four areas are described next in a little more detail. 1 2 3 4

Project management; Organisation and people; Techniques and procedures; General management.

Copies of the UK APM Body of Knowledge (BoK) are available from: The Association for Project Management 85 Oxford Road High Wycombe Buckinghamshire, HP11 2DX UK. 4/60

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Other national project management bodies such as the US Project Management Institute (PMI) have published corresponding bodies of knowledge that are relevant to practice in their own countries. The UK and US bodies of knowledge are similar and include the same general areas. •

•

•

•

Project Management

Project management. Project management includes specific aspects such as an understanding of project life cycles, project strategy and the project environment. The APM BoK makes it clear that a project manager must have an understanding of a wide range of issues that relate to project management practice. The project environment is one example. The project does not exist in isolation. An internal project management system operates within its parent’s organisational structure. The parent organisational structure acts as the immediate project environment and changes in this directly affect the project. In addition, the organisation itself operates within the external environment. Changes both within the organisation and within the organisational environment can directly impact on the project. Organisation and people. Organisation and people includes leadership, communication and team building. In order to operate successfully a project manager must have an understanding of areas such as leadership. The optimal leadership style varies in relation to the nature of the project and also in relation to the stages of the project life cycle. Leadership style has to evolve as the project develops and hence the best leadership response to change will also vary over time. Techniques and procedures. Techniques and procedures include such areas as scheduling and estimating. These are the traditional ‘hard’ areas of project management. A project manager should have a detailed understanding of the various planning and estimating techniques that can be used on projects, together with an understanding of the various control and monitoring procedures that are required in order to ensure that plans are successfully implemented. In particular a project manager should be aware of the latest approaches to planning and control, especially those approaches (such as earned value) that link to one or more success criteria variables. General management. General management includes finance and law. These functions are normally covered by appropriate specialists, but a project manager should have a basic understanding of the procedures and approaches involved. For example a project manager has to have an understanding of basic contract law so that he or she appreciates what actions are or are not permissible under the terms and conditions of the various contracts that are likely to be encountered. This is particularly important in the case of external project management where there are likely to be a range of contracts in place. It is clearly important that a project manager has adequate knowledge and experiential skills in these areas. It is not sufficient for a project manager to have well developed abilities in some of these areas and not in others. For example it is not possible to effectively plan and manage a project without a knowledge of contracts. It is possible to appoint external specialists for most aspects of contractual control, but the project manager has to know what a contract is and how he or she can use and enforce it as part of the implementation process. Edinburgh Business School

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The APM BoK attempts to encompass the full range of project management areas of expertise. It stresses both the range of subject areas required and also the importance of expertise across the entire life cycle of the project. Some areas of professional practice tend to centre on a specific part (or window) of the project life cycle. An engineering consultant who is commissioned to design and deliver a fully operating air conditioning plant for a new building is primarily concerned with the design of the system and making sure that the finished plant works correctly. The engineering consultant is generally not so concerned with the long-term use of the system, nor with any problems that might be encountered during the long-term use of the system. The APM BoK stresses that a project manager should be concerned both with the pre-design phases where the performance of the system is specified, and also with the long-term use and eventual decommissioning of the system. This long-term involvement includes post-installation review and long-term costs in use. The APM BoK also includes areas that are relatively new to UK practice, but which nevertheless fall within the domain of professional project management practice. One such area is value management. This is a discipline that is already in widespread use in the US, but is still very much in the early stages of adoption in Europe. Value management is concerned with looking in detail at early design proposals in relation to the aims and objectives of the client. It is common to find that the initial interpretations of the client brief, or specifications that have been made by designers, can be improved to deliver greater value. By employing value management tools and techniques a project manager is often able to suggest early design changes so that more effective use is made of space, available materials, design options and alternative cost scenarios. Those with a strong interest in developing their project management skills are recommended to obtain a copy of the APM BoK and familiarise themselves with it. The US PMI BoK is currently available as a downloadable file on the internet.

4.4.2.3

Summary The APM Body of Knowledge is a UK national standard for project management practice. It is one of a series of similar bodies of knowledge issued by the various professional associations around the world. It establishes national guidelines and standards for the profession, and is one of three levels of standards that are required for an effective project management system. ♦ Time Out Think about it: project management standards. Many people talk about ‘project management’ when in fact they mean something else. It is very important to appreciate that there is a recognised international body for the establishment and maintenance of project management standards and professional practice. This body, the International Project Management Association (IPMA) is an international organisation linking all the various national project management bodies together. In the UK, the Association for Project Management (APM) is the generic professional body for project management practice in all industries. It establishes examination syllabi for project management professionals and it sets out the key project management competencies in the APM Body of Knowledge.

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Increasingly, other standards are being put in place. In the UK, British Standard (BS) 6079 is the first attempt at the establishment of a UK guideline for professional project management practice. The document was developed in consultation with academics and industrialists and was designed as an attempt to consolidate a series of different industrial approaches to project management. Specific industries have responded to some extent by introducing their own standards for project management practice. Nearly all large organisations now have their own project management manual which specifically applies project management theory and practice to that particular organisation. Questions: • Why is it important to have international generic standards in project management? • What is the significance and potential significance of an international generic standard? • How does this international generic approach to standards compare to the approaches that exist in other disciplines such as medicine or law?

♦ 4.4.3

4.4.3.1

BS6079 Introduction BS6079 is the British Standard Guide to Project Management. It establishes guidelines and procedures for project management practice in the UK. One of the most important single sections in the whole document is the standard strategic project plan (SPP) to BS6079. The philosophy of the SPP is based on standardisation. At present, projects can be set up and run in any form that the individual manager responsible considers to be the best. There is no standard requirement for document preparation, recording, cost planning and control, or even of quality control. Projects are set up and executed in numerous ways, both between industries and within the same industries. Each organisation has its own procedures, and even members of the same design professions may have different approaches to designing and recording information. Cost planning and control is one example. There are several different standard methods of measurement across the EU. In addition, there is no standard for presenting drawing information, so not only the measurement but also the information presentation can differ from project to project. In addition, there are no standard approaches to the establishment or format of cost plans; and cost data collection and reporting varies widely from contract to contract and from practice to practice. This has obvious drawbacks. It makes it very difficult for anyone to evaluate project performance and individual project team performance because there are so many unknown variables. It would be useful to be able to measure how well a design team has performed relative to the fees that have been paid; at present, this is not possible because of the levels of information that are in the system and the difficulties involved in being able to isolate individual performance characteristics when there are so few constants.

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BS6079 attempts to address this problem, at least in part. The standard establishes a generic project plan that is applied to all projects. An agricultural project would therefore be set up in exactly the same way as a construction project. Eventually, BS6079 may become a European standard so that agricultural projects and construction projects would be set up in exactly the same way right across the EU. The objective of this section is to develop a basic understanding of what the BS6079 SPP is and how it works. The BS6079 SPP is a standard document that operates at one level within the project management system. It runs in conjunction with the standards that are established by the professional associations and institutions and also in conjunction with sector- or company-specific standards. The main sections of the SPP to BS6079 are considered now.

4.4.3.2

Generic SPP to BS6079 The main elements of the generic SPP defined with BS6079 are as follows:

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•

Preliminaries. Most SPPs have an extensive preliminary section. This typically contains such elements as a title page, description of the project, a contents list and an introduction. The preliminaries effectively set the project in context and name the main people who are involved in planning and executing it. The preliminaries section typically establishes some kind of configuration control reference. This is important on large and complex projects where a configuration management system (see Module 7) is to be used. This may involve the establishment of identifiers for the main project team members and also some kind of security system for controlling access to project information. As the project develops various people will contribute information and there will be a requirement for more people to access some of the information that has been input to the system. Some information such as estimating strategy and cost accounting data may be confidential and there will be a corresponding need to restrict access. In order to achieve security control each member of the project team may be allocated a security level code. Different codes then allow access to different information levels within the system.

•

Project aims and objectives. Most SPPs contain a section where the project aims and objectives are clearly stated. The objectives may relate to time, cost, quality and a range of other objectives. It is important that these are clearly defined at the outset so that everybody involved with the project has clear terms of reference to work to. This section may also contain details on sub-objectives. These sub-objectives may run in parallel with the project objectives and carry equal importance but may require different planning and control techniques. An example is health and safety objectives. As a sub-objective, successful health and safety performance may be equally as important as (for example) finishing the project on time. Health and safety performance can be a critical success Edinburgh Business School

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factor on some projects and there can be heavy statutory penalties for unsatisfactory performance or non-compliance. Companies are also increasingly considering environmental awareness performance. It is becoming commonplace to find sub-objectives relating to operating costs and recycling. •

Subject specific sections. The remainder of the SPP usually comprises a series of subject specific sections. BS6079 gives a proposed numbering system for these and details the information that should be presented under each heading. The idea of this is that all SPPs should be laid out in the same way and each subjectspecific heading should address the same issues and present information in the same format. The subject specific headings cover all aspects of the project management process from project policy to certification procedure. Specific sections are normally established for scheduling and cost control. These sections contain both the original plans and updates to allow for changes that have occurred since the original plans were established. In some cases a separate section is maintained for the effects of change. Some projects are heavily affected by change, some of which is imposed and some of which is voluntarily included by the client. It is normal practice to record these variations and maintain a record of the projected effect on the final completion date and cost of the project. There is usually a section that acts as a project history or diary. The project manager uses this section to record all important communications and events that occur during the course of the project. This section serves as an audit trail should the need arise. It is also an important repository of information for subsequent use in the post-project review.

The SPP contains all relevant project information. It acts as both a record document and as a benchmark for the project as originally developed and planned. As the project progresses and the designs and plans are implemented the SPP is updated so that it creates an update record and (if required) an audit trail for later use. In practice the SPP is developed over time during the planning process. In an external project management system the project manager assembles the SPP using information provided by the various project specialists and consultants. Some private project management organisations already use SPP pro forma documents and adapt these for use on each project they undertake. Typical contributors to the SPP are: • • • • • • Project Management

the design engineers providing drawings and schedules; the cost consultants providing estimates and cost plans; the legal consultants providing copies of the various forms of contract; the client providing information on aims and objectives; the project manager providing information on communications and other co-ordination systems; external statutory bodies. Edinburgh Business School

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The SPP is usually assembled to a specific timetable. The SPP includes all necessary project design and specification information by the time that the project is initiated or put out to tender. Clients are increasingly using SPPs as a basis for competitive bids for external project management services. It is common practice for the client to commission an SPP project manager who manages the development of the initial SPP up to baseline stage. The SPP at this stage includes all the project information an external project manager will require in order to be able to bid for the project’s professional services contract. This approach has a number of advantages over traditional selection processes. Perhaps the most important advantage is that each prospective project management consultant is using the same detailed information as the basis for his or her bid. Students who are likely to find themselves in a project management role at some stage in their careers are recommended to obtain a copy of BS6079 and familiarise themselves with the various suggested SPP subject headings. The standard is UK specific but the approach adopted is generic and could be adapted for use in most countries.

4.4.3.3

Summary BS6079 is another form of national standard for project management practice. It acts as a benchmark, particularly in relation to standardising procedures and documentation. The most important single standard document within BS6079 is the strategic project plan (SPP). This is a generic standard format for the presentation and recording of any strategic project plan for major project. Using an SPP as a template or framework, project managers can establish all projects according to the same basic format. This generic capability applies both internationally and across disciplines.

4.4.4

4.4.4.1

PRINCE2 Introduction PRINCE2 (PRoject management IN a Controlled Environment, version 2) is an alternative to BS6079. It is a project management methodology that covers the organisation, management and control of projects. PRINCE was first developed by the Central Computer Telecommunications Agency (CCTA) in 1989. At that time, it was intended to be the UK government standard for IT project management. Since 1989 it has become widely used and has been applied with success to some non-IT applications. PRINCE was reviewed extensively in 1995 and PRINCE2 was introduced in 1996. The development of PRINCE2 involved a consortium of project management consultants working under contract for the CCTA. It was validated by more than 150 public and private-sector organisations and specialists.

4.4.4.2

PRINCE2 Methodology PRINCE2 is based on a process model of a project. This involves breaking the project down into component processes. Each process is then defined in

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terms of its key inputs and outputs and in terms of the aims and objectives for each process. It is therefore based on the life cycle of the project, with each component evaluated and analysed separately. The process model (see Figure 4.27) demonstrates how a project can be divided up into manageable elements, each handled separately. This allows more efficient use of resources and more accurate measuring of progress.

Senior management

Directing the project

Start up a project

Initiating

Project mandate

Controlling a state

Managing stage boundary

Closing a project

Managing product delivery

Planning

Figure 4.27

PRINCE2 process model

A PRINCE2 project is driven by the project business case. This describes the organisation’s underlying motivation and commitment to the project. The business case is not a static document; it is regularly reviewed throughout the course of the project life cycle. The main advantages offered by a PRINCE2 approach are that: • • • • • •

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it offers a standardised project structure with a clear start, middle and end; it allows regular and detailed reviews of actual progress against planned progress; it allows regular and detailed reviews of actual progress against the business case; it identifies and makes use of flexible decision points; it identifies and allows automatic control of any deviations from the project plan; it ensures that the timing of involvement of management and stakeholders is optimised during the life cycle of the project; Edinburgh Business School

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•

4.4.4.3

it encourages and develops good communication channels between the project, the project manager and the rest of the organisation.

Summary PRINCE2 is a methodology for bureaucratic and IT-driven projects. It is an alternative to BS6079 rather than a rival. It is aimed at a different client base and clearly attempts to achieve different things. It is widely used in office-based applications.

4.4.5

Summary This section has highlighted some of the primary standards that apply to project management practice. Project management is an international generic discipline and it is important that national and international standards are observed as far as possible. At the highest level there is the International Project Management Association (IPMA) which acts as the global body for project management practice. The next level comprises the various national bodies for project management practice in individual countries such as the UK APM and the US PMI. These bodies have established bodies of knowledge in an attempt to establish and standardise the areas of expertise that are required by practitioners in the respective countries. Increasingly the national bodies are also producing standard conditions of engagement and other standardised procedures for project management practice. In some countries, the relevant national standards institutes have also produced project management codes of practice and national standards. One example is BS 6079 as produced by the British Standards Institute. This contains important practice guides and recommendations, such as the use of a strategic project plan (SPP) for every project. At the lowest level, individual industries, sectors and companies have produced their own codes of practice and guides to project management practice. These tend to be more industry specific and related to the operational processes of the companies concerned. In practice, the level to which standards are used in project management depends on individual company policies and on the level of adoption of standards by professional practices. There is a strong case for the adoption of standards whenever possible in project management practice, as the discipline it is international and generic.

Learning Summary Organisational Theory and Structures •

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The design of the organisational structure is important because the most important single element in making a project a success is the people that work in the project team. In most cases, people make projects succeed or fail. Edinburgh Business School

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•

• •

•

•

•

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•

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Most organisations naturally tend to split themselves up into functional units. Each functional unit has a functional specialisation and there is often relatively little communication between the functional units. Organisations tend to have authority levels. These run horizontally through the system and identify power and status bands. Functional boundaries run vertically. Authority boundaries run horizontally. The end result is a series of operational islands that work relatively independently. Functional systems offer good flexibility in the use of people. Staff are primarily employed to perform a functional job but may be temporarily assigned to a project that requires their particular expertise. Functional systems allow individual experts to be effectively used on a number of projects. If there is a broad base of expertise within a functional department, they can be employed on different projects with relative ease. Functional systems allow specialist knowledge to be easily shared within the function and effectively utilised by the project team. This assists in the development of continuity in the sense that expertise, procedures and administration are maintained within the function despite any personnel changes that may occur. The function provides the most secure career path for an individual. Whilst projects may generate a degree of satisfaction, the functional department probably offers more prospect of promotion. The function will tend to have more power than the project. The department will need to continue to operate as normal and any individual assigned to a project will probably be an important part of the department’s operations. A functional department tends to be process-oriented rather than goaloriented, which a project must be in order to be successful. People working within this type of structure may find it difficult to adapt to the needs of the project environment. In functional systems, full project responsibility can be difficult to assign, particularly in cross-functional projects, and is therefore often avoided. In functional systems, there is a tendency to sub-optimise the project. Project issues directly within the interest of the functional discipline would tend to be dealt with much more diligently than those from other areas. Project management offers a solution by forming horizontal project teams that run through the operational islands. Project systems can operate as pure projects within a functional organisation. A pure project would comprise a group of specialists who were drawn from functional units but allocated sole (as opposed to shared) responsibility for working on the project. Pure project systems may be a ‘satellite’ of a parent that has been set up specifically to deliver projects and could be linked to the parent company by a reporting system. Project organisations often have total freedom within the limits of final accountability; others have functional support assigned to them by their parent company. Edinburgh Business School

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In pure project systems, the project manager not only has full authority over the project but has a dedicated project team working under, and reporting only, to him or her. In effect, the project manager is the managing director of the business that is the project. In pure project systems, the project team members report only to the project manager. They are not responsible to a functional department. Pure project systems tend to have shorter and clearer communication linkages as there is no functional structure to navigate. The project manager reports directly to someone in the organisation’s senior management. Pure project systems can be particularly effective when there are a number of pure projects operating at any one time within an organisation. This allows the project organisation to build specific skills and expertise in these areas, which can result in distinct competitive advantages being built up within the organisation. These skills will not be tempered by functional duties. In pure project systems, the project team can develop a strong sense of identity and motivation; commitment to the project is often high. In pure project systems, authority is centralised and the project team can therefore make quick decisions and react rapidly to changing circumstances. Pure project systems offer the advantage that each member of the project team only has one boss, and this unity of command ensures that he or she never has to choose between the functional boss and the project boss. The organisational structure is simple, flexible and easy to understand and administer. In pure project systems, it is easy to see the project as a whole, with less of a tendency to focus on sub-systems thus losing touch with the whole project. Pure project systems that are running a number of consecutive projects may duplicate a considerable amount of work in many areas of the project. Staffing costs in pure project systems can be very high because each project has full-time functional capability whether required or not. In pure project systems, there might be a tendency to stockpile resources for future use. Pure project staff may become highly competent project workers, but absence from the functional department for extended periods could result in their losing touch with developments within the functional disciplines. The functional department may be better positioned to keep up to date with developments. Deadlines for pure projects often foster administrative corner-cutting, and policies and procedures can be left by the wayside. It becomes very difficult to maintain standard procedures across project teams who are given complete freedom to run the project. Pure project systems can lead to a ‘them-and-us’ mentality and can foster groupthink and political infighting. When staff are employed solely within a project team, there is understandable concern about their positions after the project has finished. There is a Edinburgh Business School

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•

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• • •

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tendency towards the end of a project for important team members to leave to take up longer-term, more secure positions. This can put the project in jeopardy and is often countered by the award of a project completion bonus paid to those team members still there at the end. A matrix system attempts to combine the benefits of the functional organisation with those of the pure project organisation, whilst at the same time eliminating the disadvantages. The matrix structure is the pure project structure overlaid on the functional divisions of a parent organisation. Matrix structures may be very strong or very weak, or anywhere in between, depending upon the nature of the projects undertaken. Strong matrix structures veer towards pure project structures and tend to be used on large projects where employees are assigned to projects on a long-term, full-time basis. Weak structures exist where the only full-time employee on a project is the project manager and everyone else used on the project is commissioned on a short-term basis. This is common on smaller, shorter-term projects such as those carried out by advertising agencies. Projects undertaken in this environment could be undertaken within the most appropriate functional unit. For example, a packaging redesign or product launch would be the responsibility of the different sections of the marketing department. Alternatively, they could run across different functional units – as for example, in a police crime investigation that uses specialists from a number of individual functional specialisations. Although projects carried out in this environment may be strategically important to the organisation, they are highly unlikely to be the reason for its existence. They are likely to be developmental in nature; they will tend to be projects to improve systems, procedures, methods or products and to be internal rather than external projects for the benefit of the organisation’s effectiveness. Internal or non-executive project management is an example of a matrix system. It involves a project system operating within the boundary of a larger functional system. Internal project management systems require a project sponsor, who is there to act as a moderator on the project manager and the functional manager(s). Internal project management generates interfaces. Interfaces are points where organisational linkages cross either internal or external project, function or authority boundaries. Interface management is the management of the processes of communication and action across and within the various organisational interfaces. Internal project management relies on accurate time and cost-centre recharging between functional and project systems. In matrix systems generally, the project is the point of focus and has a single person (i.e. the project manager) responsible for its success. Edinburgh Business School

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The matrix system also means that the project has reasonable access to the total capability of each of the functional areas and is well placed to draw on the services of any of the specialists across all the organisation’s departments. Even though strong matrix structures support a truly committed project team, there is little anxiety or insecurity as the end of the project nears, because team members are generally assured of their place back in the functional department. The project within the matrix structure is flexible and can respond rapidly to the demands of the client in a way that the functional organisation cannot. Close links to the functional departments ensure that organisational policy, procedures and systems are well adhered to and are consistent across all projects. This benefits project team members when they move from project to project and do not have to familiarise themselves with new ways of doing things on every project. Where there are several projects running simultaneously, a matrix structure enables better balancing of resources to meet the demands of the organisation as well as the demands of each of the projects. The matrix structure offers total flexibility between pure project and pure functional organisation and can be adapted to suit any project. There is a power-balancing issue between the project and the functional department and when the balance is delicate, as in the case of a power struggle between project manager and functional head, the project will suffer. Project management is a complex task in general and the matrix structure adds a new dimension to that complexity. Project completion in strong matrix structures is difficult. Killing off the project identity built up during the project life cycle is often resisted, and project team members may suffer a sense of loss at the prospect. The matrix structure demands project managers with strong diplomacy and negotiating skills. Without this, they may quickly find themselves at odds with the heads of the functional departments. In the matrix structure, project team members have two bosses. There is no way around this and the split in loyalty between the project and the department, which results from this situation, is the single biggest disadvantage of the matrix structure and almost always affects the project in some way. Pure functional and pure project organisations can also coexist as components of a hybrid structure. There are many forms that the structure of an organisation may take to support a project. Commonly, a hybrid will be the most suitable option given the existing structure and working procedures. Project management structures are not limited to those that can operate within existing functional structures. An external project management system could comprise only internal people but be managed by an external project management consultant; it could also Edinburgh Business School

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•

•

• • •

• • • • •

•

comprise a mixture of internal people and external consultants, all of whom are managed by the consultant project manager; or it could comprise only external consultants, some or all of whom have been appointed by the consultant project manager. The extent to which external people or consultants are involved, and the degree to which they make up a project team, depends upon the degree of surrogacy involved. Some clients want to hire a consultant project manager who will take over everything and run the whole show in return for a fee; in such cases the client wants minimum involvement and only wishes to see the end criteria met with minimum interim involvement. Other clients might want to retain more of a grip on the evolution of the project; these clients may have commissioned similar works before and know some of the problems that can occur. External Project Management tends to be more applicable to smaller organisations. It is a far more flexible approach and is much more suited to organisations with variable workloads. External project management structures are sometimes referred to as ‘executive’ project management structures. In an external system, different consultants act as agents on behalf of a client. Some or all of the consultants could work for different organisations. An external project manager, similarly, could work for a specialist project management consultancy, and could offer overall project management services, including control and co-ordination of the design team, as part of the management package. External project management systems are susceptible to the problems of differentiation and sentience. External project management systems also tend to be subject to much more open and competitive fee structures than internal systems. External systems tend to have much more developed organisational linkages than any of the internal forms. External project management systems tend to have a much wider range of formal contractual arrangements that internal systems. Authority links define the power and control structure that operates within the system. Authority links are not the same as contractual links; they need not necessarily follow the same routes through the organisational structure. Communication links define the lines of communication in the system. Again, communication links might follow the same paths as contractual and authority links, but they may also follow different paths.

Project Management Standards •

•

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Project management standards are governed by national professional bodies. The Association for Project Management (APM) is the professional body for project management practice in the UK. The various national professional bodies are governed, in turn, by the International Project Management Association (IPMA). Edinburgh Business School

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The various national professional bodies have established benchmarks for project management practice. Once such example is the Association for Project Management Body of Knowledge. This is often abbreviated to the APM BoK. The APM BoK is the UK equivalent of the US (PMI) model. It is international and is applicable to all industries. It establishes the standards and areas of responsibility for project managers in all industrial sectors. In the UK, the other main project management benchmark is BS6079. The first international code for some aspects of project management has appeared as ISO10006. In addition to these generic international documents, there has been a recent proliferation of industry-specific responses, where professional associations or industrial bodies have attempted to produce industry-specific responses to generic standards. Numerous large UK organisations, such as the British Broadcasting Corporation and British Telecom, have developed within their own organisations their own specific codes of practice and summaries of project management practice and application. For any given industry or profession, there are effectively three standards that govern project management practice in the UK. There is the internationally-based APM BoK, the national BS6079, and the industryspecific version. Anyone who is involved in project management must at least be aware of what these standards are and how they work together.

Review Questions True/False Questions Organisational Theory and Structures 4.1 The main reason that project management has evolved is because projects have become more complex. T or F? 4.2 The single most important component in whether or not a project succeeds is people. T or F? 4.3 All projects can operate successfully within existing organisations. T or F? 4.4 Pure project systems are based on randomised project groups working towards undefined targets. T or F? 4.5 Pure project systems generally have simpler lines of communication than matrix structures. T or F? 4.6 Pure project systems are more prone to groupthink. T or F? 4.7 Internal project management systems offer good staff flexibility. T or F?

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4.8 In internal systems, the project will tend to have a higher priority than the function. T or F? 4.9 In internal systems, the project manager and the functional manager generally have similar authority. T or F? 4.10 There is a low potential for conflict in internal project management systems. T or F? 4.11 Interfaces are points where organisational linkages cross boundaries. T or F? 4.12 Functional boundaries tend to run vertically while authority boundaries tend to run horizontally. T or F? 4.13 The project sponsor has executive authority over the project manager and functional manager. T or F? 4.14 There is generally more conflict in a matrix structure. T or F? 4.15 A project within a matrix structure is flexible and can respond rapidly to the demands of the client in a way a pure functional structure cannot. T or F? 4.16 A project within an internal project management structure is flexible and can respond rapidly to the demands of the client in a way a pure functional structure cannot. T or F? 4.17 A hybrid structure is basically a combination of pure project and pure functional structures. T or F? 4.18 External project management involves people who all come from outside the main organisation. T or F? 4.19 Authority links always follow contractual links. T or F? 4.20 Contractual links always follow authority links. T or F?

Project Management Standards 4.21 There are no international codes of practice for project management. T or F? 4.22 ISO9000 is a European standard for project management. T or F?

Multiple Choice Questions Organisational Theory and Structures 4.23 At which of the following levels can projects operate?

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A

Only within functional units.

B

Only outside functional units.

C

Partially within and outside functional units.

D

Across functional units.

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4.24 Research associates working on a research contract within an existing department would be an example of which structure? A

Pure functional.

B

Pure project.

C

Matrix.

D

Hybrid.

4.25 A college department with no research and all teaching would be an example of which structure? A

Pure functional.

B

Pure project.

C

Matrix.

D

Hybrid.

4.26 A team of scientists working only on developing a new vaccine would be an example of which structure? A

Pure functional.

B

Pure project.

C

Matrix.

D

Hybrid.

4.27 Flexibility of human resources is generally best achieved in which structure? A

Pure functional.

B

Pure project.

C

Matrix.

D

Hybrid.

4.28 Individual team-member motivation is likely to be greatest in which structure? A

Pure functional.

B

Pure project.

C

Matrix.

D

Hybrid.

4.29 In a matrix system, the authority of the project manager in relation to the authority of the functional manager is likely to be A

greater.

B

lesser.

C

equal.

4.30 In a matrix system, the authority of the project sponsor in relation to the authority of the project manager and functional manager is likely to be

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greater.

B

lesser.

C

equal.

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4.31 In a matrix system, operational or organisational islands represent areas that are separated by A

functional boundaries.

B

operational boundaries.

C

functional and operational boundaries.

D

neither.

4.32 In terms of operational efficiency, operational islands are which of the following? A

Good.

B

Bad.

C

Neutral.

4.33 In general, a matrix system tends to make the project management function A

more complex.

B

less complex.

C

neutral.

4.34 In general, in a matrix system, which of the following will be the most important interactive skill of a project manager? A

Negotiation skills.

B

Aggression.

C

Submission.

4.35 Fee structures are central to the establishment of most external project management systems. Generally, fees are based on which of the following? A

Published scales.

B

Negotiated rates.

C

Fair and reasonable rates.

D

Re-measurement on completion.

4.36 Design fees are generally payable A

weekly.

B

monthly.

C

annually.

D

at pre-agreed stages.

4.37 Typical external consultancy project management fees for managing a £3 million housing association refurbishment project would be which of the following?

Project Management

A

0.1 – 0.5%.

B

0.5 – 1.0%.

C

1.0 – 5.0%.

D

Over 5%.

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Module 4 / Project Management Organisational Structures and Standards

4.38 Standard forms of contract contain mainly A

direct terms.

B

implied terms.

C

assumed terms.

D

default terms.

Project Management Standards 4.39 Which of the following is the international regulatory body for global project management services? A

IPMA.

B

APM.

C

PMI.

D

PMS.

4.40 The various project management professional bodies structure their professional standards around A

a code of practice.

B

a project management charter.

C

a body of knowledge.

D

a national standard.

4.41 BS6079 is a British standard. This means that it has A

regulatory authority.

B

advisory authority.

C

statutory authority.

D

no authority.

Mini-Case Study Background Jane is an academic member of staff at a leading UK technological university. Jane works for department X. This a department was formerly successful but recently has hit on hard times. The main reason for the recent reversal of fortune for the department has been a sudden fall in student numbers and a simultaneous fall in research income. These two elements have impacted at more or less the same time, resulting in a net fall in income for the department of around 30 per cent in the current year. The department realises that it has to address this problem. In an attempt to work more efficiently, the head of department has decided to launch a series of new multidisciplinary courses. These use staff from department X plus staff from other departments, and even staff from other universities, to teach jointly on multidisciplinary courses. The head of department has asked Jane to set up a new organisational structure so that the new multidisciplinary courses can be effectively managed. Jane is not 4/78

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a professional project manager but, luckily, she is half way through a distance learning MBA at the Edinburgh Business School and she has already completed the Project Management course. She therefore feels confident that she can plan and execute the multidisciplinary course programme effectively. The first new course to go on line is to involve staff from department X and staff from other departments within the same university. In some cases Jane could hire members of staff from other universities to teach on the course. In this case she would have to hire them as consultants. Members of staff from the same university could be used at minimal cost since, in most cases, the teaching would be financed by the transfer of full time equivalent teaching loads to the departments providing the service teaching. Questions: 1 Consider the primary factors which Jane would have to take into account when deciding whether or not to proceed with the consultants. 2 If the eventual structure does contain external consultants, discuss the main internal/external interfaces which Jane would have to consider.

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Module 5

Project Time Planning and Control Contents

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5/2 5/2 5/4 5/6 5/7

5.1 5.1.1 5.1.2 5.1.3 5.1.4

The Concept of Project Time Planning and Control Introduction Aims and Objectives of the Planning Process Project Time Planning and Control and the Generic Project Plan Project Time Planning and the Project Life Cycle

5.2 5.2.1 5.2.2

The Process of Project Time Planning Factors Affecting the Time Planning Process The Planning Process

5/10 5/10 5/17

5.3 5.3.1 5.3.2 5.3.3

Project Replanning Introduction Crash Analysis Crash Example

5/60 5/60 5/61 5/67

5.4 5.4.1 5.4.2 5.4.3 5.4.4

Trade-off Analysis Introduction Methodology for Trade-off Analysis Trade-off Classification Example Trade-off Curves

5/72 5/72 5/74 5/78 5/81

5.5 5.5.1 5.5.2 5.5.3 5.5.4

Resource Scheduling Introduction Resource Aggregation Resource Utilisation Resource Levelling (or Smoothing)

5/85 5/85 5/86 5/89 5/89

5.6 5.6.1 5.6.2 5.6.3 5.6.4 5.6.5 5.6.6

Project Planning Software Introduction Advantages of Computer-based Project Planning and Control Disadvantages of Computer-Based Project Planning and Control General Factors for Consideration General Features of Project Planning and Control Software Systems Common Commercial Project Planning and Control Software

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Learning Summary

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Review Questions

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Mini-Case Study

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Module 5 / Project Time Planning and Control

Learning Objectives The objective of this module is to develop an understanding of the time planning process. This process involves breaking the project down into individual components and then allocating times or duration values to each component. The next stage is to link these components together in a logical progression. Models are then generated to ascertain likely completion dates for individual and collective activities. Finally, further models may need to be generated to allow for replanning and change. By the time that you have completed this section you should be able to: • • • • • • •

understand the process for generating a work breakdown structure (WBS); understand the basic sequence of works necessary to produce a precedence diagram; appreciate the basic mechanics of scheduling using the critical path method (CPM); appreciate the basic mechanics of Program Evaluation and Review Technique (PERT); clearly define the differences, advantages and disadvantages of CPM and PERT; generate and execute crash scenarios; generate and present trade-off scenarios.

Time planning and control cannot be considered in isolation. Time, cost and quality planning and control are intrinsically linked and must be considered collectively and as part of the project management three-way continuum. Time planning will therefore be examined as one aspect of the overall, or generic, strategic project planning exercise.

5.1 5.1.1

The Concept of Project Time Planning and Control Introduction In Modules 1 and 2 the text considered the concept of the time–cost–quality continuum. Most projects can define success or failure in terms of these three variables. The position of the project at any particular time can usually be shown as a compromise among the three, as shown in Figure 5.1. In Figure 5.1, point A represents the present position of the project. Point B represents the anticipated location after a certain amount of time if no intervention takes place. Point B1 represents the desired location. The shaded area represents the growing divergence between desired end point and actual end point. It has been decided that quality needs to be improved, perhaps because too much rework is being required. The solution in this case is to increase the time allowed; hence there is an intended move from A to the desired position B1. However, this has not taken into account the cost increases associated with the longer time scale (for example, if the same number of people are required

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for longer, the wage costs will be higher), and so position B rather than B1 is likely to result. Although this section concentrates on time planning, it must be borne in mind that, in practice, it is intrinsically linked to the other two variables of quality and cost; it is not generally possible to consider time planning in isolation. A change in any one of these variables will almost certainly impact on one or both of the other two.

Figure 5.1

Typical project management time–cost–quality continuum

Time planning is also intrinsically linked to the life cycle of the project. Planning is a distinct phase and is separated from implementation or other phases. Most projects have a planning phase, an implementation phase and a replanning phase, as shown in Figure 5.2. Planning sits within a life cycle continuum. Plans are not static because unforeseen events will occur during most projects, except for the most simple. Hence there is generally a need for a replanning process that runs in parallel with the implementation phase. Replanning generally requires trade-offs to be made among the three variables. Time planning is only one form of planning. Most projects involve cost planning and quality planning as well. Planning sets the goals or targets to be achieved. The project manager attempts to ensure that these targets are met through project control procedures, which monitor actual performance and track it over a period of time. Actual performance is compared with planned performance in order to isolate variances. These variances are then used as the basis for management reporting. The project manager can also use this information to determine where problems are likely to arise in the future. Project Management

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Planning phase

Implementation phase

Use

Variations and change

Replanning Change control Trade-offs

Figure 5.2

Planning and replanning phases

Project planning is used to establish targets for performance so that, as the project progresses, actual known performance can be compared with planned performance and variances can be calculated. This is a retrospective or reactive form of analysis in that it uses discrepancies between actual and planned progress to show where the project is performing well or badly. It then uses these variances as the basis for management reporting and executive decisionmaking. Planning can also be used to predict project performance by comparing performance projections against planned values. This is a predictive or proactive form of analysis. More experienced project managers can look at the project plans and quickly see where problems are likely to occur. They use this information to pre-empt the problems or to mitigate their effects if they cannot be pre-empted. This module considers the process of time planning from inception through to implementation, replanning and trade-offs. It should again be noted that the early stages of the planning process are to some extent common for time, cost and quality. It is only after a certain point in the project life cycle that the consideration of the variables splits into different specialisms. This usually occurs at the start of the scheduling stage. After this point, the remainder of the module discusses planning purely from the point of view of time. Subsequent modules consider cost planning (Module 6) and quality planning (Module 7). 5.1.2

Aims and Objectives of the Planning Process In the most general terms, the goals of project planning are to: • • •

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establish the desired end position (in terms of project outcomes); establish the current position; plot a course so that the project can move from the current position to reach the desired end position; Edinburgh Business School

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• • • •

establish variance limits so that any significant divergences away from the plotted course are detected; allow necessary resources so that divergences can be corrected; ensure that all divergences are pulled back into line; allow some kind of contingency to cover major divergences (especially unforeseen ones).

Project planning and monitoring establishes where the project is now, where it is trying to get to, how far off course it is, and what corrective action is needed in order to bring things back on line. Generally, the larger the required course change, the more extreme the corrective actions required. The current and desired end points are defined in terms of the project success criteria. In addition, any corrective actions are also linked to the defined success criteria, and in turn are linked to the drivers of performance in each area. An obvious example is resource availability. More specifically, the process of project planning should: • • • • • • • • • • • • • • • •

consider the overall strategic objectives of the organisation; establish project objectives that are clearly compatible with these strategic objectives; consider the work to be done and compartmentalise it (develop work packages) in some way; analyse the various work packages and work out the most logical sequence of execution; determine the various interdependencies between the work packages; determine the resources that are available or are required; integrate resources with work packages; determine the cost and duration of each work package; establish a formal communication system; establish who does what, how and when; set up a suitable organisational structure; establish baselines; identify critical activities and communicate the importance of these activities; establish suitable motivation procedures; establish clear aims and objectives for each section of the project team; culminate with the production of a strategic project plan (SPP).

There can be a number of alternative time plans that will achieve the same project goals. Some will inevitably be more appropriate than others, but there will frequently be more than one way of achieving the same end. Often, it will be down to the preference and experience of the project manager, or the project planner working under the control of the project manager. For example, a project may be running on time up to a certain point. Something might then happen, and the end result is a delay. The cause of the delay could be within or outwith the control of the project manager. The first consideration is: ‘How important is the delay?’ It might be more important to Project Management

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complete the project to the required standards or on cost. However, if the delay is significant and time is crucial to the success of the project, then it might be desirable to reduce the delay at the expense of performance in the other two areas. It is generally possible to speed up most processes. However, this usually involves either producing the same quality more quickly (increased resources and therefore increased costs) or producing a lower quality in the same time (reduced standards). The project manager therefore has two ways of achieving the same result, and the subsequent planning and replanning processes will depend on which alternative is most desirable. 5.1.3

Project Time Planning and Control and the Generic Project Plan The concept of the generic strategic project plan (SPP) has been discussed in Module 4 and project time planning and control process is part of the contents of an SPP. Project planning for other areas is a specific requirement, and provision should be made within the SPP. The SPP is a project document that includes all the information relevant to the planning process for the entire project. This includes time, cost and quality, and also a wide range of other planning element, including: • • • • • • • •

organisational and authority planning; risk management planning; communications systems planning; financial planning; conflict and stress management planning; authorisation and compliance planning; health and safety planning; change management planning.

Separate plans are required for each of these elements, and others as appropriate. The collective assembly of all these individual sub-plans forms the generic SPP. As with most other project-management functions, time planning is concerned with the development and implementation of a set of strategic objectives. Time planning and control is therefore one of the core skills used in project management to guide the project team from project start to finish. Project time planning involves identifying, sequencing and scheduling activities and resources. Depending on the nature and size of the project this information can range from just a few activities and resources to, in the case of large capital projects, many thousands with complex interdependencies. In the latter case, planning is a highly complex and iterative process. The plan is not static, but lives and develops throughout the project’s life cycle. The plan is regularly adjusted to incorporate more up-to-date and increasingly accurate information. At the end of the planning activity, the final version of the plan may be substantially different from the first. The planning process must be robust enough to respond to the constantly changing environment in which the project exists. However, the planner must never lose sight of the project goals and objectives. At best, time project plans are 5/6

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powerful tools that embrace the project vision and communicate the why, what, where, when and how of this vision to others. These plans form the basis for co-operative efforts that characterise successful teams. Project time planning is not project management; it is only one element. The plan is a tool and planning is a skill used to help project teams proactively manage projects more effectively. 5.1.4

Project Time Planning and the Project Life Cycle Planning is carried out throughout the project life cycle. In most cases, a project time plan is calculated at the outset of the project. This acts as an indicator of key dates and milestones. It is essential for such activities as placing orders, agreeing delivery dates and calculating start and finish windows for subcontractors. However, times and dates are likely to vary throughout the life cycle of the project. Internal and external factors influence the actual rate of progress, and project requirements can change. The result is that planning and replanning continues throughout the life cycle of a project, but the intensity of planning activity varies over the life of the project. Usually planning is most intense in the early stages. However, major changes during a project will result in increased planning activity no matter what stage the project is at. This replanning process is a central requirement on most large projects, and can be one of the most complex areas that the project manager has to manage. Time replanning tends to become more complex as the project continues. Figure 5.3 shows the typical planning and replanning requirements for each stage of the life cycle of the project. In most projects, changes occur throughout the life cycle of the project. However, the effects of these changes on the time planning process will increase as the project evolves. This is because more and more design and execution detail becomes fixed as the project progresses. Thus, working around these becomes increasingly complex and is to be avoided or minimised wherever possible. The scope for change decreases in proportion to project evolution, while the cost and implications of change increase in proportion to project evolution. It therefore becomes more expensive and has greater time implications on a project to make changes as the project continues. This can be represented graphically as shown in Figure 5.4. The nature and intensity of the planning activity thus varies throughout the life of the project. The level of planning activity is generally concentrated during the early stages of the project and rapidly builds up during the proposal and initiation phase. It is at its most intense during the design and appraisal phase and decreases steadily throughout the implementation phase. By the end of the project there is no planning activity. In some projects, later stage changes can have critical effects. Even on simple projects, change generally has to be controlled in some way as the cumulative effect of a number of small changes can have a large effect on the project as a whole. An example of this is creeping scope. If there is no definite cut-off point for design changes, the client may require more and more minor alterations as the design process continues. As the client sees more and more detailed prototypes

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Overall level of planning activity

Project life cycle stage

Stage

Aim

Initiation and feasibility

Design stage

Execution stage

Conception

Learning

Growth

Completion and commissioning

Maturity

Type of planning activity Objectives Feasibiity Brie Scope Estimating

Activities Resources Cost limits Risks Project plan Budget plan Cost plan

Trade-offs Re-planning Administration Progress Reporting Responses Monitoring Control

Final account Defect remedy Commissioning Facilities Maintenance

Project evolution

Figure 5.3

Planning through the project life cycle

and samples, there is always the tendency for additional specifications to be added. Later stage replanning may nevertheless become necessary for a number of reasons. Some of these will be outside the direct control of the project manager. Possible examples could include the following: •

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Internal (optional) change Large projects are characterised by a high degree of internal change which is introduced as an option by the client. Even with the most careful planning and design it is never possible to cover every aspect of the detailed design of the project. Post-design changes are necessary in order to correct such omissions. Clients also often introduce new elements after the original design has been completed. These changes may be relatively insignificant but major changes are likely to generate a need for significant re-planning.

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Cost opportunity

Cost of change

Point at which change becomes prohibitively expensive

Opportunity for change

Design/planning

Figure 5.4

•

•

•

Implementation life cycle

Typical relationship between project life cycle, opportunity for change and consequences of change

External (imposed) change External changes often generate a requirement for significant re-planning. One example is where a supplier or subcontractor’s business fails and it becomes necessary to find a replacement. Subcontracts can have a significant lead-in time and it may be difficult to find a replacement within a time scale that will not disrupt the project. Cost contingencies and time reserves can absorb such changes but only up to a limited extent. Sequential disruption The project manager may sometimes be forced to take resources from a later work package and temporarily re-allocate them to a current work package that is being delayed. This action may solve the immediate problem but it may cause subsequent delays further down the sequence of work. Project managers sometimes refer to this practice as ‘shuffling’. Miscalculation The various project planners may miscalculate the amounts of time or resources that a particular work package requires. This may result in significant cost and time effects. For example, a particular work package may finish earlier than anticipated (perhaps because of over-pessimistic estimating) and consequent re-planning will be needed in order to reduce the extent to which resources are idle.

It is important to appreciate that time planning is an ongoing process. The initial time plan is necessary in order to establish a project schedule. Some kind of baseline or milestone schedule is necessary at the outset in order to calculate key dates for the project. However, it is also important to appreciate that the schedule has to be constantly replanned throughout its life cycle. The emphasis on the planner therefore changes from pure planning in the earlier stages to replanning and monitoring during the later stages. Project Management

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Planning requirements also depend on the characteristics of the project. Discrete planning and operational phases are characteristics of traditional projects that have clear design and implementation phases. However, some forms of contract allow for non-traditional sequencing, and these types of project may be characterised by blurred boundaries between planning and implementation. This distinction is shown in Figure 5.5.

5.2

The Process of Project Time Planning

5.2.1

Factors Affecting the Time Planning Process

5.2.1.1

Introduction Project time planning is not an exact science. It represents an approach to assessing activity start and finish times using a series of estimates and approximations that are based on a combination of common sense, reasonable assumptions and past experience. To use an example, an estimate of the time required to service a vehicle will consider the work involved, an appraisal of repairs likely to be required based on reasonable wear and tear, and an adjustment based on how long the work took last time. Time planning on large projects is influenced by a range of other variables. These variables affect the data and assumptions that are used in developing the planning and control system. This subsection considers the effects on time planning of the following variables: • • • • • • •

sources of data; project uniqueness; people issues; complexity; uncertainty and change; accuracy and reliability; communication.

Each is considered in turn next.

5.2.1.2

Sources of Time Planning Data The project plan has to take account of large amounts of information. The information may come from a wide range of sources. Figure 5.6 shows some of these sources. Most project planners base estimates for individual activities on their own knowledge and experience. In cases where similar projects have been run in the past, it is usually possible to derive reasonably accurate estimates for most activity durations. This condition would apply in most types of construction projects, for example. A planner will know roughly how long it takes to construct say one square metre of single-course brickwork, simply because the company will probably have done a lot of brickwork on other projects in the past. It

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(a) Traditional life cycle Planning

Implementation

Close out

Planning activity

Inception

Life cycle phase

Inception Plan

Package A

Package B

Imp

Plan

Imp

Plan

Package C

Package D

Imp

Plan

Imp

Close out

Planning activity

(b) Phased life cycle

Life cycle phase

Figure 5.5

Planning variations between example traditional and non-traditional life cycle phase projects

is therefore feasible to forecast with reasonable accuracy the time required to construct brickwork on current and future projects. Where historical information is not available, there are sometimes national or industry-specific standards Project Management

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Internal and external standards and statutory controls Internal and external historical data

Working knowledge and experience

Stakeholder influences

The project plan

Company and project strategy

Environmental influences

Technical factors Contracts

Figure 5.6

Sources of data

available. Company strategy and shareholder preferences can also influence the process significantly. The company might have a policy of completing projects as quickly as possible, even though the required resources might be more costly than working at a slower pace. An example of is a supermarket chain that wants to get a new supermarket open in time for the Christmas trading period. It might be worth injecting more resources into the project and increasing costs by say 20 per cent in order to make sure that it is open in time for the Christmas rush. The extra trade over this period might more than pay for the additional capital outlay. Environmental conditions can also be a major consideration in the planning process. One example could be the performance and strategy of the competition. A particular client might want a project finished very quickly because this is the accepted norm for that particular industry or sector. Alternatively, a major competitor might be about to release a product that will be in direct competition to the one that the client is about to release. If this is the case, the client might put a higher priority on releasing its product first, even if this increases development and production costs. This type of scenario is sometimes found in competitive electronics, such as the release of new games console systems. In such cases, the value at stake is not only the sale value of the consoles but also the value of all the games that can be sold to play on the console over the next few years. (The concept is one of time-based competition, which is discussed in more detail in Module 7). The form of contract can also be important because it can influence the client’s planning process and have a major impact on the planning assumptions made by contractors, subcontractors and suppliers. Most standard forms of contract provide a range of key dates to be met within the contract terms and conditions. These would include date for possession, date for practical completion, period 5/12

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for final certification and completion, period of defects liability, etc. The period allowed will directly influence the contractor’s planning process. In arriving at a tender price, the contractor will look at the time scales allowed for each section of work and will resource them accordingly. Alternatively, the contractor might subcontract some or all of the individual work packages, in which case the various subcontractors will go through the same process. Stakeholder preferences can be another influence. In some cases the most powerful or influential stakeholders might push for one aspect more than others to be catered for more in the project plan. Shareholders might demand early completion and therefore early initiation of revenue flow. External financiers might prefer a slower rate of progress with less inherent risk. Technical procedures might dictate the degree to which some aspects of the plan are developed and progressed. Government regulations could influence parts of the plan by imposing compliance deadlines. This sometime happens where the plan coincides with the introduction of new legislation.

5.2.1.3

Project Uniqueness No two projects are exactly the same and hence it is necessary to plan every project independently. In most cases this involves developing a separate and unique project plan from first principles for each new project. The project planner should, of course, utilise historical data to improve accuracy and increase efficiency in preparing the plan, but should never lose sight of the unique aspects of the project. The physical aspects of the project may appear to be identical to a previous project, but some obvious differences may include: • • • • • •

the relative uniqueness of the project and therefore the extent to which knowledge transfer can be used.; the geographical location of the project and therefore the effects of the local culture; the specific objectives of the project and therefore the relative priorities to be considered; the availability of contractors, subcontractors and suppliers and the relative reliability that they offer; the contractual conditions employed and therefore the distribution of liabilities that have to be considered; the characteristics of the client and therefore the approach that the project manager has to adopt.

Even within the same country and operating under similar legal and cultural conditions, there could be factors that will affect the project and make it different from a similar project just a few miles away. Examples could include: • • • • • Project Management

time of year (in weather dependent projects); local conditions (such as soil type in construction projects); local government regulations (such as a requirement to employ a certain minimum percentage of local labour); local environment (such as restrictions on working practices and access); client characteristics (such as operational policy). Edinburgh Business School

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These variables can all have a significant impact on the project plan and therefore should be recognised and incorporated in the planning process. Before planning commences, the project must be carefully defined and its objectives made clear. Project objectives are derived from the strategic business objectives, and this relationship is often neglected in the planning activity. If the two sets of objectives are incompatible, then conflict will arise between project and organisational management. Ultimately, the project may lose organisational support and fail. Also, in large projects with large numbers of activities, any ambiguity in the scope definition can lead to misaligned activities and a lot of wasted effort. This misjudgement may become worse as the planning becomes more detailed through the project life cycle, and thereby moves even further away from the intended goals and objectives. Researchers have made some attempt to develop expert systems (advanced software programmes that attempt to replicate the knowledge base and decision making ability of experts) for project planning and control. These expert systems are frequently based on genetic algorithms that use a reasoning process to evaluate the significance of different conditions that apply to each new project. The system then uses a centralised database of project planning data to develop a rudimentary project plan that is tailored, to some extent, to comply with the unique information that was input to describe the individual characteristics of the project. Given the present state of software development, it is a reasonable assumption that planners and project managers will have to take the trouble to identify for themselves the individual differences between projects when setting up their planning and control systems.

5.2.1.4

People Issues Project planning demands a systematic approach to working that not everyone is comfortable with. It requires an ability to look ahead and effectively integrate uncertainty with the more tangible aspects of planning such as estimating and scheduling. Good project planning also requires considerable imagination and creativity, and these characteristics are not universal. Many managers, particularly those in functional areas, can predict effectively the future activity levels in their departments with little or no formal planning. Their departments do not undergo much change and their annual planning activity is little more than a budgeting exercise based on last year’s figures. They have no real experience or knowledge of planning. Others prefer to operate ‘by the seat of their pants’ and enjoy making decisions instinctively. They do not want to be constrained by formal plans and are often uneasy with control systems. The potential trap is that people with little experience of working within the type of planned environment demanded for projects to succeed may not adhere to the project plan and work independently of it, or even work to sabotage it. The project plan will be stronger if all project stakeholders ‘buy in’ and support it. By including stakeholders in the planning process and consulting with them, particularly in their areas of special interest, the plan will carry much more

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support and will have a greater chance of success. In addition, consultation with stakeholders should result in a more robust plan. In external project management situations, the plan may be imposed as a contractual term and condition, and consultation is not always an option. However, it is still essential that the stakeholders view the project plan as being fair, reasonable and achievable. Contractors and subcontractors often receive project plans that have been agreed at a higher level within their organisation with no prior consultation or communication. They are then obliged to work to these programmes, even if they consider them to be unreasonably short or unworkable. This can lead to stress and conflict, an overall reduction in morale, and ultimately to project failure.

5.2.1.5

Complexity Planning for large projects can be extremely complicated. Perhaps the most difficult part of any planner’s job is to predict the activities required to complete the project with any reasonable degree of accuracy. This involves reviewing the work description, in whatever form it takes, and breaking it down into separate elements or components that can be individually and collectively controlled. Once the elements or components have been identified, the project manager or planner then has to determine: • • • • •

the position of each work package within the immediate sequence of work; the importance of each work package to the project as a whole; the criticality of each work package; the amount of cost or time overrun (slippage) that is acceptable for each work package; the resources required by each work package.

Large projects will include thousands of activities and it should be recognised that although plans may contain the best possible estimates, they can never be wholly accurate. Good project planning involves continually reassessing the plan and continuing the planning process throughout the life of the plan. By doing this, the accuracy of planned activities will improve and the plan itself will be much more credible and viable as a result. In most projects, the level of design information included at tender stage is generally good enough to prepare a tender, but it is rarely more than about 90 per cent complete. There will always be a requirement for additional planning as design information is queried, refined, and issued by the design team. The original plan, no matter how carefully prepared, will inevitably require amendments from a very early stage. The planning must therefore continue through the life cycle of the project. Failure to continue the planning process through reliance on the original plan will inevitably result in either the plan eventually becoming unworkable and the project going forward unplanned, or the project team stubbornly adhering to the original plan and failing to overcome obvious weaknesses, with resulting undesirable outcomes. Either way, the prospect of project failure under these circumstances is very high. The development of a single plan comprising many thousands of activities is, on the whole, impractical because few if any individuals are capable of Project Management

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absorbing, retaining and doing anything useful with this amount of information, due to information overload. With plans of this nature, administering the plan becomes the main activity of the project management team. To avoid this and enable effective project management, work breakdown structures (WBS) are needed. (These will be considered later in this module). The WBS reduces the overall requirement into manageable elements and this is cascaded down through the organisation. Plans are then constructed for each element.

5.2.1.6

Uncertainty and Change Uncertainty is inherent throughout any project plan. As well as the global uncertainties surrounding the project as a whole, there are elements of uncertainty within each of the planned activities and all of the assumptions made during the planning process. Any estimate of project and individual activity duration can only ever be an estimate, and there are a lot of things that could happen to individual and collective elements to make the original duration estimate inappropriate. Even the most meticulous and carefully prepared plans are subject to some degree of uncertainty. Risk and uncertainty have been discussed in Module 3. Risk management plays an important role in project management and the success of projects is often a function of being able to identify and mitigate the most likely risks. However, it should be recognised that it is impossible to manage all uncertainty contained within a project plan. Even it were possible to identify all of the potential risks, it would be a fruitless exercise because: • • • • •

it is not possible (or desirable) to eliminate them all; the cost of eliminating some risks may be prohibitively high; eliminating some identified risks might give rise to new risks; some risks cannot be accurately assessed; the relative importance of risks may change over time.

Even when the nature of uncertainty is easily identifiable, predicting its force can be hazardous and it may be that the risk can only be mitigated to a limited degree.

5.2.1.7

Accuracy and Reliability Planning large projects requires some highly complex and specialised skills. It requires an in-depth knowledge of sophisticated planning techniques and systems that are outside the scope of this module. To achieve good workable plans, the planning skills are best complemented by sound operational and technological knowledge, as demanded by the specific project. Developments in information technology have created a number of project planning programs that require training and experience to operate and use effectively. It is highly unlikely that an inexperienced planner would be responsible for project planning, but in practice it is common to find a planner: • •

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using software that he or she is not fully familiar with; making misguided assumptions; Edinburgh Business School

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•

not using sufficient data in making estimates;

•

not fully understanding the software and the implications for the linkages between work packages.

It is important that the planner has the skills and capabilities to make him or her credible to the other project team members. If the members of the team lose faith in the planner, they will not have faith in the plan and will not support it.

5.2.1.8

Communication If the project plan is to be effectively implemented, stakeholders must be fully aware of their responsibilities. To achieve the required degree of awareness, the information must be issued in a format that is clear, understandable and unambiguous. With so many different planning systems available on the market, it may be that some stakeholders are not familiar with the system being used. It is prudent for the planner to check with the project team at an early stage and ensure that they understand the system being used, and in particular what the output data really mean. One significant advantage of the latest project-management software packages is that they are capable of producing reports in many different formats. Thus, it is possible to customise the plan to some extent to suit individual stakeholders. One significant disadvantage of information technology is that it is capable of producing volumes of data at the push of a button or click of a mouse. There is therefore a tendency to issue everyone with far more information than they require. They are then burdened with the task of filtering out what they need to know at the risk of missing something important. This issue is intensified with the increasing use of electronic mail, where the cost of preparing and distributing information is negligible. As well as the obvious consequences for project success, a poorly communicated project plan can have a devastating effect on the project team by demotivating and alienating team members who are, or become, confused about their responsibilities.

5.2.2

5.2.2.1

The Planning Process Introduction Irrespective of whether the project manager is developing time, cost or quality plans, the same basic procedure is adopted. This involves breaking the project down into work packages where individual targets for performance can be set for each block of work. The level of definition of each individual work package will depend on the nature and type of project. Project work packages might vary in relation to the specific planning and control system needed. A package for cost control purposes might not match the packages defined for quality management purposes. Irrespective of the definition required in the work package breakdown, the process is essentially to:

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1 2 3 4 5 6 7

evaluate the project through the Statement of Work (SOW); generate a Work Breakdown Structure (WBS); execute Project Logic Evaluation (PLE); separate time, cost and quality planning; use network analysis (chiefly CPM or PERT) to generate a draft master schedule (DMS); use trade-off analysis to replan; produce the project master schedule (PMS).

1. The project

Statement of works

2. Work Breakdown Structure (WBS)

3. Precedence diagram

3

5

6

4

Cost

5. Trade-off analysis

2

1

4. Draft master schedule (DMS)

Time

6. Project master schedule

Figure 5.7

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1

2

3

4

5

The top-down strategic approach to project planning

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This process is represented diagrammatically in Figure 5.7 and is known as the top-down strategic (TDS) approach to project planning. It is a top-down approach in that it takes the work at the project level and breaks it down into individual work packages or components that can be planned independently in terms of time, cost and quality control. It is strategic in that these work packages are then projected forward so that an overall sequence of execution can be derived. This sequence will determine the overall time, cost and quality planning and control characteristics of the project. The elements of the process are examined below.

5.2.2.2

The Statement of Work (SOW) The statement of work (SOW) is the descriptive document that defines the overall content and limits of the project. In practice, nearly all projects have a SOW as they cannot be efficiently managed or executed unless the managers and administrators can define the boundaries and limits of the project. The SOW includes all the work that has to be done in order to complete the project. However, the project cannot be planned or controlled at this level as it is too big. It is necessary to break the whole down into individual components that can be individually evaluated and managed. A typical SOW contains all the information that is required by a contractor or other tenderer or bidder. The level and accuracy of information provided should be such that contractors or others can price for the work to be carried out. Typical SOW contract documents include: • • • • • • • • • • • • • • •

signature block and project title; definition of contract terms and scope; information and facilities to be provided by the client; project approval requirements; terms of payment and interim valuations; working drawings; specification; schedules; general conditions; specific conditions; methods of handling variations; form of tender; appendices; dispute–resolution procedure; bonds and insurances to be provided.

The signature block and project title identify the project and the parties to the contract. This may seem obvious but it has important implications if any part of the contract subsequently becomes the subject of a dispute, claim, arbitration or litigation. The definition of contract terms and scope summarises the terms and conditions used and describes the range and extent of the works in sufficient detail to identify the limits of the project. Information and facilities to be provided by the client detail the additional obligations of the client under the contract. Project Management

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This could include items such as access to premises while works are carried out and commissioned. Payment systems are usually included within the standard or specific conditions of contract. These are generally based around a monthly valuation, where the client and contractor agree on the extent and value of the works that have been completed, and add a reasonable allowance for agreed variations, materials delivered, legally committed funds and an allocation of provisional and overhead percentages. This sum is then paid to the contractor as an interim payment. This activity usually goes on throughout the life of the project, with a balancing payment at the end of the contract when the works are finally measured and agreed. This is sometimes referred to as the final account. Working drawings show the full design information. The specification describes the technical performance standards required. Schedules describe and summarise the various component and assembly requirements. General conditions are standard forms of contract. They are sector-generic and are designed to cover the primary duties and obligations under the contract in most applications. General conditions can be ‘bought off the shelf’ in many cases, depending on the sector or industry concerned. An example is the new engineering contract. This is a document that contains standard contractual terms and conditions for use in any engineering-based contract. Specific conditions are drawn up for each particular project. Clients often want to add specific terms and conditions to suit their own circumstances. Typical examples would include restrictions on noise, working times and access. Provision for change and variation is usually included within the general and specific conditions. On a large and complex project, it might be treated separately and be included as a separate document. It would contain provision for seeking approval of variations or changes as the project progresses, together with procedures for valuing variations and obtaining payment for them. The form of tender constitutes the legal offer to carry out the works and the appendices contain any necessary summaries of any additional contractual information, such as fees and contingencies. The form of tender usually states the project title and parties involved and acts as an agreement to carry out the works as described for the stated sum. Dispute resolution is the process for dealing with disputes and arguments. Most contracts provide for an arbitration process, followed by recourse to litigation if arbitration proves to be unsuccessful. This is important because it prevents costly lengthy legal actions that can delay the project completion. Arbitration provides a quicker and cheaper alternative. Increasingly, contracts require alternative dispute resolution (ADR) systems to be included. They prescribe procedures that are to be adopted in the event of a dispute occurring. The procedures are designed to allow reasoned and informed discussion, sometimes chaired by a facilitator, in an attempt to resolve the dispute without need for further action. Bonds and warranties conditions specify what provision is required and how this is to be executed. Contracts involving public finance often require detailed bond cover. This usually is required up to a stated percentage of the contract sum, perhaps 10 per cent. Guarantees and warranties may be required over and above this. The bond covers contractor performance up to practical completion 5/20

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and hand over. The warranty guarantee covers the quality and reliability of the finished product after hand over and during use. The conditions of contract might require that the warranty is secured in some way, perhaps by being insurance backed. The documents might require a collateral warranty, such as a bank guarantee, transferable in the event of the finished project being transferred or sold to a new owner. Having identified the primary components of the SOW, the next step in the planning process is to break this SOW down into smaller units so that each can be evaluated separately.

5.2.2.3

The Work Breakdown Structure (WBS) Accurately defining the scope of a project is crucial to project success and must be carried out before any sensible attempts can be made at scheduling and budgeting. Identifying the major project deliverables is the first task. The concept of project success and failure criteria have been discussed in Module 2. In most cases, the primary success and failure criteria are converted into specific deliverables in the contract documentation. The SOW should clearly itemise what the required outcomes are. However, in most projects the major deliverables are large objectives that are impossible to deliver with a single clearly defined activity. Trying to tackle the large objectives as one entity would be an intimidating process with little chance of success. It is important therefore to break down these deliverables into smaller, more manageable, components. This is necessary in order to: • • •

improve the accuracy of cost, time and resource estimates; define a baseline for performance measurement and control; identify clear and achievable tasks and responsibilities.

A work breakdown structure (WBS) is simply a representation of how large tasks can be considered in terms of smaller sub-tasks. The idea is to work out the time, cost or quality objectives of the large task by adding together the corresponding values of each contributing sub-task. The importance of the WBS cannot be overstated. It acts as the basic starting point for all subsequent time, cost and quality planning-and-control systems. The WBS forms the building blocks of much that is encompassed by the term ‘project management’. For example, when redecorating a house, a person might want to work out in advance how long it is going to take and how much it is going to cost. This cannot be done by considering it simply at the highest level. It is necessary to split the large element up into smaller ones. The most obvious second-level split is by room. The next obvious level of the WBS is to isolate individual decoration elements such as paint and carpets. Clearly, this level of detail is needed for such processes as quality specification and cost planning. The carpet will have one quality requirement and cost, and this will differ from the cost estimate and specification for the wallpaper. The person can now measure up individual sizes and (if they are cost planning) by using unit rates, can calculate the cost of each element at WBS level 3. The cost of any element at level 2 should equal Project Management

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the sum total of the individual costs that emanate from it in level 3. This is the basis of roll-up analysis on more complex projects. An example is shown in Figure 5.8. This diagram represents a possible arrangement for breaking down maintenance elements for a production line.

Cost centre 1200 Maintenance

Planned maintenance 1200.01

Cyclic maintenance 1200.02

Responsive maintenance 1200.03

Electrical 1200.01.01

Mechanical 1200.01.02

Safety 1200.01.03

Components 1200.01.01.01

Cabling 1200.01.01.02

Circuits 1200.01.01.03

Figure 5.8

WBS arrangement for maintenance considerations

The characteristics of the WBS will vary depending on the nature of the project. The primary characteristics from an operational point of view will be threefold, as set out next: •

Level of definition of the WBS. Most WBSs operate down to about six levels, but a project manager should operate within whatever levels are most appropriate for the job in hand. For preparing detailed estimates of variation-order costs, for example, it may be necessary to operate at level 6. For general valuation purposes, it may be possible to measure and operate at level 3. Different authors recommend different levels of WBS breakdown and use different terminology. One example is shown below. Level Level Level Level Level Level

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1: 2: 3: 4: 5: 6:

The The The The The The

programme. project. element. sub-element. work package. work package component. Edinburgh Business School

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The individual level appropriate to each application varies. The WBS is usually presented in the form of a tree diagram as shown in Figure 5.8. An alternative is the tabular form shown in Figure 5.9.

level 1

Factory

Phase 1

Figure 5.9

•

Project Management

Phase 2

Phase 3

level 2

Manufacturing complex

Offices

Access roads

level 3

Office 1

Office 2

Office 3

level 4

Services works

Construction works

External works

level 5

Foundations

Walls

Roof

level 6

Internal walls

External walls

Non-structural walls

level 7

Typical WBS tree-structure arrangement

The number of WBS levels required increases with the size and complexity of the project and is determined by the need to define tasks at a level where they are manageable and achievable. Small projects such as preparing a simple brochure may require as few as three layers, whereas a project such as a launching a global marketing campaign for a consumer product may have up to six or seven levels. High-risk activities should be further broken down in order to isolate the risk and plan for its mitigation. Numbering the WBS. A logical and straightforward numbering system is required to ensure that each task is properly coded. An example of a numbering system is shown in the WBS task list shown in Figure 5.10. This assists in identifying, consolidating and communicating the WBS. Task codes can be used as unique identifiers throughout the project for many purposes, including responsibility allocation, cost allocation, monitoring and reporting. It is important to appreciate that WBS element codes should be designed so as to accommodate the cost accounting code (CAC) system that is in use. The CAC system is simply an alternative form or representation of WBS, with individual identifiers for each cost-centre heading or budget-plan section. Most modern project planning and control software automatically generates work element codes as the WBS is generated. This is generally the case with computerised database estimating system (CDES) packages. The project Edinburgh Business School

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manager, or whoever is producing the SOW from the project drawings, determines the work required and describes it in some way. The CDES prompts the designer with standard works descriptions and price codes. As a particular piece of work is defined, it is automatically stored in the CDES as a WBS. As a WBS element is generated, it is assigned an individual element code that it retains for the duration of the project. The same element code will be used in each part of the system i.e. time, cost and quality planning and control. In most cases, the WBS element code is the same as the CAC. This allows easier recharging of invoices and other costs against the correct WBS budget code. 1 Construct factory 1.1 Complete phase 1 1.2 Complete phase 2 1.2.1 Complete manufacturing complex 1.2.2 Complete offices 1.2.2.1 Complete office 1 1.2.2.2 Complete office 2 1.2.2.2.1 Complete services works 1.2.2.2.2 Complete construction works 1.2.2.2.2.1 Complete foundations 1.2.2.2.2.2 Complete walls 3.2.1.2.2.3 Install electrical system 1.2.2.2.2.2.1 Complete internal walls 1.2.2.2.2.2.2 Complete external walls 1.2.2.2.2.3 Complete roof 1.2.2.2.3 Complete external works 1.2.2.3 Complete office 3 1.2.3 Complete access roads 1.3 Complete phase 3

Figure 5.10

•

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Typical WBS tabular-structure arrangement

Dividing the WBS. As with most aspects of planning, there is no single correct way for preparing a WBS. In the example shown above, the WBS is prepared by project phase but it is a matter of choice and the WBS may by based on any of the following: – Work type The WBS may be split up into its different elements according to the type of work involved. In redecorating a house the primary elemental divisions could be decorating and carpets. An example of this approach would be where control of the individual materials is required. A homeowner might be working to a budget and therefore needs to know exactly what the carpets are going to cost. – Responsibility The WBS could be assembled according to individual responsibilities. In the redecoration example the primary elemental divisions could be decorator and carpet layer. This approach would be used, for example, where the client needs to agree a fixed fee or labour cost with the various contractors. – Location A further alternative is to base the elemental divisions on location. In the redecoration example the primary elements might be upstairs and downstairs followed by sub-elements representing single rooms. This approach might be used on larger houses or hotels where Edinburgh Business School

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there are a lot of similar sized rooms and it is easier to adopt a modular approach. This is by no means a definitive list of the basis for a WBS. Irrespective of whether the project manager is planning for time, cost or quality, the next stage of the planning process is to work out the sequence in which the works are to be executed. ♦ Time Out Think about it: Work Breakdown Structure. A WBS can take numerous forms. Most are developed using some kind of roll-up approach. The total cost or time required to complete one work package will be the sum total of the individual work packages that make up that overall package. Different levels within the WBS would be used for different purposes. In trying to diagnose the fault in an engine system, level 2 would represent the fact that there is a problem in starting the engine. Level 1 might be electrical system and mechanical components. Level 3 on mechanical components might be all the individual moving parts that could have failed and lead to the problem in starting the engine. The process involved in diagnosing the problem would then probably be one based on elimination, trying and testing each component to see whether it is defective, and eliminating components systematically until the defect is traced. Questions:

•

How could a WBS be developed to represent a person redecorating their living room?

• •

What might this WBS look like? How might the various levels of detail be specifically used?

♦

5.2.2.4

Project Logic Evaluation (PLE) Project Logic Evaluation (PLE) is the process of taking the WBS work packages that have already been identified and showing the sequence in which they are to be carried out. This is obviously important for time, cost and quality evaluation. For time control, the project manager has to know when each WBS activity is programmed to start and finish. This is a prerequisite for placing orders, committing to delivery dates, etc; it is also needed for resource calculations. PLE is also required for cost-planning calculations: the WBS acts as the basis for the budget plan, indicating when expenditure on each activity is going to start and finish, which is required for any comparison between budgeted and actual rates of expenditure. PLE is also required for quality control as it defines the activity windows for individual work packages that may be subject to testing etc. PLE simply involves taking the WBS elements and deciding on the most efficient logical order in which they should be carried out. Often, there may be more than one answer to this problem.

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For example, consider the case of making and drinking a cup of tea. The SOW would describe the activity in full and the WBS would identify each separate activity. The WBS would probably identify the individual activities like this: 1 2 3 4 5 6 7

Put water in kettle. Boil kettle. Put tea in teapot. Put boiling water in teapot and allow to brew. Put milk in cup. Pour tea into cup. Drink.

Some of these WBS elements have to be done before others. For example, activity (2) must take place after activity (1). However, the logic may not define that activity (3) has to follow activity (2). In other words you can put the tea in the teapot while the kettle is boiling. Activity (2) is therefore dependent upon activity (1) and these activities have to run consecutively. Activity (3) is not dependent upon activities (1) and (2) and can therefore run concurrently with them. These are examples of sequential and parallel activity.

Start

Put water in kettle

Boil kettle

Put boiling water in teapot and brew

Pour tea in cup

Drink tea

Put tea in teapot Put milk in cup

Figure 5.11

PLE of the process of making and drinking a cup of tea (logic-driven)

Representing activities as arrows, we can therefore represent the process of making a cup of tea as shown in Figure 5.11. This precedence diagram is indicating that the tea maker can put water in the kettle, put milk in the cup and put tea in the teapot all at the same time. The kettle can only be boiled once the activity of putting water into the kettle is complete. Similarly, brewing the tea can only occur after the water has boiled and after the tea has been put into the teapot. The tea can only be drunk after the tea has brewed and milk has been added. This sequence ignores the normal protocol involved in making tea. It is based purely on the most logical progression of activities that are involved in the process of making tea. The end format is dependent on the precedences that exist within the sequence of activities. In reality, most operations are subject to some kind of resource limitation. This constraint applies just as much to small projects, such as making a cup of tea, as it does to large complex projects. Consider Figure 5.11 again. The logic is correct, 5/26

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but there is an obvious resource implication of the pure logic representation. The diagram shows the tea maker to be putting water in the kettle at the same time as tea is being put in the teapot and milk is being put in the cup. This parallel sequence of activities is possible, but not for a single person. The logic-driven sequence as shown in Figure 5.11 is therefore dependent on additional resources. It can only be achieved if there is more than one person making the tea. It is therefore possible to redefine the same logic-driven diagram but this time to allow for resource constraints. If we assume that the tea maker is alone, the precedence diagram changes to that shown in Figure 5.12.

Start

Put water in kettle

Boil kettle

Put boiling water in teapot and brew

Pour tea in cup

Drink tea

Put tea in teapot Put milk in cup

Figure 5.12

Precedence diagram for making a cup of tea with logical constraints and resources limited to one person (resource-driven)

The logic-driven solution requires that the tea maker restricts his or her actions to two simultaneous activities at any one time. This may still be an oversimplification, and it might not be possible to fill a kettle with water at the same time as adding milk to a cup, but for now it can be assumed that it is feasible to perform these actions simultaneously. The resource-driven solution is clearly a different layout to the logic-driven solution. However, it does not follow that the resource-driven solution necessarily takes longer to complete. In this case, one of the activities has been moved forward. Putting tea in the teapot is now concurrent with boiling the kettle. This involves no necessary time increase, as boiling the kettle is a fixed time activity and cannot be reduced (unless a more powerful kettle is used or less water is put into it). Most modern software automatically calculates precedence diagrams using resource-driven or logic-driven formats, as input by the user. Programs can be set to level resources within a specified section of the program automatically. Resource levelling simply means that the program will automatically go through the calculation process that occurred above in progressing from Figure 5.11 to Figure 5.12. The program will shift activities along, and if necessary extend the project duration, in order to keep resource utilisation within the limits that have been set for the program. However, this approach is not always applicable. The project manager might want to leave the project completion date as fixed and add more resources as necessary, even though this will obviously increase costs. The project manager might therefore decide to develop the precedence diagram where the origiProject Management

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nal completion date is retained and resources are not levelled. Occurrences of resource overallocation are identified and highlighted. The most usual way of doing this is by the presentation of a simple bar chart, as shown in Figure 5.13. Resource overallocations are highlighted, and the project manager can see where additional resources are required and for how long. The project manager then allocates additional resources until all overallocations have been addressed. On most computer systems, this is achieved by the use of a so-called resource sheet, where the maximum available units are varied until an acceptable condition is achieved.

Start

Put water in kettle

Boil kettle

Put boiling water in teapot and brew

Pour tea in cup

Drink tea

Put tea in teapot Put milk in cup

3 2 1 Hands required Activity within resource limits

Figure 5.13

Maximum 2 hands available for a single person Resource overallocated

Resource over-allocation

♦ Time Out Think about it: precedence diagrams. A precedence diagram is simply a representation of the various activities that are involved in a particular project. There may be several possible alternatives for this. Generally, the precedence diagram should be the most logical sequence of activities required in order to meet a particular outcome. Most precedence considerations are based on logic constraints or on resource availability. These are relatively straightforward in simple operations but can be highly complex on large projects. It is very important that the precedence diagram is accurate and represents the activities that will actually be required, as it forms the basis of all subsequent scheduling and networking calculations. Questions:

• • • 5/28

What would a precedence diagram for changing a flat tyre on a car look like? Which activities involved in changing the tyre are logic-driven? Which activities are resource-driven?

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•

Which are both logic- and resource-driven?

♦

5.2.2.5

Separate Time, Cost and Quality Planning At this point, the process of planning splits depending upon the aspect being considered. The remainder of Module 5 is concerned with project planning from the point of view of time planning and control. Planning techniques applied specifically to time control are known as scheduling. Cost estimating, planning and control are discussed in more detail in Module 6. Basically, the cost planning process consists of isolating individual cost packages within the project and calculating an accurate cost estimate for each one. The individual components are then combined to produce a cost total, usually in the form of some kind of budget plan for the project. The budget plan is then compared with actual expenditure as the basis for cost variance analysis. Quality planning and review are covered in more detail in Module 7. Quality planning is perhaps the most complex of the three success criteria variables. The complexity of quality planning varies depending on the industry and discipline being considered. It is generally easier to plan and control quality in highly mechanised repetitive processes, such as making vehicles, than it is in highly diversified non-repetitive processes such as construction.

5.2.2.6

The Draft Master Schedule (DMS)

Introduction Once the PLE is in place, the next stage in the process is networking and scheduling. Networking is the process of defining the project logic in terms of the sequence of required activities, and then assigning durations to these activities. This allows the planner to calculate individual start and finish times for each activity and to estimate an overall project completion date. Today, virtually all scheduling and network analysis is carried out using computers. This state of affairs has not always been the case. Up until the late 1980s, companies employed large teams of planners who were responsible for manually developing and maintaining networks analyses for the projects that were being run by the organisation. Using manual calculations, the processes involved were long and time-consuming. Modern software allows networks to be generated quickly and efficiently. More importantly, it allows complex replanning calculations to be carried out quickly and accurately. This section does not attempt to develop a knowledge of computer project planning software. Each system is different and offers different capabilities. Instead, this section seeks to develop an understanding of the basic mechanics of network analysis so that its main procedures and applications are appreciated. The DMS Concept Scheduling is the process of calculating individual activity times in order to Project Management

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allow an estimate for the completion date to be calculated. The end result of the scheduling process is the Draft Master Schedule (DMS). The DMS is a complete network analysis, or programme, for the project, showing start and finish times for each activity. By using specific analysis techniques, it is also possible to calculate start and finish times for groups of activities, sections of the project and for the project as a whole. The DMS also identifies the project’s critical path, namely the path through the project that has the longest total activity duration. It is therefore the path of activities that determines the overall project completion date. The most obvious uses for a DMS are for: •

identifying an overall project completion date;

•

identifying order and delivery dates for supplies;

•

identifying notification and start dates for nominated (client defined) subcontractors;

•

identifying key completion dates as a basis for progress planning;

•

acting as the basis for the implementation of risk management system;

•

identifying logic incompatibilities;

•

use in cross-checking with subcontractor schedules;

•

use in checking contractual compatibilities;

•

providing the basis for re-planning options and trade-off analysis;

•

providing data for the establishment of possible consequences of delay;

•

providing the data for earned value analysis;

•

providing data for any necessary resource levelling.

The basic process involved is to assign durations to each activity in the PLE. By considering each activity in relation to all the other activities it is possible to identify a start and finish window for each activity. Most of the activities will have some leeway as to when they start and finish (this leeway is called float) – but some will not. Generally, the items with no float in their activity windows are critical. Any delay in these activities will delay the following activities, and some combinations of delays could delay the overall completion of the project because some items could well be on the critical path. Scheduling therefore involves the following primary stages. It is necessary to:

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•

assign durations to each activity;

•

identify the start and finish window for each activity;

•

identify those activities with no float (critical path);

•

replan as necessary;

•

rationalise resources;

•

form a Draft Master Schedule (DMS);

•

refine the draft to form a Project Master Schedule (PMS). Edinburgh Business School

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In terms of assigning activity durations, there are two primary alternatives. These are based on the critical path method (CPM) or on the programme evaluation and review technique (PERT). Both approaches use an essentially similar concept, but the calculations used and applications of each are quite different. CPM is a deterministic approach. This means that the activity durations can be calculated or are known with reasonable accuracy. An example of a deterministic string of activities would be the calculation of the time required to make a cup of tea. The kettle will always take around the same time to boil, provided that it contains the same amount of water each time. PERT is used where component activity times cannot be accurately calculated or are not known, such as making a cup of tea with a faulty kettle that may or may not work properly, or where the amount of water that has been put in the kettle is not known. In such cases, the likely time can be expressed in terms of a probability. There might be a maximum time, a minimum time and a most likely time. These times would correspond to the kettle being full, nearly empty or filled to the recommended level, respectively. PERT is therefore a probabilistic approach. In both deterministic and probabilistic cases, the calculations are used as the basis for evaluating the individual and overall times that are applicable to the project. They are not simply used once to arrive at overall and individual completion dates; they are used further as the basis for the replanning process, which is an essential feature of most project planning and control. Replanning is often necessary because the Draft Master Schedule which is produced by the Project Manager is just that – a draft. It is presented to the client as one possible solution for the planning and control of the project. It may or may not be acceptable. Typical reasons why it may not be acceptable would be because it finishes the project too late, and time-savings are required, or it is too heavily resourced and has to be reduced in cost. The replanning process is just as important as the initial planning process. As soon as a schedule has been produced, there will be immediate requirements to change it. Change notices and variation orders will be issued throughout the project construction phase. Client requirements may change, planning regulations may alter, etc. Replanning tends to be a complex operation and is one of the main reasons why project planning software, as opposed to manual methods, are used almost exclusively. Gantt Charts The oldest and simplest form of the project network or plan is the Gantt chart or bar chart. Gantt charts are named after Henry Gantt, a US engineer who made the charts famous in the 1920s. Despite its limitations, the Gantt chart remains a popular method of presenting project plan information. It is easy to produce and easy to understand. For these reasons, along with the fact that most people are familiar and comfortable with them, Gantt charts are often used for reporting and communication purposes. In its simplest form, the Gantt chart consists of: • Project Management

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• •

a vertical list of tasks; a horizontal line or bar drawn to scale to represent the time needed to complete the activity.

The level of detail of each activity displayed is determined by the time scale.

Days

Time Activity

1

2

3

4

5

6

A B C D

Figure 5.14

Simple Gantt chart

In the example shown in Figure 5.14, activities A, B, C and D should be started and completed one after the other and have durations of 2, 1, 1.5 and 1.5 days respectively. Gantt charts monitor progress effectively. Figure 5.15 shows the above example updated after three days, with the project still on schedule.

Days

Time Activity

1

2

3

4

5

6

A B C D

Figure 5.15

Updated Gantt chart

The striped bars show that the task is complete and the heavy vertical line represents time now. More sophisticated Gantt charts can be drawn to show critical activities, floats and dependency relationships. The Gantt chart detailed in Figure 5.16 is for the construction of a bridge in line with the CPM worked 5/32

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Figure 5.16

Dependency Float Critical activities Non critical activities

Mark out site Dig Foundations A Concrete Foundation A Cure Foundation A Dig Foundations B Concrete Foundation B Cure Foundation B Dig Foundations C Concrete Foundation C Cure Foundation C Erect Tower A Erect Tower B Erect Tower C Erect West Span Erect East Span Bridge opening

DAYS

ACTIVITIES

TIME

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

Module 5 / Project Time Planning and Control

Gantt chart for example of bridge construction

example using early start and early finish times, which is described later in this section. Important project events are known as project milestones and these are often shown on Gantt charts as diamond symbols. Examples of milestone events may include dates for payment, dates for conclusion of a contract, or the date of project hand-over. In the example in Figure 5.16, the opening of the bridge is shown as a project milestone. For projects of a limited size and number of activities, manually prepared Project Management

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Gantt charts provide an effective tool for planning and monitoring. They require little training to produce and give a very easy to understand visual image. However, for a number of reasons, they do have serious limitations when it comes to larger projects with complex dependency relationships, as follows: • • • •

Gantt charts do not show the underlying links and interdependencies between activities; they show primarily ‘finish to start’ relationships; in paper form they do not show complex resource requirements and demands; re-planning is difficult and can be performed more easily on an ‘activity on arrow’ (see later) schedule.

Project planning software packages have made it much easier to update and reschedule project plans, and they provide the information in the form of both Gantt charts and network diagrams (see below). Used in combination, these will effectively communicate the project plan. Network Diagrams A network diagram is simply a precedence diagram with activity durations added to it. The overriding benefit of the network diagram is that it enables the planner to express visually the logic of a project plan by showing the dependency relationships between activities in a way that Gantt charts do not. The concept of the critical path and the use of float are useful techniques to identify project priorities. The two most common types of network diagram are activity-on-arc (AOA) diagrams and activity-on-node (AON) diagrams. General rules for both types are that arrows run from left to right for start to finish of a project; and diagrams are not to scale in any way.

30 B 10

A 20 C 40

Figure 5.17

Activity-on-arc (AOA) network diagram

Figure 5.17 shows a typical AOA network. In AOA diagrams, the arrows (or arcs) represent activities or tasks, and the circles (or nodes) represent events. The events are therefore start and finish points for the activities. The activities (arrows) consume time and the events (nodes) are points in time. Events are labelled with numbers in the nodes (such as 10, 20, 30, 40) and activities are labelled with letters above the arrow or arc (i.e. A, B, C). 5/34

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In our example in Figure 5.17, node 10 represents the start of the project and indeed the start of activity A. Node 20 represents the finish of activity A and the start of activities B and C. Nodes 30 and 40 represents the finish of activities B and C respectively. The layout of the diagram shows the dependency relationships between activities. The logic is that activities B and C cannot start until activity A is complete. The completion of A defines the earliest start time for activities B and C. Table 5.1

Possible activity identities

Activity

Description

A

Dig trench

B

Lay pipework

C

Lay electrical cabling

Table 5.1 could represent the following example activities. Activity A involves digging a trench. Activity B involves laying pipework and activity C involves laying electrical cabling. The pipework and cabling can be done at the same time, but both have to start after the trench has been excavated. A characteristic of AOA diagrams is the use of dummy activities. These are shown as broken lines and represent dependencies. Dummy activities are not actual activities and usually do not consume any time. They are simply included in order to maintain project logic.

40 B

D

A

10

20

C

E

50

30

Figure 5.18

Activity-on-arc (AOA) network diagram with dummy activity

The logic of the dummy activity shown in Figure 5.18 is that activity D cannot start until activities B and C are both finished. Activity E is only dependent on the completion of activity C. An example of this could be where equipment needed by activity D is already in use on activity C. Activity D is not dependent on activity C, other than that it needs the equipment that C is using, before it itself can start. The dummy activity between nodes 30 and 40 represents this logic continuity. To continue the example above, Figure 5.18 could represent the activities set out in Table 5.2. The next step is to add the activity durations (see Figure 5.19). These are the individual time estimates for each activity to be completed. As discussed earlier in this module, these are generally based on company records and experience of doing similar work in the past. Project Management

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Table 5.2

Further activity identities

Activity

Description

Dependency

A

Dig trench

-

B

Lay pipework

A

C

Lay electrical cabling

D

Fill in trench

A

E

Connect cable to equipment

B&C C

40 10

B 3

A 2

20

D 1

C 1 30

Figure 5.19

50

E 2

Activity-on-arc (AOA) network diagram with activity durations

Information is added to the network diagram in order to make it a more useful tool. The estimated duration for each activity is added below the arrow representing that particular activity. The duration will be the most appropriate time scale, but must be consistent throughout the diagram – in the case of Figure 5.19, durations are measured in days. The final logic table is therefore as shown in Table 5.3. Table 5.3

Final logic table

Activity

Description

Dependency

Duration

A

Dig trench

-

2 days

B

Lay pipework

A

3 days

C

Lay electrical cabling

A

1 day

D

Fill in trench

E

Connect cable to equipment

B

START

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1 day

C

2 days

D

FINISH

A

C

Figure 5.20

B&C

E

Activity-on-node (AON) network diagram with no activity durations

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Figure 5.20 shows a typical AON network. This represents the same activities and logic as shown in Figure 5.18. The main difference between AON and AOA diagrams is that the AON diagrams use boxes at the nodes to represent the project activities instead of the arrows between the nodes. The arrows in this case only indicate the dependency relationships between activities. Like AOA diagrams, the activities are labelled with letters. Another significant difference is that there is no need for dummy activities in an AON diagram. Consider the example given by Table 5.4, which shows a series of activities together with descriptions and dependencies where appropriate. Table 5.4 Activity

AON activities Description

Dependency

A

Buy new piping

–

B

Buy new washing machine

– –

C

Buy new electrical cables

D

Remove existing electrical cables

–

E

Remove existing washing machine

–

F

Remove existing piping

G

Fit new electric cables

E D&C

H

Fit new piping

I

Install new washing machine

A&F B&G&H

B C G START

I

D E

FINISH

F H

A

Figure 5.21

AON diagram for the dependencies in Table 5.4

The AON diagram for the activities shown in Table 5.4 is given in Figure 5.21. Activities can be carried out in parallel unless specific dependencies are stated. This gives several alternative paths through the network. Figure 5.22 shows how the same logic would be represented using an AOA diagram. AON diagrams have evolved from AOA diagrams with the increase in the use of computers to drive project plans. There is no doubt that AON networks increase the power to cope with large and complex projects with complicated constraints between activities. Project Management

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B I C G D F

E

H A

Figure 5.22

AOA corresponding diagram

Most AON network analysis uses a standard layout for the diagram and for the information that is contained in the node itself. The standard labelling system of nodes is shown in Figure 5.23

3

1

5

4

2

Figure 5.23

Typical AON data representation

Within AON, the relationship between the start and finish times and the dependencies of each activity has to be defined. There will generally be a definite relationship between the start of an activity and the finish of an activity that immediately precedes it. The most common relationship is a so-called ‘finish to start’ relationship. This indicates that the preceding activity has to finish before the dependent activity can start. There are, however, other possibilities, and the four permutations are set out next: •

•

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Finish to start relationship Figure 5.24 shows a finish to start relationship. This is the most common and simplest type of relationship, where activity B cannot start until activity A is complete. A time lag may be written on the arrow to indicate that Activity B cannot start until a specified period after activity A has finished. A lag would appear, for example, where curing or proving times are required such as the hardening time after a concrete floor slab has been poured. Other activities do not require lag times – if, for instance, the concrete slab was pre-cast rather than poured on site, it would be ready-cured and could be loaded immediately. Start to start relationship Figure 5.25 shows a start to start relationship. Activity B can start as soon as activity A has started. An example of this is two people working together to paste and hang wallpaper. The hanger Edinburgh Business School

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A

Figure 5.24

B

Finish to start relationship

can start as soon as the paste-applier starts. There could be a time lag in this kind of arrangement. An example is a painter following on behind the wallpaper hangers. The painter cannot emulsion-paint the paper until it has dried sufficiently to allow him to do so. The lag here would be the drying-out time of the paste and wallpaper.

A B

Figure 5.25

•

Start to start relationship

Finish to finish relationship Figure 5.26 shows a finish to finish relationship. Activity B cannot finish until activity A has finished. For example, activity A could be the production of a component and B could be the distribution to a buyer. The components could be shipped in phases, but it is not possible to complete the distribution until all the components have been made. This arrangement could contain a time lag. This would occur, for example, where there is a time lag in the production or shipping of the components prior to distribution.

A B

Figure 5.26

•

Finish to finish relationship

Start to finish relationship Figure 5.27 shows a start to finish relationship. Activity B cannot finish until activity A has started. An example of this type of arrangement is a hand-over or acceptance procedure being dependent upon the start of a preceding activity. Again, this type of relationship can contain time lags.

Critical Path Method (CPM)

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A

B

Figure 5.27

Start to finish relationship

The critical path through any network diagram is the longest path. The duration of the critical path defines the expected duration of the project under normal circumstances. The most popular method for producing a draft master schedule (DMS) from a precedence diagram or network is to use the critical path method (CPM). The critical path method (CPM) was originally developed in 1960 by the DuPont corporation in order to allow the programming of maintenance work during chemical plant shut downs. CPM is a deterministic approach to project planning. It uses estimates of activity durations that are known (reasonably accurately). CPM is activity-oriented, as it is the durations taken on individual activities that determine the start and finish dates of events and activities throughout the network. The basic CPM process is to: 1 2 3 4 5 6 7

assign durations to each activity; identify the start and finish window for each activity; identify those activities with no spare time contained within the duration (critical path); replan as necessary; rationalise resources; form a Draft Master Schedule (DMS); refine the draft to form a Project Master Schedule (PMS)

Each of these is described in turn next. 1

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Assign durations to each activity. The amount of time needed to complete each activity is calculated and added to the precedence diagram. This is usually based on experience, although some organisations use national or company standards. For some activities, there may be no record or published information from which to calculate the duration. In these cases, it may be possible to calculate a deterministic estimate using one of five techniques: • Modular technique In the modular technique, large or complex operations that cannot be accurately time-estimated are broken down into smaller and smaller units, i.e. a WBS progression. In theory, if the unit is small enough, a duration estimate can always be made. The only determinant is breaking down the process into sufficiently fine detail that individual activities can be isolated and time values added. In practice, it is not always possible to isolate every single component Edinburgh Business School

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activity that is involved in the overall process. The main consideration here is the range of unknown elements that can influence the planning and execution of the project. Even with minute analysis of a problem, it is generally not possible to consider every possible activity that may be required in order for the project to be completed. There will always be something that is not foreseeable and that therefore cannot be scheduled.

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•

Benchmark technique In the benchmark technique, the estimated durations are made on the basis of recorded times for similar works. The project manager then uses this information in estimating the times required for new works. This approach is often used in repetitive works, or works that involve similar processes on similar items. The approach is often used when estimating the times required for maintenance works. A computer engineer might have repaired hundreds of computers over the past five years. From this experience, he or she knows that a type-21 PC (say) takes on average a certain time to repair. From experience of knowing how long it is likely to take to fix a type 21, and from knowing the basic differences between a type 21 and a type 22, the engineer can make a reasonable guess on how long it will take to repair a type 22. There is always an element of guesswork in this type of approach. However, within limits it can be a useful tool for estimating activity durations based on known performances from past experience.

•

Modelling technique The modelling technique makes use of data from known past activities. The data is used to generate an approximation for an unknown activity where the work involved lies somewhere between the works involved in two or more known activities. An example is the time required to replace electric-power conducting cables between transmission towers. The standard (or benchmark) time is known from previous work. A simple model is assembled and a range of variables that affect cabling time are input. These could include likely weather conditions, ground access conditions, plant availability and geographical location. These variables may also be given variable weightings. Geographical location may be a minor consideration around cities but it could be extremely important where the works are a long way from any access roads. Unintentional damage to a transmission tower or the discovery of a defective length of cable would be more important in such circumstances because the time involved in carrying out repairs or obtaining a replacement cable could be considerable. The overall duration estimate is based on the average or benchmark time multiplied by the weighted variable model total.

•

Computerised database estimating system (CDES) technique Estimators are increasingly using software packages to improve estimating reliability and accuracy. A computerised database estimating system (CDES) is a specialist software package the builds up time estimates using a database of standard times for any given activity. The activity duration is usually estimated based on the individual activity durations of

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•

all of the various sub-elements. The individual sub-element durations are stored in the database. These durations are modified or adjusted to meet the individual estimates of the organisation concerned. The use and application of CDES packages is discussed in more detail in Module 6. Parametric technique The parametric approach applies where the activity cannot be broken down any further, where no standards for similar works are available, and where the project manager has no experience of similar works on which to base a realistic estimate. The process isolates two variables, the dependent variable and the independent variable. There is a functional relationship between the dependent and independent variables that can be plotted mathematically. An example is digging a tunnel for a new sewage system. There will be a functional relationship between the time required to dig the tunnel and the length of the tunnel itself. Generally, if the length is doubled the time required to dig the tunnel will double (all other factors being equal). There is therefore a functional relationship between time required and length of tunnel. The length of tunnel does not depend on time, because the tunnel has to be complete, or there is no point in starting on it. However, time does depend directly on length. In this case, length is the independent variable and time is the dependent variable. As length increases, so does time required. The relationship may be linear or curvilinear.

♦ Time Out Think about it: sources of planning data. The source of the planning data is a very important consideration. The planning process itself is only as accurate as the data that is used in generating the precedence diagrams and schedules that form the backbone of the planning process. In addition, the project plan itself is based on an assumed level of resources. The plan can only be adhered to if these resource levels are provided and maintained for the duration of the project. In reality, activity durations can only be estimated with limited accuracy, and resource availability is rarely at the optimum assumed level. Even if activity durations are estimated very accurately, the actual time required to complete the activities (as opposed to the planned times) may vary because of fluctuations in a whole range of factors that determine completion times. Factors that affect resource availability are sometimes referred to as resource fluctuation drivers (RFDs). They are an important consideration in project management as resource availability and project team staffing are central to project success. Questions:

•

What are the obvious RFDs that affect resource availability within project teams, and how might these drivers vary over the course of the project life cycle?

• • •

Which of these RFDs originate from within the project? Which RFDs originate from outside the project? What is the overall relationship between internal and external RFDs?

♦ 5/42

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2

Identify the start and finish window for each activity. Two important event times are required. The forward pass gives the earliest start time (EST); the backward pass gives the latest event time (LET). Remove old hardware

Install new cables

Seek approvals

B

A

E

Remove old furniture

Check wiring

C

F

H

G

Supply and install new hardware

Supply and install new furniture

Install new software

Hardware test and hand-over

Commission new software

D

I Reinstall old files

J

Staff training Software test and hand-over Safety inspection

K

L

Figure 5.28

Precedence diagram for the replacement of PC systems

The precedence diagram shown in Figure 5.28 represents the work involved in replacing the central server and PC systems to a small office. In order to establish the critical path, the activity durations are added to the precedence diagram, as his is shown in Figure 5.29. 16

4

4 B

A

4

E

4

2 C

F 8

4

4 H

G

4

D

I 2

J 8 4 1 L

Figure 5.29

Project Management

K

Activity duration values

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The next stage (the ‘forward pass’) is to calculate the earliest event time (EET). This is the earliest time at which each activity can start. It is governed by the finishing time of any dependent preceding activities. For example, activity F–G is dependent upon both E–F and D–F; it cannot start until both of these activities have finished. The start of F–G is therefore the latest finish of either E–F or D–F, since both must be finished before F–G can start. The EET is calculated by carrying out a forward pass through the network. The EET of each activity is simply the finishing time of the preceding activity. Where an activity is dependent on two or more predecessors, the EET of that activity is the later of the two alternatives. The EET values are shown in Figure 5.30.

4

0

16

B

A

26

10 4

4

E

4

2

F

4

C

D

6

14

H

G

8

4

34

30 4

4

38

I 2

40

J 8 4 1 L

44

K

45

Figure 5.30

Forward pass (earliest event times)

EET is sometimes expressed in two forms. It is possible to split EET into earliest start time (EST) and earliest finish time (EFT). This approach is used in the worked example that follows this section. The critical path is then calculated by carrying out a backward pass. This involves working back from the right-hand end of the network and calculating the latest event times (LETs). This is the latest time at which an activity can finish without affecting the starting time of the following activity or activities. In this case, where one or more activities follow a given activity, the LET for the activity is the earlier of the alternatives. The backward pass gives the LET times shown in Figure 5.31 for our example.

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0

4

4

0

16

B

A

26 26

10 10 4

4

E

4

2

4

8

4

H

G

4

D

C 6

F

34 34

30 30 4

6

14 18

38 38

I 2

40 40

J 8 4 1 L

44 44

K

45 45

Figure 5.31

EETs and LET from forward and backward passes

The network now contains activity durations (values on arrows), earliest event times (left-hand boxed numbers) and latest event times (right-hand boxed numbers). It is therefore possible to identify when each activity starts and finishes and also the overall completion time for the project. There is, therefore, a float of four days on activity E–D. The earliest that this activity can start is day 10, because it is preceded by both B–E and C–E. The latest that E–D can finish is day 18 – if it finishes any later than day 18, it will affect the overall completion date of the project. Given that E–D takes four days to undertake, E–D can therefore extend for up to a further four days without affecting the completion date for the project. Looked at another way, the time required to complete E–F can be reduced by up to 4 days before E–D becomes critical. 3

Project Management

Identify those activities with no spare time contained within the duration (critical path). The difference between the EET and LET is the float. This represents spare or slack time between the EET and the LET for a given activity. The float can be eroded if required without affecting the start time of the following activity. Float therefore represents an important planning safeguard. It represents buffer time within the system where delays can be absorbed to some extent. By way of contrast, the path through the network that has zero float is the critical path. The critical path directly determines the overall completion date of the project. A delay to any of the critical-path activities will result in a delay to the overall completion date of the project. The critical path is the longest path through the system and the one that has no float. That for our example is shown in Figure 5.32, showing that on await estimates, the project cannot be completed in less than 45 days. Edinburgh Business School

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0

4

4

0

16

B

A

26 26

10 10 4

4

E

4

2

4

8

4

H

G

4

D

C 6

F

34 34

30 30 4

6

14 18

38 38

I 2

40 40

J 8 4 1 L

44 44

K

45 45

Figure 5.32

4

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Critical path activities

In terms of reducing the time to overall completion, the critical path activities are the ones that should be examined to see whether any improvements in duration could be made. Thus, a project manager would concentrate on the critical path activities for the project – there is clearly no point in speeding up non-critical activities. Replan as necessary. The estimated date for completion may be unacceptable, and the client may authorise an increase in costs in order to allow the project manager to speed up activities. Alternatively, it may be possible to: • import new (additional) resources and allocate them to the activity; • decrease the amount of work required (cut corners); • temporarily shuffle resources from other activities; • re-evaluate the activity sequence and logic (if possible); • increase the workload demand on individual team members; • negotiate increased resource provision with subcontractors (where appropriate); • overlap or phase activities (if possible); • use any activity spare time reserves; • speed up any associated approvals and consents. These are classic responses to project replanning where cost increases have to be avoided. It may be possible to go back to the original precedence diagram and re-evaluate the logic. It is sometimes possible to rearrange the original project logic and sequence of activities, and hence develop a newer and shorter critical path. Most often, rearrangement will not be possible because the critical path is already the optimum one. Edinburgh Business School

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It may also be possible to increase productivity within the system without cost increases. This is usually possible in the short term if staff are requested to make an increased effort in order to allow the project to overcome a difficult period. The most common response is to transfer resources from non-critical activities to critical activities. This increases completion times on non-critical paths, but so long as these increases are contained within float limits, they will not result in any overall increase in the project completion date. It may be possible to overlap sections of work, provided the overall logical evaluation allows this. Alternatively it may be possible to reduce or omit some work sections (with the approval of the client, of course) or reduce the waiting times that have been allowed for approvals. 5

Rationalise resources. Resources should be levelled in order to make optimum use of them wherever possible. Large peaks and troughs, and concentrations of use, of individual resources should be avoided, as should gaps in utilisation. Project resources tend to be relatively inflexible. People, plant, materials and equipment tend to have minimum hire periods. It is not usually possible to hire any of these resources on an hourly or even daily basis. It is therefore important to try to smooth out resource utillisation as much as possible. It is advisable to avoid short-term troughs in between long-term peaks, as the troughs will lead to idle time.

6

Form a Draft Master Schedule (DMS). The DMS is the first attempt at scheduling the project. It is usually presented to the project team in preparation for a subsequent brainstorming session. Often, it is also presented to the client for comment. The DMS is not intended to be a final network; it is a draft for discussion. It is the first step in the process of producing a project master schedule (PMS).

7

Refine the draft to form a Project Master Schedule (PMS). The PMS is produced as a refined version of the DMS. It contains firm times and dates for all activities, together with confirmed project logic. The PMS is a project document that is recognised and used by all members of the project team.

CPM Worked Example This example expands on CPM theory. It splits EETs and LETs into more detailed components. EET can be considered in terms of earliest start time (EST) and earliest finish time (EFT). LET can be considered in terms of latest start time (LST) and latest finish time (LFT). This approach allows for a more detailed control of float. Figure 5.33 shows a sketch of a project that involves the building of a new bridge across a valley. Table 5.5 gives some basic activity information for the same project, mapped outs Figure 5.34. The durations taken are for indicative purposes only and are not intended to be realistic. The precedence diagram, showing the logical progression of activities, is given in Figure 5.34 and is represented as an activity-on-node diagram in compliance with popular convention. Project Management

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East span

West span

Tower A

Tower C

Tower B

Foundation A

Foundation C

Foundation B

Figure 5.33 Table 5.5 Activity

Sketch of bridge across a valley Activities and durations for the bridge project Description

Duration (days)

A

Mark out site

5

B

Dig foundation A

3 2

C

Concrete foundation A

D

Cure foundation A

8

E

Dig foundation B

6

F

Concrete foundation B

G

Cure foundation B

4

H

Dig foundation C

4

I

Concrete foundation C

3

15

J

Cure foundation C

K

Erect tower A

10 1

L

Erect tower B

3

M

Erect tower C

2

N

Erect west span

5

O

Erect east span

4

Analysing the network diagram to determine the critical path involves three simple steps. These are the forward pass, the backward pass, and the calculation of float. The longest path through the network will have no float time between the earliest and latest event times and this path will therefore be the critical path for the project. The forward pass begins with the first activity box (the start box in Figure 5.34) and progresses forwards from left to right until the last box is reached. In our example, we are isolating EST and EFT rather than EET. The aim of the forward pass is to establish the earliest start time (EST) and the earliest finish 5/48

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3 B

2 C

8 D

1 K 5 N

0 Start

5 A

6 E

4 F

15 G

3 L

0 Finish 4 O

4 H

Earliest start time

Activity duration

3 I

10 J

2 M

Earliest finish time

Activity description and letter code Latest start time

Figure 5.34

Float

Latest finish time

Network diagram showing dependencies for bridge project

time (EFT) for each activity. The basic rules are: 1 2 3 4 5

The EST for the first activity is zero, or the date the project will commence. The EFT for each activity is calculated by adding the duration to the EST. The EST of the next activity is the same as the EFT of its immediate predecessor. Where an activity has more than one immediate predecessor, the EST is the highest of the EFTs of the immediate predecessors. The EFT of the last activity is the expected duration of the project.

Figure 5.35 shows the forward pass results for the bridge project. Completion of the forward pass has shown that the total project duration is 38 days. The next part of the procedure is to carry out a backward pass to determine the latest finish time (LFT) and the latest start time (LST) for each activity. This time the process proceeds from the last activity box and works backward, from right to left, through the network diagram. The rules are: 1 2 3 4

Project Management

The LFT for the last activity is the same as its EFT. The LST for each activity is calculated by subtracting the duration from its LFT. The LFT of each remaining activity is the same as the LST of its immediate successor. Where an activity has more than one immediate successor the LFT is the lowest of the LSTs of the immediate successors. Edinburgh Business School

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5 3

8

8

B

2 10 C

10 8 18

18 1 19

D

K 33 5 38

N 0

0 0 Start

0 5

5

A

5 6 11

11 4 15

15 15 30

30 3 33

38 0 38

E

F

G

L

Finish 33 4 37

O 5 4

9

9 3 12

I

H

Figure 5.35

12 10 22

22 2 24

J

M

AON network diagram for bridge project after forward pass

The backward pass results for the bridge project are shown in Figure 5.36.

5 3

8

B 19 14 22

2 10 C 22 14 24 8

10 8 18

18 1 19

D 24 14 32

32 14 33

K 33 5 38

N 33 0 38 0

0 0 Start

0 0

0

0 5

A 0 0

5 5

5 6 11

11 4 15

15 15 30

30 3 33

38 0 38

E 5 0 11

F 11 0 15

G 15 0 30

L 30 0 33

38 0 38

Finish 33 4 37

O 9

9 3 12

H 15 10 19

19 10 22

5 4

Figure 5.36

I

12 10 22 J 22 10 32

22 2 24

34 1 38

M 32 10 34

Backward pass results for the bridge project

Then next stage is to calculate float throughout and to identify the critical path. The float is the spare time available within activities throughout the project. It is calculated by taking the difference between the LFT and the EFT or the LST and the EST. The critical path is the line through the network with zero float and is usually highlighted. Figure 5.37 shows the result of the backward pass and the float calculations for the bridge project network diagram. The critical path is highlighted by the bold line through the network and comprises A–E, E–F, F–G, G–L, L–N. Knowing the critical activities is important for the project team. These are the activities where delay in completion will cause delay to the project as a whole because there is no spare time available within them. The critical path gives the project team the information needed to prioritise activities and to allocate resources in order to ensure that the critical activities remain on schedule. If 5/50

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a critical activity takes longer than anticipated to complete, it will put severe pressure on the project schedule and time must be saved from other critical activities to save the schedule. Project delays are normally caused by slippage on the critical path. 5 3

8

B 19 14 22

2 10 C 22 14 24 8

10 8 18

18 1 19

D 24 14 32

32 14 33

K 33 5 38

N 33 0 38 0

0 0 Start

0 0

0

0 5

A 0 0

5 5

5 6 11

11 4 15

15 15 30

30 3 33

38 0 38

E 5 0 11

F 11 0 15

G 15 0 30

L 30 0 33

38 0 38

Finish 33 4 37

O 5 4 9 H 15 10 19

Figure 5.37

9 3 12

I 19 10 22

12 10 22 J 22 10 32

22 2 24 M 32 10 34

34 1 38

AON network diagram for bridge project showing critical path after backward pass and float calculations

The critical path may change through the life of the project. As float is used up in non-critical activities, they may become critical. It is thus essential that the project planner is constantly on the lookout for these changes. Near critical activities (i.e. those with little float) should be monitored and managed carefully. Program Evaluation and Review Technique (PERT) PERT was originally developed in the early 1960s by departments within the US Navy, specifically for use on the new fleet of ballistic missile submarines that were being built at that time. PERT is a probabilistic approach to project planning. It uses estimates of activity durations that are known (reasonably accurately). PERT is event-oriented as it works on calculating the probability of events being completed within a given time. The basic steps involved in a PERT analysis are to: • • • • • • • • • • Project Management

assign three durations to each activity (optimistic, most likely and pessimistic); calculate activity mean duration and standard deviation; calculate forward and backward pass values; identify those activities with no spare time contained within the duration (critical path); calculate project mean duration and standard deviation; identify target completion date and calculate variance about target; replan as necessary; rationalise resources; form a draft master schedule (DMS); refine the draft to form a project master schedule (PMS) Edinburgh Business School

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Each of these is discussed in more detail below. 1

Assign three durations to each activity. In PERT analysis, each activity is assigned three durations (see Figure 5.38). These are the optimistic duration, the most likely duration and the pessimistic duration. This is necessary because it is not possible to calculate a deterministic duration for PERT activities. Examples of this kind of approach include research projects and (to some extent) transport systems such as train timetabling.

Optimistic time

Likely time Pessimistic time

1 -2 -3 A

Figure 5.38

2

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3 -5 -7 C

B

Three durations of a PERT

For example, a group of train operating companies might be deciding on a new regional timetable. This involves calculating average or likely running times for each train that is using the network and then trying to get the best blend of services running at any one time in order to make the most efficient use of the system. In order to do this, the likely journey duration of each service has to be calculated. This involves a calculation for most likely time, but also for best- and worst-case scenarios. If everything goes well, a given train might make a journey in one hour; if all the connections are wrong, it might take up to three hours. The average time over the course of the previous year might be one-and-a-half hours. This gives three separate values: (a) Optimistic: 1.0 hours. (b) Most likely: 1.5 hours. (c) Pessimistic: 3.0 hours. In PERT calculations, the expected time for an activity is taken as an average of the optimistic, most likely and pessimistic times. This average can also be expressed in terms of an activity standard deviation. The expected times are used as durations on a standard networking chart and the critical path is then calculated as in standard CPM techniques. The sum of the individual durations for the critical path can then be used to calculate a project expected time and standard deviation. Calculate activity mean duration and standard deviation. For a more detailed exposition on the underlying statistical mathematics, please refer to the Quantitative Methods course, run by Edinburgh Business School. PERT durations are based on a beta distribution average. For such a distribution, the average expected time is as shown below. Edinburgh Business School

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•

Expected mean time for each activity T=

The formula for a beta average is:

(a + 4m + b) 6

where a = optimistic time, m = most likely time, and b = pessimistic time. For the train operating company example, a = 1.0 hours, m = 1.5 hours, and b = 3.0 hours. Thus we have that T= =

(1.0 + 6.0 + 3.0) 6.0 10.0

6.0 = 1.67

•

As might be expected, the beta average give greatest weighting to the most likely outcome. Standard deviation for each activity The formula for a beta standard deviation is: s=

(b − a) 6

For the train operating company example, s= =

(3.0 − 1.0) 6 2.0

6 = 0.33

3

4

5

Project Management

It is necessary to consider standard deviation as the spread of values around the most likely time, and this may not be symmetrical. For the train journey considered, the mean duration time is therefore 1.67 hours with a standard deviation of 0.33. The PERT critical path is calculated in exactly the same way as the CPM critical path. The critical path is the longest one through the PERT network, using average expected mean times. Calculate forward and backward pass values. This is done in exactly the same way as under the CPM approach, but using individual activity mean durations rather than deterministic durations. The mean duration for each activity is calculated using the formula for a beta average as detailed above. Identify those activities with no spare time contained within the duration (critical path). Again, this is carried out in exactly the same way as a CPM analysis. The critical path is the longest path through the PERT network. There is no float on this path. Calculate project mean duration and standard deviation. In a PERT approach, the average project duration is calculated by adding all the expected durations of each activity on the critical path. The project standard Edinburgh Business School

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deviation is the sum of the squares of each individual critical path activity standard deviation. The variance for a distribution is the square of its standard deviation, and the standard deviation for the distribution of activities represented by the network is the square root of the sum of the individual critical path variances. So the standard deviation for the network is the sum of the variances for each activity on the critical path. Thus: X

Project mean duration = (all individual critical path activity mean durations) Project standard deviation = q

X

6

(all individual critical path activity standard deviations)2

For example, the project mean duration might be 35 weeks with a project standard deviation of 2 weeks. Identify target completion date and calculate variance about target. If the client gives the project manager a target completion of (say) 33 weeks, the project manager will evaluate the probability that this project will be finished in 33 weeks. The target time of 33 weeks is the target that the client is looking for, as opposed to the project mean duration of (say) 35 weeks. The project manager will use the PERT technique to evaluate the probability of this target actually being achieved. Project mean duration = 35 weeks Project standard deviation = 2 weeks Target project duration = 33 weeks

The difference between the project mean duration and the target duration is converted from weeks to standard deviations by standardising it. This is done by dividing the difference between the project mean duration and the target duration by the project standard deviation: Project mean target duration = 35 − 33 = 2 weeks

Standardising mean difference yields Project mean difference = 2.0 Project standard deviation = 2.0 Standardised mean difference = 2.0/2.0. = 1.0 standard deviation

With a project mean of 35 weeks and a project standard deviation of 2, the lower target value of 33 weeks is exactly 1.0 standard deviations below the average value. From statistical tables it can be ascertained that the mean duration will be achieved on 50 per cent of occasions. Events within 1 standard deviation of the mean will occur 68 per cent of the time. Events within 1 standard deviation above the average mean therefore occur 84 per cent of the time (50 per cent + (68 per cent of 50 per cent)). Events within one standard deviation below the average will occur 16 per cent of the time (50 per cent − (68 per cent of 50 per cent)). There is therefore a 16 per cent chance that the project will be completed by week 33 when the average is 35 weeks. This 5/54

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is a low probability and would act as the basis for the project manager’s decision about whether to accept the challenge represented by the new timetable. Replan as necessary. PERT replanning is carried out in more or less the same was as in CPM analysis. If the calculated probabilities for a given set of activities are not acceptable the project manager has to modify the activities so that the meet any minimum levels of success probability. Increasing resources will probably affect all three time estimates (optimistic, most likely and pessimistic). There will usually be a minimum level to which the optimistic value can be reduced. For example the three estimated for an activity might be:

7

Optimistic: Most likely: Pessimistic:

2 days. 4 days. 8 days.

The project manager might double resources on the activity thereby reducing the time estimates (assuming a linear function) to: Optimistic: Most likely: Pessimistic:

8 9 10

1 day. 2 days. 4 days.

A further doubling of resources may reduce the most likely and pessimistic time further, but the optimistic duration of one day may be the lowest possible limit for this activity. Where this kind of limitation occurs the proportional reduction in activity mean duration and standard deviation diminishes as the analysis continues. Replanning in PERT involves recalculating the average and standard deviation for each activity on the critical path each time the analysis takes place. Changes in critical path activity mean duration and standard deviation results in changes in the project mean duration and standard deviation. The appearance of new critical paths has to be considered in exactly the same way as they are in CPM analysis. Where there are several critical paths the same requirement for simultaneous critical path crashing occurs. Rationalise resources. This section is carried out in the same way as in CPM analysis. Form a draft master schedule (DMS). This section is carried out in the same way as in CPM analysis. Refine the draft to form a project master schedule (PMS). This section is carried out in the same way as in CPM analysis.

PERT Worked Example Consider Table 5.6. The data represent a single series of activities. A network can now be developed for these data. In developing the shape and layout of the network, it can be seen that there is an activity A–B and activities B–C and B–D. There must therefore be an activity A–B followed by two parallel activities which are B–C and B–D. Using the same logic we can develop the simple precedence diagram shown in Figure 5.39. Project Management

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Table 5.6

Basic optimistic, likely and pessimistic times

Activity

Optimistic time

Likely time

Pessimistic time

A–B

1

2

3

B–C

3

5

7

B–D

2

4

8

C–E

3

4

5 7

C–F

1

5

D–F

4

6

9

E–G

6

8

12

F–G

1

2

3

C A

B

G

D

Figure 5.39

E

F

Basic PERT logic network

The next step is to calculate the average time and standard deviation for each activity. For a beta distribution, these values can be calculated from: Beta average =

(a + 4m + b) 6

Beta standard deviation =

(b − a) 6

where a = optimistic time, m = likely time, and b = pessimistic time. Thus, for A–B: Average =

(1 + 8 + 3) 6

Standard deviation =

=

12 6

= 2.0

(3 − 1) 6

=

2 6

= 0.33

Calculating similar values for the other activities listed produces the averages and standard deviations shown in Table 5.7. These activity average completion times are now used to develop an average project completion time. The project completion time will simply be the sum of the activities on the longest or critical path through the project network. Substituting the values from Table 5.7 produces the network plus annotations as set out in Figure 5.40. The average project completion time is the sum of the individual activity averages on the critical path. As before, the critical path is identified by completing a forward and backward pass through the network. The forward pass is simply used to add up the time required to arrive at each point on the network. Where there is more than one activity arriving at a particular point, we take the 5/56

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Table 5.7 Activity

Beta averages and standard deviations Optimistic time

Likely time

Pessimistic time

Beta average

Beta SD

A–B

1

2

3

2.0

0.3

B–C

3

5

7

5.0

0.7

B–D

2

4

8

4.4

1.0

C–E

3

4

5

4.0

0.3

C–F

1

5

7

4.7

1.0

D–F

4

6

9

6.2

0.8

E–G

6

8

12

8.3

1.0

F–G

1

2

3

2.0

0.3

C A

2.0

4.0

E

8.3

5.0 4.7

B

G 4.4 D

Figure 5.40

2.0 6.2

F

PERT network using beta average activity duration values

larger of the two possible values, as the end point is dependent upon the prior completion of both preceding activities. The forward pass produces the earliest event times as summarised in Figure 5.41. The backward pass repeats the process, this time working back from the established completion date. Where there are two possible values for an activity, we take the earlier of the two. The difference between the forward pass (earliest times) and the backward pass (latest times) represents the difference between the earliest and latest times for each particular activity, set out in Figure 5.42 for our example.

11.0

7.0 C

2.0 A

2.0

0.0

E

8.3

5.0

19.3

4.7

B

G 4.4 D 6.4

Figure 5.41

4.0

2.0 6.2

F 12.6

Forward pass results calculated

The longest path through the network is the one where the earliest and latest event times are equal. On this path there is no float. From Figure 5.42 it can be seen that the longest path is A–B, B–C, C–E, E–G. The overall project average Project Management

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7.0 7.0 2.0 2.0

2.0

A

11.0 11.0

4.0

C

8.3

19.3 19.3

4.7

B

G 4.4

0.0 0.0

2.0

D

6.2

F 12.6 17.3

6.4 11.1

Figure 5.42

E

5.0

Backward pass results and network critical path established

completion date is 19.3 days, the sum of the durations on the critical path. The values related to the longest path through the network have a direct effect on the completion date for the project as a whole. Table 5.8 Activity

Critical path activity mean and standard deviation values Optimistic time

Likely time

Pessimistic time

Beta average

Beta SD

A–B

1

2

3

2.0

0.3

B–C

3

5

7

5.0

0.7

B–D

2

4

8

4.4

1.0

C–E

3

4

5

4.0

0.3

C–F

1

5

7

4.7

1.0

D–F

4

6

9

6.2

0.8

E–G

6

8

12

8.3

1.0

F–G

1

2

3

2.0

0.3

The project mean time is the sum of the critical path mean times. The project standard deviation is the square root of the sum of the squares of the critical path activity standard deviations. For the data shown in Table 5.8: Project mean = 2.0 + 5.0 + 4.0 + 8.3 = 19.3 days

p

(0.3 × 0.3) + (0.7 × 0.7) + (0.3 × 0.3) + (1.0 × 1.0)) p = (0.09 + 0.49 + 0.09 + 1.0) √ = 1.67 = 1.29

Project standard deviation =

The project mean time is therefore 19.3 days with a standard deviation of 1.29 days. It is now possible to derive a suitable target completion time. The project manager might have to look at likely completion times in order to make best use of (say) maintenance facilities. It may be that there is a 21-day window before the next project has to be accepted for initiation. Before booking that next project, the project manager has to consider what the probability is of having the first project completed within that 21-day window. The 21-day limit therefore becomes a target time: 5/58

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Project mean = 19.3 days Project standard deviation = 1.29 Target completion time = 21 days Target completion time − Project mean = 21 − 19.3 = 1.70 days (mean difference) Standardised mean difference = 1.70/1.29 = 1.32 standard deviations

The target completion time is therefore 1.32 standard deviations above the project mean completion time. From statistical tables, events within 1 standard deviation above or below the normal mean occur 68 per cent of the time. Events within 2 standard deviations occur 95 per cent of the time. Events within 3 standard deviations occur roughly 99 per cent of the time. A standard deviation of 1.32 above the mean equates to about 91 per cent. It can therefore be seen that there is a 91 per cent probability that this project will be completed within 21 days. The project manager would probably take this as a sufficiently high probability to go and make a booking for the next project to be initiated. Note: The value of 91 per cent above is determined from statistical tables. These are not normally provided for examinations purposes. Candidates may calculate an approximate value for this probability using linear interpolation. Alternatively candidates may express the probability as a range. For example 1.32 standard deviations above the mean represents a value of greater than 84 per cent (one standard deviation above) and less than 95 per cent ( two standard deviations above).

♦ Time Out Think about it: networking. Networking is the process of assigning durations to all the activities in the precedence diagram, and then working out the earliest and latest event times for each activity. The earliest time that the activity can start is set by the preceding activity; the latest it can start is set by the following activity. Activities where the earliest and latest event times are different are said to have float, which represents slack time within the network. Where the earliest and latest times are the same, there is no float. Such an activity is therefore critical, and the sequence of critical activities through the network is the critical path. The critical path method (CPM) is a deterministic approach. It is used where the various network activity durations can be estimated with a reasonable degree of accuracy. For example, in decorating a room, it is possible to estimate from past experience that it will take one hour to hang each roll of wallpaper. The time required to have ten rolls will therefore be around ten hours. The program evaluation and review technique (PERT) is an alternative. It is a probabilistic approach and is more suitable where the durations of the individual activities cannot be accurately estimated. The end result of a PERT analysis is a probability of completing by a certain given date, rather than an actual stated completion date. Both forms of analysis are commonly executed using commercial software. The likely requirement for replanning means that commercial software is normally used for network analysis.

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The planning process stage 6 (replanning and the use of trade-off analysis) is considered as a subject area in its own right in sections 5.3 and 5.4 respectively. Stage 7 (project master schedule) is simply the end-result of the trade-off analysis where the draft master schedule is modified to meet the outcome of the trade-off analysis. Questions:

• •

What are the main differences between PERT and CPM?

•

What is the significance of project mean and standard deviation in PERT analysis?

Which three individual durations are considered in PERT activity times, and how is an overall activity duration calculated?

♦

5.3

Project Replanning Note: In the following sections, the terms ‘quality’ and ‘performance’ are used interchangeably. Performance is sometimes used to refer to a specific measurable aspect of quality.

5.3.1

Introduction The preceding sections of Module 5 have considered project time planning. The planning process is concerned with taking the project SOW and breaking it down through a WBS into separate work packages, and then calculating the precedence logic of these activities so that a network can be produced using CPM or PERT techniques. The end result is a draft master schedule (DMS), which in turn forms the basis of the project master schedule (PMS). The PMS defines the main time and date milestones that will apply to the project as it is originally envisaged. As soon as the DMS and PMS have been established, things immediately begin to change. The design team may introduce new design requirements, the client may change individual preferences, the contractor may have to make programme changes, and so on. Change is a significant part of any project, and the planning and control system has to be flexible enough to allow for and incorporate change accurately. Project management is about optimising time, cost and quality performance on projects. These three variables are intrinsically linked. In most cases, it is not possible to consider any one of them in isolation. If the time required to complete a project is reduced, the overall cost required to complete it is generally increased. If quality or performance is increased, this usually requires an increase in cost and (perhaps) time. Changes in requirements of these variables frequently occur, and the project manager has to be able to replan the project accordingly and provide revised estimates for the linked variables. In practice, the most common requirement for project replanning calculations concerns time and cost. Clients often ask for projects to be speeded up and need

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to know how much of an increase in speed is possible and what it will cost. The analysis and execution of this time change, and its attendant impact on cost, is commonly known as crash analysis. 5.3.2

Crash Analysis In crash analysis, the project manager offers replanning advice based on the relationships between time and cost. This of course assumes that performance or quality criteria are fixed, as is the case in most projects. In most cases the specified outcome is fixed. Crash analysis would be used, for example, where a project manager produces a DMS that is not acceptable to the client. The project manager’s calculations may indicate that the project will take 43 weeks to complete at a cost of £2.6 million. The client may not be able to accept the 43-week duration, as completion earlier may be critical to the business. The client may ask the project manager to increase the resources on the project and complete in no more than 38 weeks. Generally, if time for completion is reduced, the project will cost more as additional resources have to be introduced. The project manager has to be able to calculate the optimum combination of resource increases required to meet this shortened project duration. Generally, a project will have clearly defined time and cost performance at the start. This will usually be the time and cost limits that were established as part of the statement of works and that have been translated into contractual terms and conditions when the contract was awarded. The project could move to a different position in terms of time and cost characteristics. If it is assumed that the project is subject to the classical time, cost and quality success criteria, then it is possible to consider time and cost as a function. This is done most simply if we assume that the third variable, namely quality, is fixed. If this assumption is made, then cost can be considered as a function of time, and the relationship between the two can be plotted as a curve. A typical curve for the time–cost function of a project is shown in Figure 5.43. Generally, a time–cost curve will typically have a starting point at the agreed tender or project price. This usually represents the minimum or near-minimum cost value and the near-optimum time values. In Figure 5.43, this position is represented as point A and is typical of optimum time and cost considerations for most types of project. In order to reduce the time estimate and save time on the project, there will almost certainly be a requirement to increase resources. This will allow the project to finish more quickly but will result in a cost increase. If a project manager is looking for different ways to achieve this, the most obvious way is to work out which activity can be speeded up at least cost, and then crash (i.e. reduce the overall activity duration) that one first, followed by the next cheapest, and so on. This will result in the typical negative time–cost curve shown in Figure 5.43, increasing in gradient as overall time for the project decreases. This curve will reach a point where all critical-path activities have been speeded up as far as possible. Beyond this point, no further time can be saved on the project. Any further crashing will result in cost increases, and no further time will be saved. The curve will therefore be vertical.

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Limit of analysis Cost (£)

£100 000

£100 000

Maximum trade-off point point (C)

Reduced time allocation point (B) Project starting point point (A) £60 000

£50 000

£60 000

£50 000 10 weeks

10 Beyond trade-off zone

Figure 5.43

15 weeks

20 weeks

20

15 Trade-off zone

Time (weeks) Fixed cost zone

Typical time–cost curve

Thus, Figure 5.43, point (A) represents the original starting point, where the project will take 20 weeks to complete. This is the agreed tender amount and the agreed project duration. In this case, the tender amount is £50 000 and the project duration is 20 weeks. Point (B) is where the time allocated is reduced to 15 weeks, and the cost increases to £60 000. Point (C) represents the shortest time possible, in this case 10 weeks, and cost increases to £100 000. Beyond point (C), no further time-savings are possible. One reason for this could be that all the critical-path activities have already been fully compressed. The classical time–cost curve is one example of a trade-off curve. Trade-off curves are widely used in project management as part of the replanning process. They allow the project manager to consider different scenarios when contemplating changes to time, cost or quality performance. They also allow the functionality between any two of these variables to be plotted, provided that the third one is regarded as a constant. The remainder of this subsection is concerned with time–cost trade-offs (crash analysis). It is, however, important to remember that curves for cost–quality and quality–time are just as important. 5/62

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The basic process involved in generating a time–cost (crash) curve is to: 1 2 3 4 5 6 7 8

define the project logic; add the duration for each activity; establish the project critical path; calculate the cost of crashing each activity; calculate the cost of crashing per unit time; calculate the most cost-effective crash sequence; check the critical path; crash the network up to crash limit.

Each of these steps is described in more detail below. 1

2

3

4

Project Management

Define the project logic. This involves obtaining the overall SOW, which provides full information on the project. This information is then used to generate the project WBS. The PLE is then developed, based on either logicdriven or resource-driven constraints. The outcome of the PLE is an overall project precedence diagram. Add the duration for each activity. These would be deterministic durations, generally based on past project records or on national standards or computerised database estimating system (CDEs). Methods for calculating these were covered earlier in the module. Establish the project critical path. The forward pass and backward pass would then be performed. In practice, this would normally be done using a suitable computer program. Programs generally cannot assist in PLE calculations and analyses, but they are of obvious use in calculating the critical path from a network with specified durations. In terms of project crashing, the critical path is of primary importance. There is no point in crashing any non-critical activities, as this will simply increase costs while giving no time saving. In most crash calculations, the starting point would be a list of all the critical activities, as identified by the forward and backward passes. Calculate the cost of crashing each activity. The cost of crashing is a function of resource limits and availability. There will be limits on the amount of resource that can be applied to any given activity. Additional resources may be immediately available at the same or greater unit costs, or available later at the same or increased unit cost etc. It is generally possible to establish crash costs for most activities in a project programme. The crash cost for increasing the rate at which trenches are being excavated by machine would be the hire rate of bringing on another machine plus any other overheads such as driver costs and fuel. The crash cost of increasing the rate at which engineering production drawings are produced could be the cost of hiring additional design specialists or of renegotiated and increased fees with the original design consultants so that they will put more of their own people onto the project. In most cases there will be a number of different activities on the critical path and therefore a number of options relating to which items to crash first Edinburgh Business School

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and what the subsequent sequence should be. The sequence can be isolated relatively easily by converting the crash cost to a cost of crashing per unit time. Table 5.9

5

Normal duration

Crash duration

Normal cost

Crash cost

A–B

6

4

10 000

20 000

B–D

5

3

15 000

35 000

D–E

4

3

12 000

37 000

E–G

4

3

20 000

40 000

G–H

3

2

32 000

58 000

Table 5.9 lists a number of activities with normal and crash durations and costs. Activity A–B has a normal duration of six weeks, and a crash duration of four weeks. The normal activity cost is £10 000 and the crash cost is £20 000. This means that activity A–B costs £10 000 to complete working at planned speed and with planned resources. If there is a need to increase the rate at which A–B is completed, then the activity can be speeded up to finish in a minimum of four weeks. However, this will involve allocating additional resources to the activity and this in turn will lead to an increase in the cost of the activity. The new cost allowing for full crashing will be £20 000. Calculate the cost of crashing per unit time. The cost of crashing for most activities can be calculated relatively easily. For example, if the crash involves doubling the excavators involved in digging trenches, the cost of the additional excavator will be more or less the same as the original excavator. However, crashing one activity may reduce overall project time more than by crashing another activity. Crash A may cost £10 000 and save 2 weeks. Crash B may cost £25 000 and save 2 weeks. The cost of crashing per week will therefore be £5000 per week for Crash A and £12 500 per week for crash B. It would obviously be preferable to crash A before B if possible, as the cost increase per unit of time is considerably lower. For the example given in Table 5.9, the cost of crashing per unit of time will be as shown in Table 5.10. The obvious order for crashing is therefore A–B, B–D, E–G, D–E, G–H. This is simple enough with a single path through the network; on more complex networks, a number of additional factors come into play.

Table 5.10

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Crash costs example

Activity

Cost of crashing per unit time

Activity

Normal duration

Crash duration

Normal cost

Crash cost

Crash increase

A–B

6

4

10 000

20 000

10 000

5 000

B–D

5

3

15 000

35 000

20 000

10 000

D–E

4

3

12 000

37 000

25 000

25 000

E–G

4

3

20 000

40 000

20 000

20 000

G–H

3

2

32 000

58 000

26 000

26 000

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Crash cost per week

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6

Calculate the crash sequence. The crash sequence will usually start with the cheapest unit-crash-cost item and progress to the most expensive unitcrash-cost item. This will generally appear as a negative curve, rising more and more steeply away from the origin (which represents original project time and cost). The curve should always rise more and more steeply as the unit crash cost increases for the later items, producing a cumulative effect that is more and more costly. The other major consideration is the critical path. There is no point in crashing non-critical items as any time saved on these items will not reduce the overall project or package completion date. It is therefore essential that the crash sequence contains only those items that are on the project or package critical path. In practice, it may not be necessary to crash the entire sequence. The replanning process might only require a time saving of (say) four weeks, in which case it would be sufficient to crash the first two activities only. This would save the required four weeks at an overall cost increase of +£30 000. Once this kind of trade-off curve can be generated, different scenarios can be given showing potential changes in time or cost in relation to the consequences of achieving them. Table 5.11 shows the most logical crash sequence and the corresponding cost increases for the project.

Table 5.11 Activity

Crash cost

Time saved

Cost increase

Cumulative

Cumulative

per week (£)

(weeks)

(£)

project cost increase (£)

project duration reduction (weeks)

+10 000 +30 000 +50 000 +75 000 +101 000

−2 −4 −5 −6 −7

1

A–B

5 000

2

10 000

2

B–D

10 000

2

20 000

3

E–G

20 000

1

20 000

4

D–E

25 000

1

25 000

5

G–H

26 000

1

26 000

7

Project Management

Cost of crashing per unit time with cumulative project cost and duration totals

Check the critical path. As critical path items are crashed, the overall length of the critical path will reduce. In most cases, this means that at some point the original critical path will no longer be critical, because it will become shorter than one or more parallel paths through the network. It is therefore important that the critical path is checked after each crash to ensure that it is still critical. And if a parallel path becomes critical before the crash limit has been reached, then the process has to be repeated so that a new critical path can be identified. In some cases, two critical paths may appear. If this occurs, it is no longer viable to crash a single critical path. It now becomes necessary to crash both critical paths at the same time. This involves identifying those activities on each critical path that have the lowest cost of crashing per unit time and then crashing them simultaneously. Once this has been done, the next lowest Edinburgh Business School

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pair is crashed at the same time, and so on. Once any critical path becomes fully crashed, that is the end of the process.

7 2 2

A 0

2

7 C

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20 20 G

4

6

8

8

5

B

0

E

5

D

Figure 5.44

12 12 5

15

2 3

F 12 18

Check critical path

In the example shown in Figure 5.44, it is clear that there are multiple paths through the network. These are largely split into two alternative groupings, namely • B–C and C–F (10 days) or B–D and D–F (7 days); • C–E and E–G (13 days) or C–F and F–G (7 days). A crash analysis might, for instance, reduce B–C and C–F by up to two days. If this line is reduced by three days, then a double critical path forms with B–D and D–F. The same applies to C–F and F–G if C–E and E–G are reduced by more than five days. If double critical paths do form, both sides have to be crashed by an equal amount for any net reduction in the overall completion date to occur. Crash the network up to the crash limit. The crash limit is the point at which no further crashing of activities can take place. The most common form of limitation is by critical path. All the activities on the critical path could be crashed and it still remains the critical path. There is no point in crashing alternative non-critical activities. The crash curve will therefore adopt the classical profile shown in Figure 5.45. Each event on the curve shows one crash or time–cost trade-off alternative for the client. The main points on the curve will be the following: • Optimum cost point This is the project starting point or ‘trough’ point. The lowest cost will be established for a given time. In order to reduce time, costs will have to increase as more resources will be required. If more time is taken, the project cost may not reduce because of fixed or overhead costs. • First crash point This is the point (point A) to which the project can be crashed using the cheapest crash cost per unit of time for a critical path component. It therefore generates a negative curve with a shallow angle. The next part of the curve is normally steeper. • Maximum crash point The maximum crash point (point D) is the point at which all critical path activities have been crashed right up to their Edinburgh Business School

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•

limits. The only other items that can still be crashed after this are noncritical ones. Crashing these will result in cost increases but no time savings because the items are non-critical. This area corresponds to the vertical section of the curve. Fixed overhead curve This is the region in which additional time is allowed for the project although no extra resources are injected. Fixed overheads such as security, contributions to the centre and so on, continue to accrue, and hence overall costs increase.

Limit of analysis Cost (£1000)

250

Crash D and maximum trade-off point

Crash C 190

Crash B Crash A

Optimum cost point (project starting point)

130 110 100

13 Beyond trade-off zone

Figure 5.45

5.3.3

14

16 Trade-off zone

18

20

Time (weeks) Fixed cost zone

Classical cost–time trade-off curve

Crash Example Consider a worked crash example. Table 5.12 shows a range of activities together with normal and crash duration values and normal and crash costs. The critical path activities are A–B, B–F, F–G, G–H and H–J and the critical path is shown in Figure 5.46.

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Table 5.12

Trade-off data

Activity

Normal duration (weeks)

Crash duration (weeks)

Normal cost (£)

Crash cost (£)

Cost of crashing per week

A–B

4

3

A–C

2

1

10 000

20 000

10 000

20 000

100 000

A–D

6

80 000

4

30 000

60 000

C–E

15 000

5

3

10 000

50 000

20 000

C–F

4

1

100 000

400 000

100 000

B–F

4

3

3 000

33 000

30 000

E–G

3

2

10 000

70 000

60 000

F–G

6

4

10 000

150 000

70 000

D–I

6

5

20 000

60 000

40 000

G–H

5

4

10 000

60 000

50 000

H–J

4

2

200 000

290 000

45 000

I–J

3

1

80 000

240 000

80 000

0

0

2 2

A

4

19 19

C

H

5

7

11 4

4 4 6

4

4

5

E 3

J

G

B 4

6

23 23

14 14 F 8 D 6

Figure 5.46

3

8 I 6

14

12 20

Critical path for trade-off data

The critical path is calculated by developing a forward and backward pass as previously. The initial project condition is therefore 23 weeks at a cost of £503 000. The project manager might then be asked to reduce the overall project completion date as much as possible, irrespective of cost increases. The most economic sequence is as shown in Table 5.13. This sequence will remain the most cost-efficient until a new critical path is formed at some point in the network. The most cost-effective sequence is reflected in the cost of crashing per unit of time figures, rather than the overall cost of crashing figures.

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Table 5.13

Initial crash sequence

Activity

5.3.3.1

Normal duration (weeks)

Crash duration (weeks)

Normal cost (£)

Crash cost (£)

Cost of crashing per week

A–B

4

3

10 000

20 000

10 000

B–F

4

3

3 000

33 000

30 000

H–J

4

2

200 000

290 000

45 000

G–H

5

4

10 000

60 000

50 000

F–G

6

4

10 000

150 000

70 000

Crash A–B Activity A–B is crashed by 1 week. The critical path is then checked. It can be seen from Figure 5.47 that the critical path is unchanged by this initial crash. There are three weeks of float on the upper route and seven weeks of float on the lower main route. The obvious danger area is the upper secondary route through A–C and C–F. After crashing A–B, there is only one week of float available on this route before a second critical path is formed. This could lead to a problem if B–F is the next most economical activity to crash, but it will not be a problem if the next activity is not parallel to A–C and C–F.

0

0

2 2

A

3

18 18

C

H

5

7

10 4

3 3 6

4

3

5

E 3

J

G

B 4

6

22 22

13 13

F 7 D 6

Figure 5.47

5.3.3.2

3

7 I 6

13

12 19

Critical path after crashing A–B

Crash B–F Activity B–F is the next most economical activity to crash. It can only be crashed by one week. It should be noted that even if it could have been crashed by more than one week there would be no point in doing do, as a double critical path is formed after this activity is crashed by only one week. Activity B–F is therefore crashed by 1 week and the critical path is then checked. It can be seen that the total float that existed between the route A–B, B–F and A–C, C–F has

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now been eroded, and there are now two critical paths in this region of the plan (see Figure 5.48). In addition, A–B and B–F have both been crashed right up to their individual activity limits; no further crashing is therefore available on these items. In addition, because A–C and C–F run in parallel to these fully crashed activities, no further crashing is economical on either A–C or C–F. These activities should therefore be ignored in the subsequent analysis, even if they appear cheaper to crash than some other activities, and even if they appear on a critical path.

0

0

2 2

A

2

17 17

C

H

5

7

9

3

4 3

6

4

3

5

E 3

J

G

B

3

6

21 21

12 12

F 6 D 6

Figure 5.48

3

6 I 6

12

12 18

Critical path after crashing B–F

The remaining critical items are therefore still F–G, G–H and H–J. Activity H–J is the next most economical.

5.3.3.3

Crash H–J Activity H–J is crashed by 2 weeks. This activity is not in parallel with any other near-critical activities, and it is therefore not seriously eroding any important slack reserves. The new network therefore is as shown in Figure 5.49. The critical path remains the same. The next stage is to crash G–H as the next most economical activity.

5.3.3.4

Crash G–H Activity G–H is again not in parallel with any other critical activities; it is only in parallel with the upper and lower alternative routes. Both of these still have reasonable amounts of float time left within them, and so crashing G–H (see Figure 5.50) poses no direct problems. The final activity to crash is F–G.

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0

0

2 2

A

2

17 17

C

H

5

7

9 2

3 3 6

4

3

5

E 3

J

G

B 3

6

19 19

12 12

F 6

6 I

D 6

Figure 5.49

0

3

6 12 16

10

Critical path after crashing H–J

0

2 2

A

2

16 16

C

H

5

7

9 2

3 3 6

4

3

4

E 3

J

G

B 3

6

18 18

12 12

F 6

I

D 6

Figure 5.50

5.3.3.5

3

6 6

9

12 15

Critical path after crashing G–H

Crash F–G Crashing F–G (see Figure 5.51) brings the overall completion duration down to 16 weeks. This represents the end of the crashing process as all the activities on the critical path have been crashed up to their crash limits. The crashing of any other activities in the network would be pointless as there will be no further reductions in the overall completion duration. The final crash sequence is shown in Table 5.14, and the final crash curve for this project is shown in Figure 5.52.

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0

0

2 2

A

2

14 14

C

H

5

7

7 2

3 3 6

4

3

4

E 3

J

G

B 3

4

16 16

10 10

F 6

6 I

D 6

Figure 5.51 Table 5.14

3

6 12 13

7

Critical path after crashing F–G

Final crash sequence with project cost and time

Activity

Normal duration

Crash duration

Normal cost

Crash cost

Cost of crashing per week

Cumulative time 23

503 000

A–B

4

3

10 000

20 000

10 000

22

513 000

B–F

4

3

3 000

33 000

30 000

21

543 000

H–J

4

2

200 000

290 000

45 000

19

633 000

G–H

5

4

10 000

60 000

50 000

18

683 000

F–G

6

4

10 000

150 000

70 000

16

823 000

5.4 5.4.1

Cumulative cost

Trade-off Analysis Introduction Crash analysis is one type of trade-off analysis, but crash calculations consider the relationship between time and cost variables only. Other forms of trade-off analysis are applicable to performance and time, and performance and cost. Each scenario seeks to establish the relationship between two of these variables while assuming that the third variable is fixed or constant. Thus, the crash analysis summarised above assumes that the quality standards on the project are constant. It would, of course, be possible to save time on the project by reducing quality, if the client finds this acceptable. Performance–time trade-offs assume that cost is fixed and performance–cost trade-offs assume that time is fixed. There may be cases where more than one variable is fixed, there may be cases where none of the variables is fixed, or yet other cases where they all are. Trade-offs are very useful in that they allow a project manager to show a client different scenarios and outcome possibilities as an aid to decision making.

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Cost (£1000)

Non-critical crashes

823 F–G

G–H

683

H–J

633

B–F A–B Project starting point

543 513 503

16

Figure 5.52

18

19

21

22

23

Time (weeks)

Final crash curve for worked example

This section seeks to develop an understanding of what trade-off analysis is and how it can be applied as a project management tool. Figure 5.53 shows a typical trade-off curve for cost against performance. The curve represents the relationship between cost and defect rates. The higher the performance, the higher the unit cost. Higher reliability will generally lead to higher sales, provided that the increase in cost does not make any required increase in price uncompetitive in relation to competitors. As reliability increases, the cost will at some point reach a stage where it is no longer competitive. Clients generally want reliability, but they are only prepared to pay for it up to a point. Once the product becomes too expensive, they will switch to a less reliable product. Clients will generally be happy to accept a known defect rate, provided that it is relatively low and is adequately covered by some form of guarantee or warranty. Trade-off analysis is the process that allows project managers to produce these curves as an aid to decision making.

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Detect-free rate

95% 90% 85%

500

750

1000

Manufacturing cost per unit (£)

Figure 5.53

5.4.2

Cost–performance trade-off

Methodology for Trade-off Analysis There is a six-stage methodology for trade-off analysis: 1 2 3 4 5 6

Identify the reason for the problem. Reevaluate the project objectives. Allow for any other relevant factors. Assemble a shortlist of solutions scenarios. Select and test the best (or approved) alternative. Implement the best alternative. Each is considered in turn below.

5.4.2.1

Identify the Reasons for the Problem In all cases there is an underlying need for the trade-off analysis to be conducted. The original plan has become obsolete for some reason. The trade-off analysis seeks to correct the plan to allow for whatever has happened, but it is important that whatever it is that has happened is identified so that the project manager can make sure that the problem does not recur. It would be dangerous to carry out a full trade-off analysis and develop a revised project plan if the underlying problem or problems have not been addressed. Trade-offs can occur both before and during the execution of the project. Pre-execution trade-offs usually result from changes in the client requirements or because the original draft master schedule (DMS) or cost plan does not meet client requirements. The original DMS might show a project duration of 45 weeks and a cost of £6.2 million. The client time deadline might allow a project duration of up to 48 weeks but a maximum cost limit of £6.0 million. In this case the trade-off would be concerned with extending the durations of some activities

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so as to bring the overall cost estimate down to £6.0 million. The process would take place before any work actually starts on executing the project. Typical reasons for pre-execution trade-offs include: • • • • • • •

changes in client requirements (particularly changes in the required scope of work and cost limits); discovered design incompatibilities; changes imposed by subcontractors and suppliers; changes imposed by external consultants; misunderstandings resulting from poor communications; unforeseen problems such as sudden non-availability of important materials; changes in organisational strategic objectives (generally resulting from external imposed change).

Execution trade-offs are usually (but not always) tactical responses to change. Projects are subject to a wide range of internal and external changes and some of these may cause a requirement for trade-off analysis in order to keep the project on course. The progress control system might indicate that a particular work package is seriously behind schedule. The project manager might look at the work package and form the opinion that the delay that has occurred is too great for the time reserves that are built into the programme and that the likely rate of progress on the work package must be increased. If the rate of progress is not increased, there may be a serious impact on subsequent work package start and finish times and the progress of the whole project could be affected. The project manager has no alternative other than to input additional resources to the work package and incur additional costs as a result. Typical reasons for execution trade-offs include: • • • • •

changes in client requirements (particularly additional required work); discovered human error (such as inaccurate time estimating); discovered execution problems (such as unforeseen work complications); emerging risk (such as inaccurately assessed risk); project-specific events (such as mechanical failure or unforeseen ground conditions).

It is imperative that the reason for the problem is identified and some kind of control system put in place to avoid or control the occurrence of the same project in future. For example a client who insists on continuously changing the specification and adding to the scope of the works should be warned that such practice will have a detrimental effect on the overall performance of the project. Such warnings do not always have the desired effect! However in issuing such a warning the project manager has fulfilled his or her professional obligations in relation to notifying and informing the client about the consequences of his or her actions.

5.4.2.2

Reevaluate the Project Objectives In the case of both pre-execution and execution trade-offs it is necessary to reevaluate the project objectives in order to ensure that the original objectives of

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the project have not changed. Imposed change may result from changes in the project status and environment. The parent company may have acquired newer and more prestigious projects and as a result the priority given to a particular project may have changed. The parent company may choose to deprive the project of resources or reduce the cost limits available because priority and emphasis has changed. Alternatively there may be a change in the overall strategic objective of the organisation and this may result in an imposed realignment of the objectives of the project. An example of objective re-alignment is a sudden shift in strategic objectives resulting from an environmental change. A company might be half way through a strategic acquisitions programme when suddenly there is a change in the environment and revised strategic objectives have to be formed. If this occurs the chances are that a project that was important in terms of the old strategic objectives (such as a former key acquisition) becomes downgraded and of secondary importance. In such circumstances it may be a waste of time for the project manager to attempt to negotiate to retain his or her initial project resources as the entire strategic thrust of the organisation has changed. Typical reasons for a relative change in project status resulting from a change in organisation strategy include: • • • • • • •

changes in competitor behaviour; changes in customer demand; changes in the national and global economy; changes in strategic leadership and emphasis; changes in available technology; the introduction of new codes of practice; the introduction of new legislation.

Any of these changes could result in the formulation of new strategic objectives, which in turn could result in the original project objectives becoming misaligned.

5.4.2.3

Allow for Any Other Relevant Factors Having identified the reasons for the change and having re-evaluated the project objectives, the project manager has to consider any other relevant factors that could affect the trade-off analysis. These factors could apply at any level from strategic to operational. Typical examples could include: • • • • • • •

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The range of potential factors is wide. There is no point in trying to speed up an activity if the resources required to do so are suddenly not available. This occurrence could result from the initialisation of other major projects within the company portfolio. Project work packages tend to be highly interdependent, so it may be a waste of time adding resources to speed up a work package if other success-dependent contributors (such as external consultants) do not do the same.

5.4.2.4

Assemble a Shortlist of Solutions Scenarios The next stage is for the project manager to consider all possible solutions to the problem and develop a short list of those that most readily meet the demands of the problem. The shortlist is restricted in scope to what is possible within the constraints that apply and is particularly influenced by the nature of the problem. If cost is the problem, the project manager may attempt to address it by extending the time that is allocated to individual activities or by compromising on performance. This is the classic response of the building contractor who will take resources from a site and/or try to execute the work to a lower standard. The extent to which these tactical responses work, will depend largely upon the controls that are applied to the project. The contract may stipulate a contractual date for completion and the contractor may be faced with financial penalties if the project is not completed on time. The contract will usually also contain detailed provisions on the standards of quality and workmanship that are required (the specification) and if the contractor is caught compromising these, he or she is in breach of contract. If time is the problem, the project manager might seek to address it by adding additional resources or again try to compromise quality. Increasing resources usually means increasing costs, and this may or may not be acceptable within the cost control system that is applied to the project. If performance is the problem the classic responses are to increase the time that is available for completion of the work package or to increase the cost limit that is available. The additional time required may or may not be available under the terms and conditions of the contract (see above). These responses are all linked and are compatible with the time–cost–performance continuum discussed earlier. The project manager has to look at the options that are available and consider the potential risks and negative consequences that are associated with each alternative scenario. If necessary a full risk assessment (see Module 3) may have to be carried out where the advantages and disadvantages of each scenario are evaluated.

5.4.2.5

Select and Test the Best Alternative The final decision on the best scenario could be the responsibility of the project manager or it could have to be referred to a higher authority. The change control system will normally set out specific levels of authorisation for tactical responses. Most change control systems require an estimate of the likely cost or time implications of individual decisions (including the selection of the best trade-off

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scenarios) and set authority levels to match these estimates. For example the change control system might establish that if the estimated cost of the decision is less than £100 000 the project manager is responsible. Above this level the decision may have to be referred to a change control committee or equivalent. Where approval at a higher level is required it is normal practice for a formal trade-off recommendation report (TORR) to be produced. This report sets out the underlying facts for the recommendation and seeks approval for the recommendation to be implemented. The project manager usually maintains a ‘hit list’ of preferred scenarios and submits these in order of preference. The project manager’s recommendations may be ‘knocked-back’ several times before an acceptable compromise is reached. Alternatively the TORR may contain (say) the top five recommended scenarios and the higher level authority is invited to choose the option that they feel is best under the circumstances. Change control committees and change review panels often do not like this approach as it puts the decision-making responsibility on them!

5.4.2.6

Implement the Best (or Approved) Alternative The project manager is responsible for implementing the best (or approved) alternative. This involves implementing the revision and producing a new draft master schedule (DMS). There may sometimes be a requirement for further approvals before the revised DMS can act as the project master schedule (PMS). In the case of pre-execution revisions, the end result is the PMS that is issued as part of the contract documentation. In the case of execution revisions, the original PMS is revised and a new PMS is issued subject to the appropriate revision records and controls.

5.4.3

Trade-off Classification Within overall time, cost and quality constraints, some projects may operate with one variable fixed, with two fixed, or even with all three fixed. There are therefore several alternative scenarios that might apply. Type 1, 2 and 3 trade-offs are those where one variable is fixed. This limitation would apply to most standard projects. Where one variable is fixed the other two can be expressed as a function. Type 4, 5 and 6 trade-offs are those where two variables are fixed. This scenario is more unusual and would apply where more rigid control systems are in place. Type 7 and 8 trade-offs are more unusual still and would apply only to very small projects or projects that are carried out under extreme environmental conditions.

5.4.3.1

Type 1: Time Is Fixed A type-1 trade-off has a fixed time element with variable cost and performance. Time compliance is therefore the primary project objective and can be achieved by variations in cost and performance. This type of trade-off occurs where time is of the essence and cost and performance are secondary. An example is re-opening a main railway line after a derailment. In the UK railway lines and signals are owned by Railtrack. Railtrack have various service level agreements with train

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operating companies that require them to provide track at all times or face direct loss and expense penalties. Railtrack are liable for large reimbursement payments for every minute that a main line is out of commission. If there is major derailment, it is in Railtrack’s own interests to reopen the line as quickly as possible no matter what the actual project costs are. Performance is also a variable in that one way traffic may be acceptable in the short time provided the line is reopened. Type-1 trade-offs are widely used in planning production systems. Most massand batch-production systems are set to manufacture products at a constant rate. The product designers vary the cost and performance of the product in order to meet customer demand and the effects of competing products. New products are designed using the same approach.

5.4.3.2

Type 2: Cost Is Fixed A type-2 trade-off occurs where cost is the primary consideration and where time and performance are variable. This type of scenario would occur where a certain amount of money has to be spent within a set time scale. An example is a budget for a research contact. A research council may allocate a certain sum of money to a university to conduct a piece of approved research. The award usually has to be spent within a certain variable time limit and any money not spent has to be returned to the research council. The university will usually ensure that the money is spent even if it does not necessarily contribute to the quality of the research!

5.4.3.3

Type 3: Performance Is Fixed A type-3 trade-off occurs where performance is fixed. In this case, the quality of the process is the most important factor and it is permissible to vary time and cost in order to meet the minimum standards of performance that are set. An example is clinical trials of a new drug. The consequences of releasing a defective drug are potentially disastrous for a pharmaceutical company. The quality control sections within the organisation will insist on accepted minimum standards being applied irrespective of how long the process takes or how much it costs. In some cases, the company may even abandon projects where results do not indicate minimum levels of quality, even though this may mean writing off a great deal of development investment. Most production systems used type-3 trade-offs to some extent. Customers demand a certain minimum level of performance and the production system uses appropriate quality-management systems (see Module 7) to ensure that production meets these levels. Defective products can incur significant cost as the organisation may be liable for reimbursement and compensation. The reputation of the company may be damaged, leading to a subsequent reduction in customer demand for the product.

5.4.3.4

Type 4: Time and Cost Are Fixed A type-4 trade-off occurs where time and cost are fixed but performance is variable or not specified. In this case, a cost is agreed together with a time scale

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for completion but the level of performance is left open within limits. An example is a professional services contract. External consultants are commissioned to complete a given task at agreed fees and to an agreed time limit. However, the client does not set an established level of performance. The client, instead, relies upon the professional standards and codes of practice that are set by the appropriate professional body. Type-4 trade-offs are rather unusual in a project context. The relative complexity of projects generally means that performance standards have to be specified in some way. External professionals can be ‘trusted’ to some extent, but it is generally a dangerous policy to allow performance to vary.

5.4.3.5

Type 5: Time and Performance Are Fixed A type-5 trade-off occurs where time and performance are fixed but cost is variable. A company sets a date for completion and a set of minimum standards and then spends a variable amount of money in order to achieve these fixed objectives. An example is the development and release of a new high status model of automobile. A company, such as Mercedes, may take a strategic decision to launch a new high profile and high quality model by a certain date. The new model has to meet (at least) the minimum standards that customers expect of a Mercedes. The company may be prepare to accept varying development costs in order to meet the published date and quality standards in order to maintain their reputation for reliability and quality. The consequences of a lower-than-expected product or late release may more than compensate for any increased development costs.

5.4.3.6

Type 6: Cost and Performance Are Fixed A type-6 trade-off occurs where cost and performance are fixed but time is variable. This scenario would occur where a company knows that it has to achieve some minimum standard but it has some flexibility over how much it spends and how long it takes in achieving it. An example is the compliance with a new environmental standard. Government legislation may require (for example) a power generator to comply with new emission standards by 2007. Compliance may require the installation of new electrostatic dust precipitators that will cost a known amount at today’s prices and which will reduce emissions to within the minimum set by the new legislation. The company can either go ahead and do the work now or it can wait a few years and do the work at some point in the future, provided that it is completed by 2007. The decision on when to proceed may be influenced by a range of performance factors and considerations.

5.4.3.7

Type 7: Everything is fixed A type-7 trade-off occurs where all three variables are fixed. There is no flexibility in time, cost nor quality. This scenario is unusual and tends to be found in relatively small, simple projects. An example is a householder who contracts with a kitchen installer to install a new kitchen. The householder agrees the cost, the specification and the time scale before hand and the installer complies with the agreed values. There may be some scope for cost increases – possibly if

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additional works are discovered or if the householder changes his or her mind on a particular cooker or fridge – but excluding imposed changes, the three variables are fixed from the outset. A type-7 trade-off is only likely to occur where: • • • • • •

5.4.3.8

the project is relatively simple and small; the extent of the works can be accurately agreed before work starts; there is unlikely to be much imposed change; the overall duration is short and can be estimated more or less precisely; the cost of the works can be agreed accurately; the performance requirements can be agreed in detail.

Type 8: Nothing Is Fixed A type-8 trade-off occurs where no variables are fixed. This scenario is relatively unusual and is restricted largely to emergency works. A disaster-relief project might involve sending rescue teams to an earthquake zone. All that matters is rescuing people while there is still a chance that there may be survivors amongst the wreckage. It does not matter how long it takes (provided that people can have survived long enough) or how much it costs or even how the work is carried out so long as people are rescued. Type-8 trade-offs are sometimes encountered in stop-lossing. This practice is used by contractors who have lost money or prestige on a project and all they want to do is comply with their contractual obligations as quickly as possible and move onto another contract. In such cases, contractors will sometimes ‘pull out all the stops’ and do whatever is possible to fulfil their contractual obligations as quickly as possible.

5.4.4

Example Trade-off Curves Trade-off curves can be generated for virtually any application. The crash cost curve generated in the crash analysis section is an example of a trade-off curve, for it shows the relationship between project cost and time with performance fixed. Other example curves could include those for time–cost, performance–cost and performance–time, each of which are described further below.

5.4.4.1

Time–Cost Curve A in Figure 5.54 represents a typical time–cost trade-off. The curve is negative with an increasing gradient. Curve B represents a project with a large fixed overhead cost. The time-decrease section of the curve is similar to curve A but, because of the large fixed overhead, the time-expansion section shows a considerable and rapid cost increase. This type of curve is typical of large local authority or central government departments where large numbers of expensive staff are being charged to a given project. As the time scale for the project life cycle expands, so does the wages bill.

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Time-decrease section

Cost

Curve B Time-expansion section Curve A

Time

Figure 5.54

5.4.4.2

Trade-off curve for time–cost

Performance–Cost The trade-off curve for performance and cost could take a number of different forms. Curve A in Figure 5.55 represents a standard performance–cost relationship. In most cases, it is generally possible to improve performance by investing in a relevant production system. There will generally be a linear relationship between cost and performance up to a point, but beyond that point there will generally be a change in the linear relationship. Typically, the cost of achieving further performance improvements will increase. This change will tend to occur because the benefits of the original cost investment will have reached the limits of their applicability; further performance improvements will require additional investment. There will also be a point beyond which no further performance improvements can be achieved, irrespective of investment. Most production systems have a maximum performance point. Curve B in Figure 5.55 represents a system where very large injections of cash are needed in order to achieve small improvements in performance. This type of curve might be present in high-technology development or research programmes. For example, existing rocket fuels may provide known energyrelease rates. It may be possible to improve efficiency by 1 per cent by increasing development costs by 50 per cent – this kind of scenario is relatively common in research applications. Clearly, the 1 per cent increase in efficiency might just be enough to make the product the market leader, or allow it to break through into a new application area. Marginal improvements in near perfect systems like this is only justifiable in a relatively small range of applications. Examples are high-technology research and development, medicine and pharmaceuticals, and military applications. Curve C in the same diagram represents a case where there is a linear relationship between cost and performance, followed by a cash investment that creates a significant improvement in performance. This could be a case where an organisation sends inefficient staff on a training course, which might

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represent only a small investment but it might bring about large increases in output efficiency. The curve would be characterised by a sudden increase in performance followed by a gradual levelling out as the effects of the training course become absorbed into the system and reach a point where they cause no further increases. This will tend to happen as something else begins to limit improvements, such as equipment, breakdowns, packaging etc.

Curve A

Cost

Curve B

Curve C

Performance

Figure 5.55

5.4.4.3

Trade-off for performance–cost

Performance–Time The final set of curves shows possible trade-offs between performance and time. In most cases there will be a linear performance–time curve up to a point. It is likely that a system can produce something better if it is allowed to take more time. However, this will only apply up to a point. Beyond that point it will require a lot more time to gain additional improvements in performance of the same size. This arrangement is represented by curve A in Figure 5.56. Curve B in that diagram shows a similar relationship. In this case, large improvements are initially possible by allowing more time. This type of arrangement would be observed where a new adaptation or breakthrough is being exploited. As the knowledge base and experience increase within the organisation, the rate of development decreases. Curve C represents a case where large amounts of time are required to secure small increases in performance. An example is a highly complex engineered product, which is already designed and used at the leading edge of technological development. Curve D in Figure 5.56 represents a stepped profile. Time investment leads to performance improvement in ‘steps’. An example of this is allowing an assembler more time to assemble a finished product. By making the time investment, the defect rate is reduced and hence the overall performance of the system is increased.

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Curve A

Time

Curve C

Curve D Curve B

Performance

Figure 5.56

Trade-off for performance–time

♦ Time Out Think about it: trade-off variables. It is usually possible to adjust all three project-success criteria at least to some extent. Sometimes it may be possible to work with more than one fixed criterion. In a highly controlled project, the client might insist on a definite hand-over date and a carefully controlled level of quality, and the contractor or subcontractor can only increase costs if there is any slippage in any of these fixed items. The number and range of variables will depend on the nature of the project and on client requirements. It is generally possible to negotiate changes in the project variables with consultants, contractors and suppliers. For example, most consultants will be appointed under some form of professional engagement contract. This will give a date by which the design work must be completed, details of the remit and established fees agreed. The project manager might subsequently want to speed up the rate at which the design work is carried out. This may be because of changed client requirements or because delays have occurred elsewhere. In such circumstances, the project manager would usually negotiate increased resources with the design teams. The negotiations would usually be based on increased fees in relation to increased resources in order to increase output. This could be done by converting the agreed fees into an hourly equivalent, (probably based on total fees and total agreed design times). Increased resources could then be covered by increased fees in relation to the increase in person hours required in order to achieve the new completion dates. It is not always as simple as agreeing increased staffing levels in order to speed up output. The major design milestones might depend on inputs from other bodies that cannot be speeded up as readily as the design consultants. External consultants could include organisations such as funding bodies, local authorities, statutory bodies and anyone else who might have to make a significant input and over whom the project manager has relatively little control. These external bodies can often greatly

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complicate the trade-off process. Questions:

•

What would be typical external contributors on an educational project to develop a new course?

•

What sort of procedures could be used to try and give the project manager as much control as possible over external contributors?

♦

5.5 5.5.1

Resource Scheduling Introduction Project planning depends on a wide range of variables, but the most important one when scheduling activities is resource availability. It is one thing to define the project logic and set out the most logical network for completion. It is very much another thing to staff the project team and then ensure that enough resources are available to allow the project to be successfully completed. After defining and sequencing the tasks to be done, resources have to be allocated to each activity to ensure its successful completion. There are seven main types of resource: • • • • • • •

people; materials; equipment; funds; information; technology. space (where appropriate).

and the two major considerations to be made in allocating these resources are: • •

resource productivity; resource availability.

Resource productivity is a measure of how effectively team members work both individually and collectively as the project team. The team itself will generally include individuals who possess a range of different abilities and skills. Each person also has a personal level of motivation. The productivity of the project team is not necessarily the sum total of the individual potential productivity ability of each individual. Some teams work better than the should do when looked at ‘on paper’. Other teams perform considerably worse than their potential. There are numerous reasons for varying levels of productivity. Project Management

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•

•

• •

•

Individuals who are highly able and committed may be held back by the rest of the team where the average level of commitment and motivation is lower than that of the individual. In order to perform well, teams need to have a balance of individual member abilities. A team may comprise a number of individuals who all have good leadership skills. It does not follow that the team will be well lead. A balance of different skills is required. Personality clashes may lead to conflict and the overall performance of the team may be affected. Teams have to evolve through a forming process and the task itself usually generates an imposed learning curve. Team performance tends to be related to project life cycle. Some combinations of individual personalities and skills produce synergies that are not apparent ‘on paper’.

Productivity does not relate purely to people. Equipment can have a considerable effect on overall productivity. Manufacturing systems tend to rely very heavily on equipment and the technology that is associated with it. Variations in equipment productivity have an immediate effect on the productivity of the whole system. Similarly, resource availability will directly affect how well the team is able to meet the requirements of the schedule. Resources might or might not be available at the start of the project. Once the project is under way, team members might become unavailable for a time, perhaps through being temporarily reallocated within the organisation, or through sickness. These factors will have a significant impact on the project plan. It is clear that a building company with only two plumbers available, cannot carry out several simultaneous plumbing activities that require four plumbers without hiring two more. It is equally obvious that a plumber bending pipes manually is going to produce less output (have lower productivity) than a plumber using a mechanical pipebending machine. Most organisations do not have idle staff and equipment waiting to carry out a particular activity for a particular project. What is more likely is that several projects will be competing for the same resources at any one time and hence the work must be scheduled according to the organisation’s priorities. 5.5.2

Resource Aggregation Resource aggregation is a way of estimating the total resource requirements on an ongoing basis throughout the life cycle of the project. The starting point is to isolate the resources that are required for each activity, and then to calculate resource requirements as a function of schedule completion requirements. Consider the labour requirements for the bridge project, set out in Table 5.15. The data represent the estimated labour requirements for each activity. The project estimator (see Module 6) will generally allow for the resources required when he or she is preparing the cost estimate for each activity. The resources allowed will usually be based on past experience of carrying out similar works.

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Table 5.15

Example resourcing requirements Labour requirements

Activity

Description

Skilled

Unskilled

A

Mark out site

1

2

B

Dig foundation A

1

4 5

C

Concrete foundation A

1

D

Cure foundation A

0

1

E

Dig foundation B

1

5

F

Concrete foundation B

1

7

G

Cure foundation B

0

1

H

Dig foundation C

1

4

I

Concrete foundation C

1

6

J

Cure foundation C

0

1

K

Erect tower A

2

3

L

Erect tower B

2

5

M

Erect tower C

2

3

N

Erect west span

2

5

O

Erect east span

2

4

Table 5.15 represents only the labour resource. Each activity will have provisions made for all the resources that are required for that individual activity. In the bridge project, as in many others, the main resources will be labour, equipment and materials. Figure 5.57 shows a Gantt chart for the project, along with its associated unskilled labour resource table and labour histogram. The Gantt chart shows the start and finish times for the various activities. The resource table shows the total resources required based on the Gantt chart and using the resource distribution given in Table 5.15. The labour histogram shows the total resource demand over the duration of the project. There is a clear peak between days 6 and 12. The maximum single resource demand occurs on day 10. There is an obvious trough after day 12, although resource requirements increase again up to a second peak around days 35–38. The resource distribution indicates considerable fluctuations in labour demand on a day-to-day basis. Resource fluctuations are inevitable and will always occur to some extent on a project, but the magnitude of the fluctuations in the example is considerable. Generally the greater the difference between the maximum and minimum demand the greater the degree of inefficiency within the resource profile. The only context in which large fluctuations do not indicate an inefficient arrangement is where resources can be moved quickly between projects and where set skills are in more or less constant supply and demand throughout a programme of projects. If resources cannot be moved around between projects easily, large variations in resource demand leads to periodic idle time. Idle time in turn can lead to individual loss of earnings (through bonus and productivity related pay) and consequent disillusionment and de-motivation. If resources can be moved easily between projects there are still a number of disadvantages associated with wide variations in demand. Each time a person joins a new project team there is an Project Management

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inevitable team forming process before the team can work at full efficiency. There will also be a learning curve as the new member comes to terms with the new project. Team and project learning curves both lead to reductions in productivity and a consequent reduction in the overall effectiveness of the project. Day number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 Mark out site Dig Foundations A Concrete Foundation A Cure Foundation A Dig Foundations B Concrete Foundation B Cure Foundation B Dig Foundations C Concrete Foundation C Cure Foundation C Erect Tower A Erect Tower B Erect Tower C Erect west span Erect east span Total unskilled labour

0 0 0 0 0 4 4 4 4 6 6 13 8 8 8 2 2

2 5 2 2 2 4 4 1 1 1 1 1 1 5 5 5 9 9 9 9 5 0

Gantt chart for bridge project before resource levelling Day number Mark out site Dig Foundations A Concrete Foundation A Cure Foundation A Dig Foundations B Concrete Foundation B Cure Foundation B Dig Foundations C Concrete Foundation C Cure Foundation C Erect Tower A Erect Tower B Erect Tower C Erect west span Erect east span

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 2 2 2 2 2 4 4 4 5 5 1 1 1 1 1 1 1 1 5 5 5 5 5 5 7 7 7 7 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 4 4 4 4 6 6 6 1 1 1 1 1 1 1 1 1 1 3 5 5 5 3 3 5 5 5 5 5 4 4 4 4

Total unskilled labour

2 2 2 2 2 13 13 13 14 16 12 14 9 9 9 3 3 3 5 2 2 2 4 4 1 1 1 1 1 1 5 5 5 9 9 9 9 5 0

Unskilled labour resource table for bridge project before resource levelling 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1

Labour histogram for bridge project before resource smoothing

Figure 5.57

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5.5.3

Resource Utilisation It is important to make efficient use of resources where possible. Efficient resource utilisation can be a key determinant of project performance and can contribute significantly to the achievement of project objectives. Resource utilisation is often expressed in terms of an efficiency index known as the resource utilisation percentage. The resource utilisation percentage is simply the total number of person days actually worked on the project divided by the total number of persons days available for the project. If 100 people are employed on the project for 50 days there are 5000 person days available. If each person on average only works on the project for 25 days then the total number of person days worked is 2500. The resource utilisation percentage is: Resource utilisation percentage =

2500 5000

× 100% = 50%

In Figure 5.57, the black area in the histogram represents the days actually worked on the project. The resource utilisation percentage can be calculated for each week (or even day) through the project based on the resource allocation allowed for in the planning stages. The percentage can be projected forward and shown as a curve. This curve can be superimposed over the resource histogram to show percentage values across the life cycle of the project. The project manager might set a minimum value for the percentage. If it falls below a certain level, for example 70 per cent, then some degree of resource levelling must take place in order to increase the percentage to at least the minimum level. 5.5.4

Resource Levelling (or Smoothing) Resource levelling or resource smoothing is the process of levelling out the peaks and troughs in resource demand so that resource utilisation approaches an average. Most project planning software has a facility to perform a resource levelling function. When using most packages the project manager can set the program to level automatically as activities and resources are entered or to level manually (only when the project manager wants the resource profile to be levelled). There are a number of constraint scenarios within which resource levelling can be considered. The relative scenario affects the extent to which resource levelling can be carried out. Some scenario examples are considered below. 1

2

Project Management

The project completion date is fixed. Resource levelling can only be carried out to a limited extent. The levelling cannot affect the critical path so critical activities cannot have resources reallocated or delayed. This means that resource peaks in critical activities cannot be reduced. Levelling is restricted to non-critical activities and only to the extent that any available float time can be consumed. The project completion date is variable. Levelling can take place on all activities but only up to the maximum duration allowed for the project. In this case the critical-path activities are prioritised and levelling takes place Edinburgh Business School

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3

4

in a set sequence. The prioritisation system allows for such variables as agreed subcontractor start dates and supply delivery dates. Resources are limited. In practice, resources are always limited to some extent. A number of parallel activities may require the same key resource. Levelling may distribute demands in this key resource over several parallel activities, which may lead to a resource demand that is in excess of the limit allowed. For example, an IT upgrade project may have a limit of ten software engineers. Levelling has to take place subject to the constraint that a maximum of ten resource units. This constraint limits the extent to which any redistribution can take place. Resources are unrestricted. In this case, there are no limitations on the extent to which resources can be redistributed. This scenario would only occur in the case of relatively small projects that are being executed within a relatively large organisation.

The combination of scenarios that apply to the project affect the ultimate flexibility of the resource levelling process. Most flexibility is allowed where the project has unlimited resources and a variable duration. Least flexibility is available where the duration and resources are both fixed. In most practical applications, resource levelling works by consuming the float that is available on each non-critical activity. For each non-critical activity, there is an earliest start time and a latest start time. Resource levelling works by comparing the resources required to achieve the earliest start time and comparing this to the resources required to achieve the latest start time. A compromise is then made at which lies somewhere between these minimum and maximum resource values. Consider the network in Figure 5.58. The critical path runs A–B, B–D, D–F, F–G, G–H. The early and late start points can be calculated as shown in Table 5.16. The early start figures originate from the forward pass and the late start figures originate from the backward pass. For example, the earliest that activity B–C can start is day 2, because it is dependent on A–B. However, because there is 3-day float on this leg, activity B–C can start as late as day 5 and still be completed by day 8 (as its duration is 3 days). Table 5.16 shows the early and late start values for each activity, together with the total number of resource units required for each activity. It is now possible to develop a resource aggregation for the two extremes of early start and late start. This aggregation is shown in Tables 5.17 and 5.18. It is clear from the data that the shift toward the later start dates reduces the maximum peak values around days 3–5. However, the late start alternative leads to low resource utilisation for the first four days of the project, unless some labour can be hired to start on day 5 instead of day 1. The ideal solution would comprise mostly later starts for the network activities, but with some shifting of activities from days 5–7 back to the area of day 0–4.

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8

5 C

2

10

3 0

2

0 A

F

2

2

6 4

B

6

13

10 3

13 G

4

1

H

14

14

D

1 2

E 4

Figure 5.58

Table 5.16

12

Network for resource smoothing

Early and late start values

Activity

Duration (days)

Early start (days)

Float (days)

Late start (days)

Resource units

A–B

2

0

0

0

2

B–C

3

2

3

5

3

B–D

4

2

0

2

4

B–E

2

2

8

10

1

C–F

2

5

3

8

2

D–F

4

6

0

6

2

F–G

3

10

0

10

4

E–G

1

4

8

12

1

G–H

1

13

0

13

2

A partial compromise between the early and late extremes involves working from the late start times and pulling back some of the activities with float towards the early start times. Table 5.19 shows the effects of pulling back activities B–C and C–F to their early start positions but leaving the remaining activities in late start positions. Activity B–C starts on day 2 (early) rather than day 5 (late). In each case, it uses three resource units over three days. Activity C–F starts on day 5 rather than day 8. In each case, C–F uses two resource units over two days. Tables 5.20 and 5.21 show the absolute values for resource demand for the early start and late start options. Project Management

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Table 5.17 Day

0

Early start values 1

2

3

4

5

X

X

X

6

7

8

9

10

11

12

13

10 9

X

8 7

X

X

X

X

6

X

X

X

X

5

X

X

X

X

4

X

X

X

X

X

X

X

X

3

X

X

X

X

X

X

X

X

2

X

X

X

X

X

X

X

X

X

X

X

X

X

1

X

X

X

X

X

X

X

X

X

X

X

X

X

X

Note: the X bars shown in the table are intended to show general fluctuations in resource demand. They do not represent absolute values.

Table 5.18 Day

0

Late start values 1

2

3

4

5

6

7

8

9

5

X

X

X

4

X

X

3

X

10

11

12

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

13

10 9 8 7 6

2

X

X

X

X

X

X

X

X

X

X

X

X

X

X

1

X

X

X

X

X

X

X

X

X

X

X

X

X

X

7

8

9

10

11

12

13

Table 5.19 Day

0

Partially balanced solution 1

2

3

4

5

6

5

X

X

X

X

X

X

X

X

4

X

X

X

X

X

X

X

X

3

X

X

X

X

X

X

X

X

X

10 9 8 7 6

2

X

X

X

X

X

X

X

X

X

X

X

X

X

X

1

X

X

X

X

X

X

X

X

X

X

X

X

X

X

Note: the histograms shown in Tables 5.17, 5.18 and 5.19 are intended to show broad variations in resource requirements. The height of the individual X-columns is not intended to represent absolute resource numbers

The extent to which the resource profile can be levelled depends on the number and extent of critical items, and the range and distribution of resource demand for each activity. In the case of the bridge example, Figure 5.59 shows 5/92

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Table 5.20

Early start values (absolute values) Early start values

A–B

B–C

B–D

Day

B–E

C–F

D–F

F–G

E–G

G–H

Total

Resource units required

0

2

1

2

2 2

2

3

4

1

3

3

4

1

4

3

4

5

8 8 1

4

8

2

6

2

6 2

4

7

2

2

8

2

2

9

2

2

10

4

4

11

4

4

12

4

4

13

Table 5.21

2

2

G–H

Total

Early start values (absolute values) Late start values

A–B

B–C

B–D

Day

B–E

C–F

D–F

F–G

E–G

Resource units required

0

2

1

2

2 2

2

4

8

3

4

8

4

4

8

5

3

4

6

3

2

4

7

3

2

2 2

6

8

2

2

9

2

2

2

10

1

4

11

1

4

12

4

13

4 4 1

4 2

2

the resource utilisation and the resulting histogram after resource levelling has occurred. On this basis: resource smoothed utilisation = 222/(12 × 38) = 48.7%

which is higher than the unsmoothed utilisation.

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Day number

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

Mark out site Dig Foundations A Concrete Foundation A Cure Foundation A Dig Foundations B Concrete Foundation B Cure Foundation B Dig Foundations C Concrete Foundation C Cure Foundation C Erect Tower A Erect Tower B Erect Tower C Erect west span Erect east span Total unskilled labour

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Gantt chart for bridge broject after resource levelling Day number Mark out site Dig Foundations A Concrete Foundation A Cure Foundation A Dig Foundations B Concrete Foundation B Cure Foundation B Dig Foundations C Concrete Foundation C Cure Foundation C Erect Tower A Erect Tower B Erect Tower C Erect west span Erect east span

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 2 2 2 2 2 4 4 4 5 5 1 1 1 1 1 1 1 1 5 5 5 5 5 5 7 7 7 7 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 4 4 4 4 6 6 6 1 1 1 1 1 1 1 1 1 1 3 5 5 5 3 3 5 5 5 5 5 4 4 4 4

Total unskilled labour

2 2 2 2 2 5 5 9 9 9 9 11 11 11 7 7 7 7 7 7 3 3 3 3 3 3 3 3 4 4 5 5 8 9 9 9 9 5 0

Unskilled labour resource table for bridge project after resource levelling

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 12 11 10 9 8 7 6 5 4 3 2 1

Labour histogram for bridge project after resource smoothing

Figure 5.59

Resource-smoothed Gantt chart, resource table and labour histogram for bridge project

The levelling process produces a better resource utilisation percentage. The process also provides a number of associated advantages. Some of these are listed below. •

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Reduced peaks in resource demand means that there are fewer people on the project at any one time. This has implications for the overall coordination and control demands on the project manager and may also have a cost implication. In the bridge example, the employees would require accommodation, transportation and other forms of support that would carry a fixed overhead cost. Fewer people means lower fixed overhead costs. Edinburgh Business School

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• •

•

Individual people work for a longer period on the project. This has benefits in relation to the development of team working and learning curves. Reduced float times on individual activities can lead to greater continuity between activities. This can be significant where there are direct operational linkages between activities. Reduced activity durations may have an implication for external subcontractors. Resource levelling may reduce the overall time that a particular subcontractor is required to attend the project and in turn produce overall cost reductions.

In the bridge example, the available float on the tower A activity has been used and this activity has now become critical. Increased criticality is an unavoidable consequence of resource levelling. The project manager has to constantly check the network and monitor the development of new near-critical and critical paths. As more than one critical path develops, the levelling process becomes more complex. As float generally is consumed, the consequences of any delay increase and so does the overall level of project risk. This general increase in risk can be offset to some extent by the project-risk management system (see Module 3).

5.6 5.6.1

Project Planning Software Introduction Information technology plays an ever-increasing role in all management fields and in none more so than project management. Recent history records that project management tools and techniques grew hand in hand with the development of computerised information systems. The characteristics of complex data management that are so crucial to successful project management have driven the information technology developments in this field. The pioneers of project management techniques in the aerospace, engineering and defence industries were willing participants in the growth and development of information systems. Having recognised the inherent need within large-scale projects to store and process large amounts of information, project management systems were developed and used as early as the 1960s. Of course, the cost of technology in those days restricted use to only the very largest projects, and early project management systems had a network planning capability and not much else. As costs reduced over the years, computer network planning became more widely used across technology-based industries. Project management techniques were also evolving, and concepts such as earned value analysis (EVA) required an ongoing ability to process large quantities of information throughout the life of the project. Systems were then developed to help control projects as well as plan them. Today, it would be almost inconceivable for all but the smallest of projects to be managed without a computer-based system, and that computer system will embrace every aspect of the project. In the case of fully integrated business systems, they embrace every aspect of the organisation.

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For those companies which have adopted the disciplines of project management as a business management philosophy, the capabilities of their project management software can be a critical factor in the overall success of their business. The responsiveness and effectiveness of the project management software can be one of their major competitive advantages. For example, effective management of costs and schedules has been one of the greatest challenges of major aircraft-development programmes, in both the military and commercial sectors. Lockheed Martin tactical aircraft systems, the world’s leader in fighter aircraft production, has implemented a company-wide integrated project management system to support the goals of the joint strike fighter programme and to help ensure success in all company and supplier tasks. The project management system of Lockheed Martin continues to yield significant business benefits in terms of administrative cost savings, improved visibility, and reduced cycle time for analysis. Lockheed Martin’s current project management system clearly contributes towards its competitive advantage. Project management as a management paradigm has expanded rapidly over the last five years as more and more companies understand the benefit to be gained from managing their entire business portfolio as a series of projects. The time- and field-proven techniques embodied in project management are rapidly being institutionalised as a new management culture across other expanding industries such as telecommunications, service companies, information systems, and other sectors where ‘time to market’ is a key business driver. Project management information systems can work in a range of environments. In contemporary project management, virtually all project planning and control is carried out using proprietary software. Most students of project management will quickly become familiar with packages such as Microsoft Project. This project planning package acts as a very useful introduction to computerised project planning and control. It is widely used for standard, non-specialist applications throughout the world. It provides simple, straightforward applications for planning and controlling relatively simple projects. There are a range of more powerful packages, such as the international best sellers of Power Project Professional and Primavera. These professional packages offer comprehensive and sophisticated applications for professional use. 5.6.2

Advantages of Computer-based Project Planning and Control The use of project management software is almost universal and there are few doubts as to the benefits to its effectiveness. The most obvious advantages include the following: •

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Speed Computerised project-planning software offers the obvious example of speed. One good package can produce the same planning information as a whole team of specialist planners and in a much quicker time. Good software gives particular time savings in replanning after trade-off analysis. Cost Modern high-performance software is initially expensive. The package itself can cost several thousand pounds and the necessary staff training and development can cost much more. However once the software is in Edinburgh Business School

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5.6.3

place and staff have developed proficiency in the use of the various systems, the potential cost savings can be very significant. One skilled planner can effectively perform the same work as a whole team of skilled planners working on paper would have formerly required. Capacity Good packages offer enormous capacity and even very large projects with thousands of activities and resources can be accommodated. In most cases, the limiting factor is the processing capacity and speed of the computer that used. Reliability Modern software is extremely accurate and reliable. The programs are very carefully checked and tested to ensure that the various calculations and presentations are accurate. Any programme is only as reliable as the information that is input to it and the possibility of human error remains. Combined analysis Most modern packages offer combined analysis functions. The operator can use the software to plan and control time and cost simultaneously. Information on resources can be stored within the system and automatic trade-off scenarios can be generated. This level and complexity of analysis is simply not possible on a manual basis.

Disadvantages of Computer-Based Project Planning and Control Project managers generally take project-planning software for granted and regard it as a standard tool for what they do. Project planning software, along with IT in general, has reached all levels of many industries. There are, however, some disadvantages associated with the use of project-planning software. •

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Reliance The use of advanced software generates an automatic reliance and a consequent risk. The prudent project manager will ensure that all computerised data and records are adequately protected and backed-up but a surprising number of project managers do not take adequate precautions. System information can easily be lost or corrupted as a result of faults in the IT system, or inadequate protection from external tampering or malicious viruses. Smaller companies which run projects only occasionally are often guilty of not taking adequate precautions to protect their project data. Over emphasis on system detail Very large project plans require a great deal of administration and attention to detail. The project manager or planner may find that he or she is spending an increasing amount of time in maintaining the various linkages and dependencies within the program rather than managing the actual project. This tendency may not be a problem as long as it is adequately controlled. It does mean, however, that the project manager, as an expensive professional, may be spending some of his or her time on what is really an ancillary support activity. Information dump Modern packages can store and process very large amounts of data and allow aspects of the project plan to be looked at from numerous different aspects. Even the most basic packages offer a multitude of different report formats and styles. There is often a tendency for people to produce reports and print-outs that contain too much information, simply Edinburgh Business School

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5.6.4

because it is so easy to do so. The project manager needs to exercise a degree of restriction and control over the output so that the important facts and figures are not confused within a mass of less important information. Potential misdirection Modern packages can produce very detailed and professional looking reports. This can be a danger as people have a natural tendency to accept well-presented material as being accurate. As discussed above, the system is only as accurate as the information that is input to it. Incorrect data will lead to incorrect reports and the degree or quality of report presentation does not alter this fact.

General Factors for Consideration IT is so widespread in modern commerce and industry that virtually everybody takes it for granted. Project planning software is a specific IT application and is somewhat specialised in its use. A company that is thinking of purchasing a project planning system, or replacing an existing system, should consider a number of issues. •

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Lead-in time Modern packages are very complex and it can take a long time for staff to develop full proficiency in the use of the system. Even with intensive training and testing support, it can take three to six months for a new system to be installed and commissioned up to a level where it is reliable. Transition Transition may be a problem where a company is changing from one system to another. People who have built up a detailed knowledge of one system tend to have natural reluctance to switch to a new system, the main reason being the effort involved. Software designers tend to use some common approaches but the detailed design of systems tends to be quite different. It is still common to find word processing staff using systems such as Word Perfect within networks that were converted to run on Microsoft operating systems several years ago. There is also the problem of parallel integration. Phasing out an old system and replacing it with a new system is itself a project and is subject to all the (hopefully now familiar!) issues of planning complexity and risk. Training Staff training can be a time consuming and expensive process, especially where large numbers of staff are involved. Training on new systems has the effect of reducing the availability of resources for use in existing systems and this can have an adverse effect on the overall profitability of the organisation. Intensive retraining can also be a source of stress among staff and acts as a catalyst for conflict. Different departments often feel that they are being unfairly pressurised into retraining earlier or more quickly than other departments. Updates The maintenance in proficiency in modern software is an ongoing process. Software manufacturers introduce frequent updates and these can often involve considerable additional functions and adaptations. The manufacturers of the more complex programs hold regular training seminars so that users can stay up to date with the latest developments to the system. Edinburgh Business School

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5.6.4.1

Such seminars are useful and they do allow staff to use the software to its full potential, but keeping up to date with the latest developments consumes time and money that could be used elsewhere. Networking On large projects, it is standard practice to run some kind of configuration management system (CMS). A CMS is a centralised information management system and is usually based on a central server, which runs on centralised network software serving a number of remote users. The project-planning software used on a networked system is accessible by a number of different people, even if the access is restricted to read-only. This multi-user approach means that the project manager and planners have to have an awareness of networks and the corresponding security and access implications that are involved. Wider compatibility The logical extension of the CMS system is to link the central network to external consultants and even (in some cases) to external contractors and suppliers. There are obvious security considerations to allowing contractors and other external organisations to have direct access to the project database, but there are also significant potential advantages. This kind of approach is used already on large-scale term maintenance contracts. A particular engineering company might win a contract to carry out maintenance and repairs on a power station. Using a CMS, repair requests can be e-mailed directly to the contractor for online estimating and programming. In some cases, work re-measurement and payments are also made online.

System Critical Success Factors Project-planning software can be considered in terms of a number of critical success factors. These are the characteristics of the system that determine how useable it is in terms of delivering project success criteria. There are a number of generally accepted program success factors. •

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The system should be useable. Most people have encountered software that is not ‘user-friendly’. Some programs seem to be very difficult to understand and do not give the user any support or advice where problems are encountered. Some of the early DOS-based estimating and planning packages were particularly bad for this. The only way to learn to use them was to be shown how by an expert. The package itself and the supporting documentation did not contain the amount of information required for a new user to learn how to use the system. Modern packages are more approachable, but large project-planning packages can still appear to be daunting to the uninitiated. Ideally, even the most complex packages should be readily approachable and should offer support and assistance to new users. Staff will respond much more readily to such software than they would to unapproachable systems. The systems should use familiar displays. The most successful complex packages produce displays and outputs that are compatible with what users expect. Most people expect a cost report to have a certain type of appearance. It should typically show the budget limit for a particular work package, how much has been spent to date and what level of progress has been made in Edinburgh Business School

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5.6.5

incurring these costs. The most effective displays and reports are those that present this standard information as clearly and as succinctly as possible. The system should be CMS compatible. As discussed in section 5.6.4, large and complex projects often use a configuration management system where all information is centralised and distributed to all members of the project team through remove PCs. The amount of information that each person can obtain and the level of access that is permissible is restricted by individual authority clearance levels. The higher the clearance the greater the amount of information the person has access to within the DMS. A centralised version of the project master schedule (PMS) is particularly important since most members of the project team have a considerable interest in it. The system should be extendable. Complex software increasingly incorporates a degree of over design. A common complaint about Microsoft Word is that it incorporates a great many functions and applications that nobody ever uses. This over-design results in the use of large amounts of ROM so that the microchip makers have to keep developing new and more powerful processors. The end result is that PCs become obsolete very quickly as only the latest chips can run the latest version of the software. This end result is not intentional on the part of Microsoft. They are simply designing systems that have built-in capacity for extension. Many of the functions that are not used are in fact designed to lead in to the next version of the software. The potential for extension is an important aspect of software design. The software should not be limited to what people want now. It should also be forward looking and try to incorporate next generation ideas so that innovation supply stays ahead of demand.

General Features of Project Planning and Control Software Systems Every project management system available will have its own distinctive features. They are all likely to have different interfaces (differences may be slight), they will look different on screen, reports will look different, and they may even emphasise different aspects of project management depending on the philosophy on which the system is based. Irrespective of what each individual system looks like and what it costs, every project management information system on the market today will be capable of at least one, and probably most, of the following: •

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Project planning Having defined the project activities and their dependencies, most systems will produce good-quality Gantt charts and network diagrams. Most systems will be capable of critical path analysis. All systems can reschedule and update the information automatically when changes are made. Resource management Resources are allocated to each project activity and the system will calculate the resource loading for the project. It will identify conflicts (e.g. where the same resource is required in two places at the same time) and may be capable of levelling resources across the project. Where costs are allocated to resources, budgets and forecasts can be prepared. Edinburgh Business School

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•

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5.6.6

5.6.6.1

Tracking and monitoring Updating data, including the ongoing status of each activity (i.e. the percentage complete), enables a system to monitor a project against the original plan and will highlight variances from the plan. By establishing a baseline at the outset, it is possible to use this as a fixed reference point for the project as it progresses. Report generation Every system will generate a wide range of status reports covering most aspects of the project, from budgets and cash flows to resources and schedules. Analysis and decision aiding Some systems offer the capability of ‘what if’ analysis; but, in any case, most will perform straightforward analysis that can be used in decision making.

Common Commercial Project Planning and Control Software Introduction There are many project management systems currently on the market, ranging from the high-cost large-project management systems to the very low-cost end of the market catering for the project manager who simply wants good-quality charts. There follow some of the more popular products available in each segment of the market. Systems suitable for large or multi-project users include: • Power Project Professional; • Primavera Project Planner; • Artemis Views 4; • Open Plan; • Cobra; • Enterprise PM; • Micro Planner X–Pert. These are likely to cost from £1000 upwards, and require a significant investment in time and effort to master all the features. Mid-range products up to about 2000 tasks include: • Microsoft Project; • Micro-Planner Manager; • Primavera Suretrak. These software packages offer a tremendous range of planning, scheduling and tracking tools and they produce a vast array of reports. They cost from around £200 upwards. For the project manager who wants merely to automate the process of laying out plans, preparing occasional status reports and producing some simple Gantt and PERT charts, without investing the time to master the more sophisticated tools, there are plenty of low-cost packages available for under £100, including:

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5.6.6.2

Milestone Simplicity; Project Vision; Quick Gantt.

Artemis Views 4 Package Overview Without endorsing any particular product, Artemis Views 4 is reviewed here to give an idea of the kinds of facilities and functions that are available. Artemis Views 4 is an enterprise resource planning (ERP) system that integrates all levels and functions of the organisation for project management. The system has all the features required in a good-quality project management system (and a great many more). Artemis Views 4 is an enterprise business system incorporating project planning, cost control, resource tracking, and project analysis. The system has a role-based approach to software design and implementation. Views 4 provides separate role-based applications for project planning, resource and activity tracking, project cost control, and executive analysis and reporting. This enables immediate project feedback for every level of the organisation. The system provides users across functional disciplines with information and reports relating to business projects. Different users only need one application to do their particular job; and so implementation time and training costs are minimised. Views 4 consists of: • • • •

ProjectView – used to plan, manage and schedule projects; TrackView – used to report and measure progress, effort expended, and actual costs; CostView – for project, contract and programme performance management and cost control; GlobalView – a reporting application that provides graphical project data analysis.

Views 4 applications are similar to Microsoft’s office suite of desktop applications, giving them a familiar feel to the new user. ProjectView Note: ProjectView is considered as one aspect of the package. Integrated with Enterprise Resource Planning (ERP) applications, the system is an enterprise multi-user, multiproject management application. It is designed for use by project managers, project planners, and resource managers, and combines multi-user project planning, resource scheduling, cost control, and graphical reporting. Planning and scheduling features include capabilities to: • • • 5/102

build and update project schedules using graphical, Gantt or spreadsheetstyle interfaces; assign resources to activities across multiple projects; define project relationships; Edinburgh Business School

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• • • • • •

prioritise activities during scheduling; maintain up to 99 different versions of projects; carry out ‘What if. . .?’ analyses; create unlimited numbers of project combinations without the need to merge or duplicate data; create milestones; carry out critical path analysis. Project definition and start-up features include capabilities to:

• • • • •

create templates and library projects, including standard WBS and OBS, to support corporate processes and standards; define reference data to be shared between all projects, resource pools, and consolidation structures; control read/write access authority to project plans; define access authority according to individuals or groups; globally update changes to project data by single or multiple projects.

To manage projects across the organisation for enterprise project planning, ProjectView uses a graphical planning structure to organise and navigate projects by hierarchy. Project planning features include capabilities to: • • • • • •

work in either tabular, tree or outline format; navigate projects by hierarchy, and launch directly into project plans; create virtual multiproject groups; consolidate projects using planning structures (i.e. OBS, WBS, project manager, etc.); isolate projects and compare target dates and budgets at any level, with actual deadlines and costs; identify budgeting or scheduling problems using an ‘early warning’ system. Resource and cost management features include capabilities to:

• • • • • • • • •

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cope with an unlimited number of resources per activity or project; allocate resources by various techniques, including total content or at a constant rate; display resource usage for selected resources or skill groups; schedule using resource and time constraints; integrate with the CostView cost control software for automated financial forecasting, budgeting and earned value analysis; integrate with TrackView effort-tracking software for automated timesheet booking and progress updates; prepare standard cost reporting, including ACWP, BCWP, BCWS, and EAC calculations; establish time-phased resource rates; break down complex programmes of work with planned costs and target dates into projects using a graphical planning structure. Edinburgh Business School

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ProjectView includes a wide set of reporting and graphics tools to document and present project information. These include an extensive assortment of pie, line and bar charts, Gantt and PERT charts, and histograms, to cover all aspects of single and multiple project reporting.

Learning Summary The Concept of Project Time Planning and Control •

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Project time planning and control are essential project management skills. In order to be able to deliver on time, cost and quality limits for any process, planning and control are always prerequisites. Planning is essential to most enterprises, and it is taken for granted in the management of everything from football teams to construction projects. Most aspects of an enterprise can be planned, and the planning process can aim at several different objective criteria. Most projects evaluate success in terms of the optimisation of time, cost and quality criteria. As a result, most project management planning and control tends to centre on these three variables. Other variables may also be considered, such as safety and reputation, but most of the immediate and non-statutory success objectives are related to time, cost and quality optimisation. Planning as a discipline effectively sets targets. These targets may subsequently be achieved or not, depending on the success of the project. The project manager attempts to ensure that these targets are met through project control procedures. Project control procedures examine actual performance and track it over a period of time. They then compare actual performance with theoretical performance in order to isolate variances. These variances are then used as the basis for management reporting. Planning is also a way of establishing where the project should be, in terms of time, cost and quality performance, at any particular moment in time. A project manager can then use this information to identify where problems are likely to arise in the future – for example, where existing performance is likely to cause problems in the future. Variations in project success and failure criteria will affect the time planning and control process. If the value of quality suddenly increases, this will almost certainly generate an increased time requirement. The project time planning and control process is only part of the contents of the generic project plan or strategic project plan (SPP). The SPP is a project document that includes all the information relevant to the planning process for the entire project. The project SPP includes separate planning and control processes for time, cost and quality, and also a wide range of other planning elements including communications planning, marketing planning, financial planning, benefits planning and risk planning. Edinburgh Business School

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Separate plans are required for each of the foregoing elements, and also for the others listed in the SPP pro forma in BS6079 (see Module 4). The collective assembly of all these individual sub-plans forms the generic SPP. A project plan must be established for all projects if effective project management techniques are to be applied. The project time planning and control system is only one of numerous planning and control systems that collectively form the generic project plan. Project time planning involves identifying, sequencing and scheduling information. Depending on the nature and size of the project, this information can range from just a few activities and resources to, in the case of large capital projects, many thousands of activities with complex interdependencies and resources. The planning process must be robust enough to withstand rigorous testing and yet take account of the constantly changing environment in which the project exists. Planning is carried out throughout the project life cycle. The intensity of planning activity varies over the life of the project. Traditionally, planning is most intense in the early stages. Major changes during the project will result in increased planning activity no matter what stage the project is at. This replanning is a central requirement on most projects and can be one of the most complex areas that the project manager has to manage. Time replanning tends to become more complex as the project progresses. In most projects, large changes at later stages in the project life cycle can have critical effects.

The Process of Project Time Planning •

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The time planning process will vary in relation to a number of factors. These factors influence the data and assumptions that are used in developing the planning and control system. Typical examples include sources of time planning data, project uniqueness, people issues, large project complexity, project uncertainty, competence in planning and communicating the plan Most project planners base their time estimates for individual activities on their own knowledge and experience. In cases where similar projects have been run in the past, it is usually possible to derive reasonably accurate estimates for most activity durations. No two projects are exactly the same and it is generally necessary to plan every project independently. This applies more to some applications than to others. Construction projects in particular tend to be more or less unique. Project planning involves a systematic approach to working that not everyone is comfortable with. It requires an ability to look ahead and effectively integrate uncertainty with the more tangible aspects of planning such as estimating and scheduling. Good project planning also requires considerable imagination and creativity and these characteristics are not universal. Perhaps the most difficult part of any planner’s job is to predict the activities required to complete the project with any reasonable degree of accuracy. Edinburgh Business School

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The risk of uncertainty is inherent throughout any project plan as in any plan. As well as the global uncertainties surrounding the project as a whole, there are elements of uncertainty within each of the planned activities and all of the assumptions made during the planning process. Planning large projects is a highly complex and specialised skill. It requires an in-depth knowledge of sophisticated planning techniques and systems. To achieve good workable plans, the planning skill is best complimented by a good operational and technological understanding of the project itself. If a project plan is to be effectively implemented, stakeholders must be fully informed of all their responsibilities. The information must be issued in a format that is clear, understandable and unambiguous.

The Planning Process •

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Irrespective of whether the project manager is developing time, cost or quality plans, the same basic procedure is adopted up to a point. This involves breaking the project down into some kind of work packages where individual targets for performance can be set for each such package. The level of definition of work package will depend on the nature and type of project. Project work packages might vary in relation to the planning and control system concerned. A package for cost control purposes might not match the packages defined for quality management purposes. This process is sometimes referred to as the top-down strategic (TDS) approach to project planning. It is a top-down approach in that it takes the work at the project level and breaks it down into individual work packages or components that can be subjected to individual and independent time, cost and quality control. Planning is strategic in that work packages are projected forward so that an overall sequence of execution can be derived. This sequence will determine the time, cost and quality planning and control characteristics of the project. The Statement of Work (SOW) is the descriptive document that defines the overall content and limits of the project. In practice, nearly all projects have a SOW, as they cannot be efficiently managed or executed unless the managers and administrators can define the boundaries and limits of the project. The SOW includes all the work that has to be done in order to complete the project. However, the project cannot be planned or controlled at this level as it is too big. It is necessary to break the whole down into individual components that can be individually evaluated and managed. For a US or European project, the SOW is usually contained in the contract documents. In the UK this would comprise a full set of production information, a specification, all schedules and some kind of measurement or quantification of the works to be done, assembled in such a way that it can be accurately priced by a tenderer. A work breakdown structure (WBS) is a representation of how large tasks can be broken down into smaller and more manageable sub-tasks. The number of WBS levels required increases with the size and complexity of the project and is determined by the need to define tasks at a level where Edinburgh Business School

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they are manageable and achievable. Small projects such as preparing a simple brochure may require as few as three levels, whereas a project such as a launching a global marketing campaign for a consumer product may have six or more levels. Project logic evaluation (PLE) is the process of taking the WBS work packages that have already been identified, and showing the sequence in which they are to be carried out. This is important for time, cost or quality evaluation. Networking is the process of defining project logic in terms of the sequence of required activities, and then assigning durations to these activities. Scheduling is the process of calculating individual activity times in order to allow an estimate for the completion date to be calculated. The end result of the scheduling process is the Draft Master Schedule (DMS). The DMS is a complete network analysis or programme for the project showing start and finish times for each activity. By using specific analysis techniques, it is also possible to calculate start and finish times for groups of activities, for sections of the project and for the project as a whole. The DMS also identifies the project’s critical path, namely the path through the project that has the longest total activity duration times. It is therefore the path of activities that determines the overall project completion date. In terms of assigning activity durations, there are two primary alternatives. These are based on the critical path method (CPM) or on the programme evaluation and review technique (PERT). Both approaches use an essentially similar concept, but the calculations used and applications of each are quite different. CPM is used where deterministic calculations can be used. Deterministic values are applicable where times for activities can be calculated or are known with reasonable accuracy – for example, the times taken to execute each of the stages in making a cup of tea. The critical path through any network diagram is the longest path. The duration of the critical path defines the expected duration of the project under normal circumstances. The most popular method for producing a draft master schedule (DMS) from a precedence diagram or network is to use the critical path method (CPM). PERT is used where component activity times cannot be accurately calculated or are not known, such as making a cup of tea with a faulty kettle that may or may not work properly. In both CPM and PERT cases, the calculations are used as the basis for evaluating the individual and overall times that are applicable to the project. They are not simply used once to arrive at overall and individual completion dates. They are also used as the basis for the replanning process, which is an essential feature of most project planning and control. Replanning is often necessary because the Draft Master Schedule produced by the project manager is just that – a draft. It is presented to the client as one possible solution for the planning and control of the project; it may or may not be acceptable. Typical reasons why it might not be acceptable are Edinburgh Business School

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•

that it finishes the project too late and time savings are required, or it is too heavily resourced and the overall cost has to be reduced. The replanning process is just as important as the initial planning process. As soon as a schedule has been produced, there will be immediate requirements to change it. Change notices and variation orders will be issued throughout the project execution phase, client requirements may change, planning regulations may alter etc. Replanning tends to be a complex operation and is one of the main reasons why project planning software, as opposed to manual methods, is used almost exclusively.

Project Replanning •

•

•

•

In crash analysis, a project manager offers replanning advice based on the functional relationship between time and cost. The objective is to look at that relationship for the process concerned and to generate a curve showing alternative cost and time scenarios. The client can look at this curve and can see how much it will cost to meet a range of different time options. The cost of crashing is a function of resources limits and availability. In addition, resources on an activity can only be increased up to a point. Additional resources may be immediately available at the same or greater unit cost, available later at the same or increased unit cost, etc. The crash sequence will usually start with the cheapest unit crash-cost item and progress to the most expensive unit crash-cost item. This will generally appear as a negative curve, rising more and more steeply away from the origin (original project time and cost). The curve should always rise more and more steeply as the unit crash cost increases for the later items and the cumulative effect is significant. The other major consideration is the critical path. There is no point in crashing non-critical items as any time saved on these items will not reduce the overall project or package completion date. It is therefore essential that the crash sequence contains only those items that are on the project or package critical path.

Trade-Off Analysis •

•

•

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Crash analysis is one aspect of trade-off analysis. The crash example in the text considered the trade-off between time and cost. There can also be trade-offs between time and performance and cost and performance. Each scenario seeks to establish the functional relationship between two of these variables while assuming that the third element is fixed or constant. A requirement for trade-off occurs because project conflicts arise. This could be because of changes to project objectives, success and failure criteria, incompatibilities, errors etc. The main types of causes for trade-offs are human error and mechanical failure, problems of uncertainty and totally unexpected problems. Changes in project environment, changes in company corporate strategy, new statutes and codes of practice, and inaccurate original forecasts and Edinburgh Business School

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planning are all potential sources for conflict and a requirement for trade-off analysis.

Gantt Charts •

•

In its simplest form, the Gantt chart consists of a horizontal time scale, a vertical list of tasks and a horizontal line or bar drawn to scale to represent the time needed to complete each task or activity. Gantt charts provide an effective tool for planning and monitoring. They require little training to produce and give a very easy to understand visual image.

Resource Scheduling •

• •

Most organisations do not have idle staff and equipment waiting to carry out a particular activity on a particular project. What is likely is that they are also required for other jobs, and some degree of prioritisation will be required. Resource scheduling is critical in any resource-driven application. Resource levelling allows peaks and troughs in resource demand to be evened out allowing more consistent use of resources.

Project Planning Software • •

•

In contemporary project management, virtually all project planning and control is carried out using proprietary software. The use of project planning software offers advantages of speed, capacity, efficiency, economy, accuracy and the ability to cope with large amounts of complex data. Disadvantages include the systems management requirement, information overload, isolation, and dependency.

Review Questions True/False Questions The Concept of Project Time Planning and Control 5.1 Time planning and control can be considered in isolation from other project success variables. T or F? 5.2 All project time planning and control systems are based on setting targets and then monitoring actual performance against planned performance. T or F? 5.3 Project time planning systems are obsolete as soon as they are prepared. T or F? 5.4 A project time plan is only one form of plan contained within the overall strategic project plan (SPP). T or F?

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5.5 A project time plan has only limited value if it is not used in conjunction with a cost plan and a quality plan. T or F? 5.6 The project time planning and control process continues throughout the life cycle of the project. T or F? 5.7 Post-contract time planning is less effective than pre-contract time planning. T or F? 5.8 In the case of most projects, there will be a requirement for some kind of pre-contract and post-contract replanning. T or F?

The Process of Project Time Planning 5.9 The majority of project time planning data is obtained from historical records and past experience. T or F? 5.10 All members of an organisation are happy to operate within a planned environment. T or F? 5.11 All processes can be subjected to some form of time planning and control. T or F? 5.12 Generally, the larger and more complex the project, the greater the need for effective project time planning and control. T or F? 5.13 Project time planning reduces uncertainty. It is therefore a form of project risk management. T or F? 5.14 A statement of works (SOW) accurately defines the scope of the project. T or F? 5.15 A work breakdown structure (WBS) breaks the project down into components that can be subjected to different planning and control systems. T or F? 5.16 All WBS operational systems operate at the same levels of control at all times. T or F? 5.17 All WBSs must have six levels. T or F? 5.18 The project WBS defines the basic building blocks for the time, cost and quality planning and control systems. T or F? 5.19 A precedence diagram is essentially a WBS that has been developed in terms of showing work execution sequences. T or F? 5.20 There is one primary form of scheduling, the critical path method. T or F? 5.21 CPM is a deterministic approach, based on known activity durations. T or F? 5.22 PERT is a probabilistic approach based on unknown durations. T or F? 5.23 Only CPM uses the analysis of the critical path. T or F? 5.24 A project can only ever have one critical path. T or F?

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5.25 Project replanning is only necessary because of changes in the pre-contract phase. T or F? 5.26 Project replanning uses trade-off analysis as an evaluation tool. T or F?

Trade-Off Analysis 5.27 Trade-off analysis is a way of providing alternative scenarios when time, cost or quality have to be changed in relation to each other. T or F? 5.28 Crash analysis is a form of trade-off analysis and involves a cost–time trade-off. T or F? 5.29 A type-7 trade-off is one where all three elements of time, cost and performance are fixed. T or F? 5.30 The requirement for a trade-off is always generated within the project. T or F?

Gantt Charts 5.31 A Gantt chart shows activities against dates. T or F?

Resource Scheduling 5.32 Resource levelling is a way of minimising resource demand. T or F? 5.33 Resource levelling is appropriate in any type of project. T or F?

Project Planning and Control Software 5.34 Most contemporary project time planning and control is carried out on a computer using purpose-written software. T or F?

Multiple Choice Questions The Concept of Project Time Planning and Control 5.35 Most clients set project objectives that are based on which of the following? A

Success criteria.

B

Failure criteria.

C

Success and failure criteria.

D

Other.

5.36 Most clients would define project parameters in terms of

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A

time.

B

cost.

C

performance.

D

any two.

E

all three.

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5.37 A good Strategic Project Plan (SPP) contains separate plans for A

time.

B

cost.

C

performance.

D

all three.

E

all three plus others.

5.38 Project time planning is carried out A

pre-contract.

B

post-contract.

C

both pre-contract and post-contract.

D

both, plus other at other life-cycle stages.

5.39 Generally, as the life cycle proceeds, the complexities involved in project planning and replanning A

remain unchanged.

B

increase.

C

decrease.

5.40 Project time planners often use their own basic data for assembling draft schedules. These basic data are most often based on which of the following? A

Past experience.

B

Published standards.

C

Extrapolation and interpolation.

D

Computerised systems.

5.41 In general terms, the more unique the project A

the more complex the planning process.

B

the greater the consequences of change.

C

the easier the process of change.

D

the lower the cost of planning implementation.

5.42 Project planning works better in some organisations than in others. Generally, rigid and scientific project time planning works best in which of the following? A

Pure project.

B

Pure functional.

C

Matrix.

D

More than one of the above.

The Process of Project Time Planning 5.43 Which of the following is a statement of works (SOW) ?

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A

A description of all the works required.

B

A form of contract.

C

An invitation to bid.

D

A form of method statement.

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5.44 Which of the following is a work breakdown structure (WBS)? A

A form of project schedule.

B

A form of contract.

C

A set of individual works descriptions for subcontractors.

D

A set of project work packages.

5.45 Most practical WBS would be developed to a maximum definition of A

four levels.

B

five levels.

C

six levels.

D

more than six levels.

5.46 Generally, the project WBS acts as the basis of the project A

time plan or schedule.

B

cost plan.

C

quality plan.

D

all three.

5.47 Project logic evaluation (PLE) is the process of A

calculating the most efficient use of resources required for the project.

B

deriving the most logical sequence for executing WBS element activities for the project.

C

levelling project resources.

D

calculating the critical path.

5.48 Generally, project logic evaluation can be A

resource-driven.

B

logic-driven.

C

both.

D

other.

5.49 The end result of the scheduling process is A

the work breakdown structure.

B

the precedence diagram.

C

the draft master schedule.

D

the project master schedule.

5.50 The critical path method (CPM) is a deterministic approach. This means that CPM is applicable where activity durations can be estimated

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A

with absolute and precise accuracy.

B

with a reasonable degree of accuracy.

C

as a range of possible outcomes within wide limits.

D

as individual probabilities.

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5.51 CPM is most applicable for which of the following? A

A research project.

B

Transport systems modelling.

C

A construction project.

5.52 The program evaluation and review technique (PERT) is applicable where: A

activity durations can be accurately estimated.

B

activity durations can be expressed as possible values within a range.

C

where the network has no critical path.

D

where no resources are involved.

5.53 PERT would be appropriate for which of the following? A

A research project.

B

A repetitive manufacturing process.

C

A construction project.

5.54 CPM uses one duration estimate for each activity. How many does PERT use? A

One estimate.

B

Two estimates.

C

Three estimates.

D

More than three estimates.

5.55 PERT activity average, project average and standard deviation are calculated using which of the following? A

A normal distribution.

B

An alpha distribution.

C

A beta distribution.

D

Other.

5.56 PERT project target average outcomes are compared using a A

A normal distribution.

B

An alpha distribution.

C

A beta distribution.

D

Other.

5.57 In both CPM and PERT, the critical path is the A

longest path.

B

shortest path.

C

path that cannot be crashed.

D

cheapest path.

5.58 Any project can have a maximum of

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A

zero critical paths.

B

one critical path.

C

two critical paths.

D

other.

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Project Replanning 5.59 Replanning may be required during which of the following? A

Pre-contract stages.

B

Post-contract stages.

C

The entire project life cycle.

D

Other.

5.60 Crash analysis is a form of trade-off analysis. Crash analysis considers the tradeoff between A

performance and time.

B

cost and performance.

C

time and cost.

D

other.

Trade-Off Analysis 5.61 Trade-off analysis uses the relationships between time, cost and quality for a project. In doing this, it assumes that A

one variable must be fixed.

B

two variables must be fixed.

C

three variables must be fixed.

D

no variables must be fixed.

E

any combination of the above.

5.62 In a type-1 trade-off A

time is fixed.

B

cost is fixed.

C

performance is fixed.

D

none is fixed.

E

all three are fixed.

5.63 In a type-2 trade-off A

time is fixed.

B

cost is fixed.

C

quality is fixed.

D

none is fixed.

E

all three are fixed.

5.64 In a type-3 trade-off

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A

time is fixed.

B

cost is fixed.

C

performance is fixed.

D

none is fixed.

E

all three are fixed.

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5.65 In a type-4 trade-off A

time and cost are fixed.

B

performance and cost are fixed.

C

performance and time are fixed.

D

none is fixed.

E

all three are fixed.

5.66 In a type-5 trade-off A

time and cost are fixed.

B

performance and cost are fixed.

C

performance and time are fixed.

D

none is fixed.

E

all three are fixed.

5.67 In a type-6 trade-off A

time and cost are fixed.

B

performance and cost are fixed.

C

performance and time are fixed.

D

none is fixed.

E

all three are fixed.

5.68 In a type-7 trade-off A

time and cost are fixed.

B

performance and cost are fixed.

C

performance and time are fixed.

D

none is fixed.

E

all three are fixed.

5.69 In a type-8 trade-off A

time and cost are fixed.

B

performance and cost are fixed.

C

performance and time are fixed.

D

none is fixed.

E

all three are fixed.

Gantt Charts 5.70 A Gantt chart is a form of

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A

cost plan.

B

cost report.

C

time schedule.

D

quality plan.

E

none of the above.

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Resource Levelling 5.71 The main objective of resource levelling is to A

crash the schedule.

B

smooth out peaks and troughs in resource utilisation.

C

identify activities that are under-resourced.

D

improve overall quality performance.

E

none of the above.

Project Planning Software 5.72 In project management, specialist software is most frequently used for A

time planning and control.

B

cost planning and control.

C

quality planning and control.

D

all of the above.

5.73 Which of the following proprietary project planning packages is the most powerful? A

Microsoft Project.

B

Power Project Professional.

C

Super Project.

D

Quick Gantt.

Mini-Case Study Background Big projects always seem to take longer than their original time estimates. Generally the longer the designed duration of a project, the more likely that project is to suffer from delays. In addition, delay likelihood is a function of project complexity. A good example can be found in the Eurofighter aircraft. The Eurofighter has been developed by an international consortium including the UK, Germany, Italy and Spain. It is easily one of the most expensive projects in military history and it has been plagued by delays ever since it was first launched in the early 1980s. The Eurofighter is in direct competition with two other leading military aircraft designs. These are the US Joint Strike Fighter and the French Rafael. The Eurofighter is big business. The UK has placed an order for 232 Eurofighters to replace the existing RAF Tornado F3 and Jaguar aircraft. The bill for this order has increased over the years from just under £7 billion when it was placed to £16 billion by 2002. The manufacturers claim that the Eurofighter will be the most advanced aircraft in the world when it finally comes into production. Only the US F-22 will be able to outperform it, and that aircraft will cost more than twice as much per plane as the Eurofighter. Project Management

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The Eurofighter is a conglomeration of different components manufactured in the various countries which are collaborating in the project. The UK and Germany are the largest contributors. The UK is responsible for around 37 per cent of the construction of the aircraft with Germany manufacturing around 30 per cent. Italy and Spain manufacture lesser proportions at 19 per cent and 14 per cent respectively. The UK company British Aerospace builds the nose cone, the cockpit, canards (elevators), inboard flaps and the tail and rudder assembly. The EADS (European Aeronautic Defence and Space Company) manufactures the main fuselage in Germany and the right wing in Spain. The left wing is manufactured by Alenia of Italy. It is immediately obvious that this kind of international collaboration is both complicated and risky. It is much easier to build a complicated and difficult aircraft in one factory in one country than it is in a number of different factories in four different countries. The different political and national influences between the collaborators generated a whole series of delays at each stage in the lifecycle of the design and manufacture of the aircraft. Further delays were caused by performance problems, where trial versions of the aircraft did not perform as well as had been expected. Performance failings were particularly prominent in terns of the ‘dog-fight’ close manoeuvrability, and stealth performance of the aircraft. The Eurofighter project was hit by further delays in December 2002 when a DA6 development version of the aircraft crashed in Spain in exactly the same week that the first batch of completed Eurofighters was due to be delivered to the UK RAF. The crash raised serious concerns within the UK Ministry of Defence about the overall reliability of the aircraft in terms of both design and assembly. The first delivery of completed aircraft was put back to June 2003 at the earliest in order to allow for safety inspections to be made and for any necessary modifications to be carried out. Everybody concerned has to adopt the same approach. At £40M each, the aircraft are simply too expensive to lose in accidents. The flying reliability has to be very high before the aircraft can be allowed to fly on an operational basis. Questions: 1 Consider why the Eurofighter was always going to take longer to develop than the US or French equivalents. 2 Consider the operational implications of such a long project duration. 3 Explore how the time performance of the project could have been improved.

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Module 6

Project Cost Planning and Control Contents

6.1

6/1

6.1

Introduction

6.2 6.2.1 6.2.2 6.2.3 6.2.4 6.2.5

Project Cost Planning and Control Systems Introduction Cost Planning and Control as a Concept Types of Control System Costs and Allowances Life Cycle Costs

6/2 6/2 6/3 6/10 6/16 6/21

6.3 6.3.1 6.3.2 6.3.3

The Project Cost Control System Introduction The PCCS Planning Cycle The PCCS Operating Cycle

6/27 6/27 6/28 6/58

Learning Summary

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Review Questions

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Mini-Case Study

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Introduction This module introduces the concept of cost planning and control from the perspective of the project manager. In the UK, cost planning and control has traditionally fallen within the remit of a specialist cost consultant. For example, large engineering-project cost planning and control is still carried out by specialist surveyors. Surveyors are frequently appointed during the early phases of the project life cycle. They generally monitor the design as it evolves and provide initial and updated estimates of the likely final cost. The surveyor then provides post-contract cost-monitoring services, checking on the performance of the project and preparing monthly cost reports. The surveyor typically prepares the project final account and agrees on any balancing payments required. In the USA, and in a number of EU countries, standard practice is somewhat different. On major engineering projects, most cost planning and control is regarded as a function of the lead consultant engineer. In most cases, there is no separate and specific cost consultancy role. Under a full internal project management system, the project manager may arrange cost planning and control either through a specialist cost controller or as a sub-function of a wider engineering role.

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This module introduces the concept of cost planning and control as a project management discipline. It examines project planning and control in the context of the combined time, cost and quality evaluation perspectives of a project manager. It uses the concept of the project cost and control system (PCCS) and develops earned value analysis (EVA) as the primary evaluation technique. The module also examines cost-reporting systems, which make use of project variance analysis reporting (PVAR). These approaches are very much based on US rather than EU models and may therefore appear unfamiliar to readers who have a traditional UK cost background. The module considers the two cycles of the PCCS separately. The first, or planning cycle, is concerned with budgeting and cost planning. The second, or control cycle, considers cost monitoring and control, including suitable reporting systems.

Learning Objectives By the time that you have completed this section you should: • • • • • • • • •

6.2 6.2.1

understand the basis of project budgeting; understand the concept of project cost control systems; be able to summarise the essential sections and components of a PCCS; be familiar with the concepts of project estimating and budgeting; appreciate the main components of the PCCS planning cycle; understand the main components of the PCCS control cycle; understand the concept of computerised database estimating systems (CDES); understand the mechanics and application of earned value analysis; understand the mechanics and application of project variance analysis reporting.

Project Cost Planning and Control Systems Introduction Cost planning and control is an essential project-management function. Virtually all projects are constrained (at lease to some extent) by cost limits. In many cases, cost performance is either the most important consideration or a close second. In trade-off analysis (see Module 5) cost is the most common variable to be fixed. Cost planning and cost control are two separate entities. Cost planning is the process of breaking the total project down into individual elements or work packages and assigning a realistic estimate of what that element or work package should cost. It is standard practice to develop cost limits for different levels of work within the project. Where individual work packages can be grouped to form elements, the total of the cost limits for the work packages should equal the cost limit for the element or sub-element. Elemental or sub-elemental cost limits can be determined by ‘rolling up’ or

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Module 6 / Project Cost Planning and Control

summing the individual cost limits of the various individual work packages that constitute that element or sub-element. The cost plan provides a cost ‘map’ for the project. Individual work package managers can identify the cost limits applicable to the work that they are responsible for. The project manager can identify the cost limits applicable to each section of the project at all levels. He or she can also see the cost limit that applies to the project as a whole. Cost control is the process of ensuring that the cost limits established by the cost plan are adhered to wherever possible. There are essentially six main stages involved. These are: • • • • • •

monitoring on-going actual expenditure against cost limits; identifying any variances that occur; identifying the reasons for any variances; taking appropriate corrective action; monitoring to ensure that the corrective action resolves the variance; taking further corrective action as necessary.

The cost planning and cost control functions work together but are fundamentally different in approach. Cost planning is essentially a strategic project function in that it establishes aims and objectives before work actually starts. Cost control is a tactical or reactive function in that it is intended to monitor and control in order to ensure that the project strategic cost objectives are met. The cost plan and cost control system are both detailed in the project SPP. This section considers the basic approaches to cost planning and control that are used by project managers. It also identifies some of the main costs that are likely to be encountered on projects and discusses how these can be incorporated into the cost planning and cost control systems. 6.2.2

6.2.2.1

Cost Planning and Control as a Concept Introduction The process of cost planning and control is essentially similar to the mechanics of time planning and control as discussed in Module 5. The work is broken down into a form of work breakdown structure (WBS) so that individual work packages can be estimated and priced. This sets up a budget plan where individual packages have target costs and are identified by an account code system. Actual costs charged against each package can then be related to budgeted costs as part of the monitoring process. The main difference between this approach to cost control and project (schedule) control is that there is no direct time measurement involved. However, time does affect the performance of the cost control system because it regulates the rate of expenditure and therefore the characteristics of both the expenditure and projected cash-flow curves. For most practical purposes, the time and cost planning processes are linked and use the same basic work-package elements as derived in the initial development of the project WBS. It will be recalled from Module 5 that the WBS

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identifies separate work packages or elements for the project down to such a level of detail that individual control of time, cost and quality can be initialised and executed – it is indeed logical to use the same basic building blocks for time, cost and quality control as far as possible. For this reason, the process of developing project time, cost and quality plans and control systems are common up to a point in the top-down strategic process, after which the three aspects divide and separate, planning and control systems are developed for the specialised control of each aspect.

Project

Package A

Package B

Cost profile (A)

Cost profile (B)

Package C

Cost profile (C)

Projected actual

D

C

Projected final variance

Cumulative cost

Actual cost

Current variance

Planned cost

B

A

Figure 6.1

Time

Work package cost planning and control

Figure 6.1 illustrates the concept of grouped work packages and cost planning and control. In this example, the project is made up of three work packages, which have to be identified as part of the time planning and control process (see Module 5). The cost planning process simply adds cost information to the schedule information that has already been calculated for each activity. Each work package will have a different expenditure profile, and the overall profile will match the sum of the individual profiles at any particular time. 6/4

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Cost performance depends on schedule and quality performance. A particular element or package might be over cost, but this may not be a problem if that same element is ahead of schedule. Alternatively, it could be worse if that same element is behind schedule. The net result is a cumulative expenditure profile that can be plotted against an actual expenditure profile at different levels through the WBS. This allows cost monitoring and control at top, intermediate and lower levels within the project. In Figure 6.1, between time A and time B there is a positive variance: actual expenditure is less than planned. At time B, actual expenditure overall equals the plan. At time C, there is a negative variance: actual expenditure exceeds the plan. Projections at time C suggest that, at the end of the project, actual costs will exceed those planned unless some form of corrective action takes place.

6.2.2.2

Cost Planning and Control as Management Functions Cost control is similar in concept to time control and quality control. It involves the establishment of cost targets approved by the project team and acting as project success criteria. Variance analysis is used in order to determine how close actual performance is against planned performance at any particular time. This analysis identifies those areas where progress has, for better or worse, deviated from what was planned. At this point it is the responsibility of the project manager to take control of the situation and try to check adverse anomalies as early and as effectively as possible. In order to be able to compare actual performance or expenditure with some kind of standard, there has to be a pre-existing budget or cost limit that has been planned through some form of estimating. Cost control can therefore only exist as part of a larger process. In order to have control, there must be a plan and there must be monitoring and analysis of planned and actual. Cost planning and cost control are therefore closely related. The appropriate project management response to cost variances depends on the nature of the project, and identifying the ‘best response’ under any given set of circumstances is a key project management skill. It is very difficult to learn about best responses other than by gaining practical experience. The underlying causes for cost variances can be complex and often there is no single course of action that will remedy the situation. Understanding these complexities and being able to identify the necessary responses are classical management skills. There will be some cost variances in all projects. On-going expenditure rarely matches exactly what is planned but usually there is little justification for spending a lot of time investigating small cost variances. The project manager has to be able to review a table of cost variances and identify which ones are indicators of more serious underlying problems. In making this assessment the project manager makes a parallel assessment of the progress of the work packages and the levels of risk associated with each. A cost variance that has arisen from an internal source may be much easier to control than a cost variance that has arisen from an external source. For example, depending on the form of contract the project manager may have no control over increases in external supplier prices. If the contract terms and conditions include a provision where the external supplier can claim for supply price increases (or fluctuations, see Module 4)

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the project manager has no option other than to accept these increases. The project manager must also establish a rational and controllable programme of cost monitoring. It is not generally feasible for the project manager to monitor all element or package costs on a daily basis. Most control systems allow for weekly or (more frequently) monthly cost reports. Some reporting systems are based on ‘milestone’ reporting where costs are reviewed only upon completion of major sections of work or milestones along the way. The project manager has to ensure that the frequency of the reporting system is sufficient to allow adequate response before a variance can become critical. In some projects costs can spiral out of control within a month and in other cases a greater or less frequent reporting cycle may be required. Effective cost planning and control depends on a range of associated management functions. Cost control is an art rather than a science. The main complicating factor is time lag. There is always a time lag between a piece of work being done and payment actually being made. Within this time lag there may be other important commitment dates including when the cost becomes legally committed, and sometimes payments may become due on materials that have not yet been incorporated into the works. For example a company undergoing an IT upgrade may have to pay for computers and other equipment that have been delivered but not yet installed and operational. There is a range of other complications such as time recording, overhead charges, contributions to the centre and so on. The project manager has to be able to make allowance for these complications and also make a reasonably accurate estimate of likely costs at any particular time.

6.2.2.3

General Requirements of a Cost Control System The efficacy of a cost control system depends on the accuracy of the budget plan, which itself is only as accurate as the information that is used to assemble it. In assembling a cost control system, there are a number of important prerequisites. These include the topics listed next: •

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The project schedule must be accurate. In order to be able to prepare accurate budgets, it is essential that all the work input to a particular work package or task has been thoroughly and carefully considered, and that all the relevant information has been taken into account. The cost of the project can only be properly estimated if an accurate description is available. For external contractors and suppliers, this usually takes the form of a statement of works (SOW). For an internal planner or estimator, it would involve a full and complete breakdown of all the resources required for the project, together with all direct and indirect costs that are (or are likely to be) involved. The SOW also has to be considered in context. The SOW identifies the work packages and the relationship between them, but it does not allow for unforeseen additional costs or works that could entail additional costs. An obvious example is potentially adverse weather on a project that is affected by climatic conditions. Some allowance for unforeseen events is usually held in a contingency reserve.

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•

The estimating system must be reliable. The cost control system is only as accurate as the estimating process that has been used to prepare it. Cost planning should be based on detailed calculations and good use of established data in order to produce accurate, fair and workable estimates of the required involvement of plant, materials and labour. There are still relatively few estimating standards in general use. Increasingly, estimators are making use of electronic estimating systems. These are usually linked to an electronic database of unit prices and output standards. As the estimator enters item descriptions, the database is used to generate time estimates and corresponding unit rates. There is also a limited range of more traditional estimating aids. Some sectors still make use of price books. These perform essentially the same role as the electronic database. They list a library of standard descriptions and relate these to output standards and average unit rates. Estimators can use price books to look up particular activities and arrive at standard or average prices for them.

•

The scope of the project must be clear. Again, in order to budget accurately, the parameters of the task must be clearly and unambiguously determined. This is often a problem in internal project management applications, particularly where staff are shared between functional and project responsibilities. In addition, it is often the case that where there are a number of overlapping tasks, the boundaries become blurred and it is easy to assume that somebody else will do a particular piece of work, when in fact that individual may have made the same assumption. Alternatively, there could be double pricing of a piece of work where two consultant designers include the work in the total upon which their fee percentage is based. This often happens in multidisciplinary design teams, where different specialists design different aspects or components, but all base their fees on some kind of total cost for the complete work packages involved.

•

The budgets must be realistic. The budget has to be fair and reasonable, and it must accurately reflect the likely costs of performing the budget in a proficient manner. It is important that the budget becomes established quickly and is not changed or altered once it has been agreed, other than for approved changes under some form of change control system. It is important to make sure that nothing is missed, and that the budget is realistic and respected by all project team members. Any proposed changes to the budget should be routed through a clear and unambiguous appraisal and control system.

•

The authorisation system must be clear. In order to control expenditure against budgets, there must be a clearly specified system of authorisation. The usual system is to designate one or two people who are authorised signatories. The idea is that these signatories have full responsibility for expenditure and are therefore directly Edinburgh Business School

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accountable. This procedure acts as its own form of regulation. Once this accountability is lost and anyone can draw on the budget, the system can quickly become open to abuse. This process is generally controlled as part of the project configuration management system (CMS). In most cases, the control system will allow different levels of authorisation depending on the cost of the proposed change. This concept is shown in Figure 6.2. In this example, the project manager can authorise changes up to £10 000, provided that the change control section is notified. Changes up to £100 000 are referred to a steering committee for a decision. This could include client representatives, design consultants and external cost-control consultants, as appropriate. Changes over £100 000 are referred directly to executive management for a decision, or alternatively could be relayed by the steering committee. This kind of approvals system is sometimes referred to as an approvals filter.

Contractor Change control

Project manager

Figure 6.2

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Over £100 000

Executive decision

Up to £100 000

Steering committee

Over £10 000

Change control

The system must be flexible and responsive. The cost control system has to be dynamic. Projects change, and the cost estimates for individual sections of it and for the project as a whole change with them. The cost control system has to be designed in such a way that it can provide output data in relation to changing requirements. The most common form of change on most projects takes place through variation orders or change notices. These are issued by the supervising officer or other approved person, depending on the form of contract. They act as formal changes to the terms and conditions of contract that were agreed at the outset when the project was awarded to the contractor or supplier. Change notices can add, omit or vary the quantity, scope and type of work involved in the project. As each change notice is authorised, the estimated cost of the appropriate work package, and the project as a whole, have to be updated accordingly. Edinburgh Business School

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•

There must be a reliable approach to cost tracking and variance analysis. The accuracy of the output will be a function of the frequency at which analysis takes place. It is therefore important to design the cost control system so that it can perform rapid and frequent analyses of the data. This is one reason why computerised database estimating systems (CDESs) are increasingly used for cost planning and control (see section 6.3.2.4). These allow the project manager to compare instantly the baseline cost plan with the latest cost plan, and compare both with the actual expenditure across hundreds or thousands of work packages as required. This allows the project manager to assess the performance of the project as a whole and of different sub-components of the project on a top-down basis. This is the basis of CDES-based diagnostic analysis.

•

The variance detection sensitivity envelope must be time dependent. The sensitivity of variance detection system should vary as a function of time. In most cases, the degree of acceptable cost variance should diminish as the project continues. It is relatively common for cost variances to occur early in the execution of an element or work package. The various teams are still forming and there is an inevitable learning curve (see Module 4). As the project develops the effects of these factors should diminish and the degree of acceptable variance can therefore be expected to diminish. There should be little or no on-going cost variances being incurred towards the later stages of an element or work package (although any accumulated variance will remain).

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There should be a flexible approach to the use of reserves and contingencies. Virtually all project estimates include allowances for unforeseen works or works that cannot be accurately measured before the project starts. In practice, even on the most carefully planned projects it is usual to find a contingency reserve of around 5 per cent of the contract value and provisional items (works that cannot be accurately measured) amounting to 10 per cent or more of the contract value are not unusual. These contingencies and provisional sums are in place for a specific reasons. The project manager should be allowed to use them as required, subject to whatever authorisation system is in place, in order to correct cost variances on effected elements or packages.

In most cases the release of provisional sums and contingency allowances is controlled rigidly through the authorisation system. It is usually necessary for a change order or variation order to be issued, which has to state the specific provisional sum or reserve that is being utilised. Client cost control departments and external cost consultants sometimes seem to have a ‘sixth sense’ for detecting such orders and asking for more information about them!

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6.2.3

6.2.3.1

Types of Control System Introduction There are three primary types of control system. • • •

cybernetic; analogue; feedback.

Each of these types of control mechanism are studies next.

6.2.3.2

Cybernetic Control Most animals (and plants to some extent) make decisions using a cybernetic control system. The project could be anything from driving an automobile (in the case of humans) to hunting for food (in the case of other animals). There is a series of inputs to the project that establish the context in which it is taking place. There is also a series of outputs, such as how well the project is progressing. These outputs are subject to some kind of monitoring system. This system evaluates what has happened so far and links into an analytical element. In animals this analytical element is the reasoning process. It takes place within the bounded rationality (see Module 3) constraints of the thought process. The analytical element links directly into the decision making process which in turn impacts on subsequent inputs to the project. The analytical element is determined by some kind of pre-set values that are in turn tempered by environmental influences. Cybernetic control processes operate at different levels. Low-level processes use pre-set information as the basis for analysis while higher order systems use more advanced processes. The main differences between lower- and higher-order systems lie in: • • •

the range of information that can be used in the system memory; the extent to which this data can be used to influence the decision; the extent to which two-way connections between the elements can be developed.

A simple low-level cybernetic control process is shown in Figure 6.3 The lowlevel cybernetic control system is typical for simple response mechanisms. One example of this is a thermostatically controlled mixer valve on a shower in a bathroom. The pre-set temperature range in which the shower is set to operate is set by environmental influences (the manufacturers specification). The shower may be set to operate within a range of ten degrees and there is no flexibility in these limits. The temperature sensor within the shower unit makes a decision as to whether to continue running at its current level or change the balance between the hot and cold water inputs. The decision is based on an analysis that combines output temperatures with the pre-set temperature range. Virtually all thermostats work on the same principle.

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Inputs

Evaluation and decision

Environmental influences

Analysis and comparison

Pre-set system values

The project

Monitoring and control system

Outputs

Figure 6.3

Typical low-level cybernetic control system

Low-level cybernetic control systems are widely used in a range of applications (such as in instrument controls and in animal physiological responses. They are simple and can function automatically. They can be left to operate unattended with no real monitoring provided they are calibrated correctly and are subject to the required degree of checking and maintenance. Mid-level cybernetic control systems may be required where the analysis process is more complex or where a greater degree of flexibility and response is required. Figure 6.4 shows a typical mid-level cybernetic control process. In this case, the decision making process relies on analysis that is more complex. The preset system values interact with the environment and modify themselves as the environment changes. In animals this process is known as learning. The analysis element interacts with the varying system values and considers any new or changed values in making the analysis. The learning process also allows the development of a database of relevant information that also acts as an input to the analysis process. The eventual decision in this case is still directed by the analysis, but the analysis considers multiple variables. The engine management system in a modern automobile is an example of a mid-level cybernetic control process. The engine management system monitors the performance of the engine in terms of fuel consumption, power output, oxygen consumption, oil consumption and makes allowances for wear and maintenance. The system includes a range of pre-set responses to allow for different combinations of these variables. For example, the system may allow greater fuel consumption where the degree of wear is high in order to maintain the power output of the engine. External factors are also interactive. As external air temperature changes the fuel-air mix may be varied, again to ensure a constant power output. Project Management

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Inputs

Evaluation and decision

Environmental influences

Analysis and comparison

Variable system values

The project

Monitoring and control system

Outputs Database of pre-programmed responses

Figure 6.4

Typical mid-level cybernetic control process

Most mechanical systems require a micro-computer or advanced processor to carry out the level of analysis that is required for a mid-level cybernetic control system. Mid-level cybernetic control systems offer a much greater degree of response flexibility than low-level systems. However, they are still limited because they can only operate within the limits that are set by the design of the control system itself. They are not ‘intelligent’ in that they can still only operate within a range of pre-programmed responses, even if this range is more extensive and can respond to changes in the environment. A high-level cybernetic control process introduces the concept of intelligence. This allows the system to move beyond any level of pre-programmed responses into the realm of individual thought. A typical high-level cybernetic control system is shown in Figure 6.5. It replaces the database of pre-set responses with a reasoning process that combines memory and experience with the power of original thought and intelligence. This allows a fully informed response which can be supplied to the analytical element. The system values and reasoning process are fully interactive so that changes in the environment can be allowed for. The level of awareness generated also allows the decision-making element to interact directly with the environment and bypass the reasoning process where necessary. This allows an immediate decision based not only on reasoning but also on the immediate characteristics of the environment. The human brain uses control systems at all three levels. There is clear evidence that the various brain operational levels have developed as a product of evolution. Basic physiological processes tend to operate as low-level systems and originate within the brain stem. Examples include the operation of 6/12

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Inputs

Evaluation and decision

Environmental influences

Analysis and comparison

Variable system values

The project

Monitoring and control system

Outputs Memory, experience, intelligence, original thought and informed response

Figure 6.5

Typical high-level cybernetic control process

sweat glands in response to external (environmental) temperatures and humidity. More complex emotional responses tend to operate as mid-level systems and originate within the limbic system. Examples include fear in relation to learned information which itself is based on experience. Intelligent thought and informed reasoned response operate as high-level systems and originate within the neo-cortex. Examples include the power of original thought and understanding beyond what is known. Each section of the human brain originated as different (and successive) stages of the evolutionary process and were effectively evolutionary responses to the increasingly complex behaviour characteristics of humans. Some examples of each type of cybernetic control system as related to project teams are listed below. 1

2

3

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Low-level cybernetic control systems: • detecting time and cost variances; • adjusting likely final time and cost estimates to allow for detected variances; • re-programming the project schedule following change. Mid-level cybernetic control systems: • adjusting estimates to allow for increases in individual cost rates; • establishing the individual cost of change notices and variations; • allowing the use of provisional and contingency sums. High-level cybernetic control systems: • generating original tactical solutions to discovered programming problems; Edinburgh Business School

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• •

6.2.3.3

updating the risk profile of the project following change; developing a strategy for required negotiations.

Analogue Control Analogue control systems are more appropriate for smaller elements or work packages. An analogue system is based on the assessment of individual work components in terms of whether or not they have been completed satisfactorily by a certain time. Analogue control systems are widely used in computers. An analogue system comprises a series of simple ‘yes or no’ questions. Depending on the answer, the system directs the process to another ‘yes or no’ question and so on. The idea is that every aspect of every eventuality is considered in terms of a simple ‘yes or no’ question. This approach may appear to be over-simplified, and yet the approach forms the basis for most reasoning processes. The human reasoning process tends to operate by a process of elimination. When faced with a complex problem, the natural human reaction is to: • • • •

eliminate those solutions that are not feasible; take the solutions that are feasible and break them up into smaller sections; break the feasible solutions up into smaller and smaller subsections; tackle each subsection separately.

The same approach can be applied to major projects, and can be particularly useful where the project is subject to high degrees of pooled or sequential interdependency (see Module 2). Analogue control depends on the project manager being able to set straightforward outcome criteria for individual work packages. In many cases it may be possible to set: • • •

package start and finish times; package cost limits; package performance limits.

Analogue control involves assessing the progress of each work package by evaluating the extent to which it has achieved these objectives at any given point in time. The approach tends to be used more in the pre-execution phases and tends to be particularly important in monitoring and controlling the various planning phases. The project manager can set specific time, cost and performance limits for a particular gateway report and may insist that the next reporting stage cannot be authorised until the limits have been met. If the limits are not met, the project manager may need to initiate a detailed trade-off analysis to provide an acceptable solution. Analogue control systems tend to operate where there are rigidly defined time, cost and performance limitations. Rigid time limits are likely to be encountered in projects where there are penalties associated with late completion, such as railway repair works or motorway diversions. At the outline proposals stage the project manager may be 6/14

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refused approval to produce the detailed designs until he or she can demonstrate that the outline designs can be implemented within acceptable time limits. Rigid cost limits are often encountered in public works. Local statutory controls on public finance expenditure may dictate that a project to upgrade street lighting cannot proceed to detailed design until the project manager can demonstrate that the project can be contained within set cost limits. In some cases it may be necessary to omit some streets from the project in order to ensure that the cost limits are not exceeded. Rigid performance limits are encountered where the quality of the product is paramount. A pharmaceutical research company, in conjunction with statutory controls, might dictate that a project to develop a new drug cannot proceed to a particular testing and evaluation stage until preliminary testing standards have been met.

6.2.3.4

Feedback Control Feedback controls are based on post-project evaluation and feedback. The approach involves the assessment of completed projects with the intention of feeding back any lessons learned to future projects. The approach is widely used in organisations that have a constant stream of projects. In such cases it is essential to learn from past experiences in order to review and improve future project strategy. In most cases, feedback control makes use of formal reporting systems. Clients who commission a large number of buildings such as in speculative housing or office developments may make use of a post occupancy evaluation review (POER). This review involves the detailed evaluation of the finished product including detailed feedback from users. The intention is that the review indicates particular strengths and weaknesses in the design and indicates areas where future designs could be improved.

6.2.3.5

The General Design of a Control System Irrespective of the design of control system used, there are a number of important considerations that should be taken into account when designing or choosing the most appropriate systems including: • • • • • • • • • • •

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the level of response required; the flexibility of response required; the level of innovation and original (thought) response required; the reasonableness of any imposed standards in relation to project performance; the level of detail required in reporting systems; the degree to which responses can be automated; the degree of variance that is acceptable (as a function of time); the range of acceptable solutions that are available; the degree of time lag (between identification and response) that is acceptable; the authority systems that are in place and associated time implications; the extent to which corrective actions may be limited or controlled. Edinburgh Business School

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In addition, a good control system should: • • • • • • • • • 6.2.4

6.2.4.1

be be be be be be be be be

fully automated in the case of low-level systems; flexible in the case of mid-level and high-level systems; cost effective (some systems cost more to run than they actually save); accurate and reliable; useful (not there just for the sake of being there); responsive within any time limits that may apply; capable of extension; user-friendly and easy to understand (or people will not use it); fully documented by generating detailed reports.

Costs and Allowances Introduction A cost planning and control system must allow for all the costs that are likely to be encountered during the course of a project. This section considers the main cost headings that would be included in the control system for a project.

6.2.4.2

Cost and Allowances Classification In preparing overall project budgets and estimates, it is necessary to consider the different types of costs that may or may not be incurred during the project, and the allowances that should be included to mitigate the inherent risk of projects. These can be classified as follows:

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Fixed and variable costs Costs can generally be classified as fixed and variable. Fixed costs continue to be incurred irrespective of the level of activity on the project. These include management and administrative salaries, rent, rates, heating, insurance and so on. Fixed costs tend to form the major part of a project’s indirect (or overhead) costs. Variable costs are those that are incurred at a rate that depends on the level of work activity. These are usually direct costs (see below), but may have a small indirect content. For example, if temporary administration staff have to be employed at head office for the duration of a particular part of a project, the associated costs may be classed as variable and indirect.

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Direct and indirect costs Project costs can be direct or indirect. Direct costs are the costs directly attributable to the job or project task and include the labour, materials and equipment charges directly related to carrying out that task. Indirect costs (or overheads) include the facilities, services and personnel costs that exist in an organisation irrespective of the project. They include such costs as operations, office accommodation, personnel, training, accounts and marketing. The recovery of indirect costs is spread over a company’s projects and it is a matter for often heated debate about how much should be attributable to any one project. The relationships between variable and direct costs are summarised in Figure 6.6. Edinburgh Business School

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Profit Contingency Risk reserves

Indirect costs

Fixed costs

Potential return

Overheads Indirect expenses Direct expenses

Sales price

Subcontractor payments Project potential costs

Supplier payments Consultant fees Equipment costs

Direct costs

Variable costs

Material costs Labour costs

Figure 6.6

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Cost types

•

Measured works Measured works form the backbone of a cost plan. They describe the works and identify individual unit prices for carrying out individual sections of work. In most forms of contract, they are subject to a periodic re-measure that forms the basis for interim payments through the life cycle of the contract.

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Contingencies and reserve Most projects will also include allowances for contingencies in some form of reserve. Large and complex projects are renowned for running over budget and the main reason for this is the failure to make allowance at the outset for unforeseen additional costs that are inevitable as a result of the highly unpredictable nature of projects. These can occur for any number of reasons, including: – poor scope definition; – design errors; – poor activity planning; – poor resource estimation; – production mistakes; – untried methods; – changes in the environment. The purpose of the contingency is to cover these undefined additional costs and the amount of contingency added will depend on many factors, including: – the type of project; – the performance of the company and the project team; Edinburgh Business School

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– the soundness of the technology; – the reliability of subcontractors; – experience. Historical performance data from previous projects usually provides a reasonable indicator of how much to add to a project for contingencies. An allowance of up to 10 per cent is not unusual and, depending on the market competition, contingency allowances may be much higher. However, if it is perceived within the company that the risk inherent within a particular project requires an excessively high contingency allowance, it may be worth considering whether the project is worth pursuing in its current form in the first place.

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Fluctuations Cost escalation is generally more relevant to longer-term projects and is mainly the direct result of inflation. It is fairly easy to predict short-term rises in labour, materials and equipment costs in stable economies, although they are not totally immune to surprises. However, it is less easy to predict what will happen in the medium to long term. Projects with a duration of more than two or three years are particularly vulnerable to the effects of cost escalation, and some factor must be allowed for this. It would be normal in large-scale and long-term projects to have cost escalation considered in the conditions of the project contract. The project company will often include a time limit on the validity of the price in its tender proposal so as to protect it against cost escalation. Most standard forms of contract allow for a fixed-price contract with fluctuations. In this arrangement the client bears the risk of price increases across a schedule of pre-agreed items. The contractor or supplier bears the risk of any cost increases not covered in the fluctuations schedule. Once agreed, the contractor or supplier can submit regular claims for fluctuations in the form of a schedule of cost increases. These usually have to show the agreed starting or tender price plus the current price, usually substantiated in some way such as by a listing of current supply prices as provided by the various subcontractors or suppliers.

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Prime cost and provisional sums Prime cost sums are sums that have been agreed (or provisionally agreed) with specialist or nominated suppliers or subcontractors. In most projects there will be some items over which the client wants to retain control. If the client does not wish to retain control over the selection of an item, the client can simply describe it in the specification and allow the contractor to choose a supplier or installer. If the client does indeed wish to retain control over the selection of an item, the client can nominate a specified supplier or installer. An example is the supply of computers as part of an office refit. The client will usually have a preferred manufacturer, or even a term supply contract, where all PCs are bought from an agreed supplier for a period of years in return for a special deal from that manufacturer. In such cases, the nominated supplier or subcontractor is usually paid through the main contractor, but the payment is identified as a separate Edinburgh Business School

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amount that is payable by the main contractor directly to the nominated subcontractor or supplier. The standard form of contract usually makes clear provisions for time limits for the main contractor to pass on such payments to the nominated subcontractor or supplier. Provisional sums are estimated to cover work that is foreseen but not clearly defined at the outset. This enables the contractor to reserve his position and not be held to a fixed price if the extent of the work turns out to be greater than at first expected. Provisional sums are also requested, in many cases, by the client in order to get an indication of the costs associated with doing a particular job that is not readily defined. For example, a client wishing to re-roof a building may want to salvage as many of the existing slates or tiles as possible to use on the new roof. It would be very difficult to ascertain, before the slates or tiles were removed, how many were suitable for reuse. A provisional sum would be included in the price for refurbishing and reusing a particular number of slates or tiles. This would allow the client to decide whether it was worth carefully removing the existing slates or tiles and refurbishing them or use new materials throughout.

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Direct payments Large projects often require the input of external bodies. These may be statutory bodies, such as local authorities, or service bodies such as the local power company. Local authorities are sometimes required to inspect design drawings or structural proposals, as in the case of building warrant and structural certificates in the UK. They may also be required to issue a fire certificate or safety certificate for certain types of works. These works have to be carried out by the local authority or other statutory bodies because the law demands it. Other works may have to be carried out by single companies because there is no alternative available. In some parts of the UK, there is no choice of electricity or water supplier. In such cases, these companies have to be employed by the client, but they would normally not work through the contract. The client would normally agree a sum with them beforehand and this would be included as a direct payment within the overall tender sum for the project. The statutory body or supply company would carry out their agreed works and invoice the client directly. The sum would therefore be included within the overall tender sum, but would not be paid through the contractor at any time.

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Bonds and warranties Bonds and warranties specify what level of provision is required and under what conditions these can be triggered. Contracts involving public finance often require detailed bond cover. This is usually a stated percentage of the contract sum – perhaps 10 per cent. Guarantees and warranties may be required over and above this. The bond covers contractor performance up to practical completion and hand-over. The warranty or guarantee covers the quality and reliability of the finished product after hand-over and during use. The conditions of contract might require that the warranty is secured in some way, perhaps by being insurance-backed. The documents might require a collateral warranty, which is transferable in the event of the finished project being transferred or sold to a new owner. Edinburgh Business School

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Exchange rates and currency fluctuations Projects are often undertaken overseas or involve a number of overseas companies either as suppliers or project partners. It is sensible to price, be paid for, and pay subcontractors and suppliers in the contractor’s own currency (irrespective of the location of the project) in order to protect the price against any currency fluctuations that might occur during the course of the project. Alternatively, if the local currency is not an option, a very stable currency such as US dollars, Swiss Francs, European euros or the UK pound is preferable. It is common practice in cost estimating to nominate a project currency and all estimates should be converted into that currency using a well-chosen exchange rate. Whatever the practice, it should be absolutely clear which currency is being used for each estimate. Whether the exchange rate is declared to the client or not, it would be prudent either to include some contingency in the total estimate for currency movements or a condition in the contract that protects the price from excessive currency movements, or preferably both.

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Insurance Most standard forms of contract require the client and other parties to the contract to take out and maintain suitable insurance policies. Typical client insurable risks include: – fire (within limits); – flood; – lightning; – impact of aerial devices or objects dropped therefrom; – ionising radiation. These are events that cannot be reasonably foreseen by either party, and it is therefore the responsibility of the client to insure against them if they are likely to affect the progress and well-being of the client’s project. Fire insurance may sometimes be necessary depending on the type of work involved and whether or not the contractor’s actions affect the probability of a fire occurring. An example might be where a contractor is carrying out works inside the client’s premises that involve welding. A contractor is generally required to carry some other forms of insurance in relation to events or occurrences that could affect the project. Examples include employers liability for employees, and liability for damage to thirdparty persons and property. Large contractors generally cover these risks with some kind of ‘all risks’ policy. All employers have to carry insurance cover against compensation claims by employees or others who might be injured as a result of the works. This includes damages to both persons and property. Undermining risk might be appropriate where large excavations or tunnelling is involved in built-up areas. Insurance could also be appropriate where any potentially harmful substances are used.

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6.2.5

6.2.5.1

Life Cycle Costs Introduction Cost estimating, planning, monitoring and control systems are all concerned with the costs of one or more aspects of the project. The project exists within a time continuum, and the costs required for each section of this continuum vary. It is the responsibility of the project manager to ensure that the client is fully aware of all the life cycle costs that are likely to affect the project. It is also important that: • •

the cost planning process allows for life cycle costs; the cost control system is capable of offering adequate control over each life-cycle phase.

Cost planning accuracy is a function of time. The further ahead the project manager looks, the more difficult it is to forecast the cost of individual elements accurately. There will inevitably be a greater margin of error as the cost plan attempts to predict costs to be incurred in the relatively distant future. Life cycle costing (LCC) is the process of attaching costs to individual life-cycle stages of the project. LCC is therefore concerned with the overall life cycle of the project. It is a cost-based response to the strategic planning process. LCC is concerned with the overall cost incurred in the ownership of a product, structure or system over its entire life span. It includes costs that have traditionally been ignored during the planning cycle. LCC is an important consideration in long-term strategic cost planning. The LCC approach considers the costs over the whole life cycle of the project and not simply the costs of the work package or element that is being considered as part of an individual exercise. There are different levels or scopes of consideration for life cycle cost analyses. Some products are supplied as ready-made ‘off the shelf’ items; these products are generally supplied pre-assembled and will have life cycle costs that are limited to acquisition, operation, service and disposal. This would apply in the case of a vehicle. Other products may not be supplied as pre-assembled: such ‘non-immediate purchase products’ are not immediately available off the shelf, and the life cycle costs could include the costs associated with feasibility, conceptual analysis, development, prototype, design, logistics support, manufacture, testing, etc. The LCC approach would state (for example) that the eventual demolition and disposal costs should be considered during the briefing stage for a new factory because two solutions might have the same development and build cost but the disposal costs might be entirely different. This may not become evident unless the demolition and disposal costs are considered at the outset.

6.2.5.2

Objectives of LCC LCC is important because decisions made during the early stages of a design process invariably have an impact on longer-term performance in the later stages. Obvious examples would be running costs and maintenance costs for any mechanical product. The primary objective of LCC is therefore to help the project

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manager and the client to identify and evaluate the economic consequences of their decisions, particularly in the early stages of the design. LCC approaches are widely accepted and recognised in many industries. Typical Life-Cycle Phases Most projects have typical life-cycle cost phases. Some projects might have more phases than others. Typical phases include the following six: 1

2

3

4

5

6

Inception This is where the client identifies a requirement for the project. This usually involves some kind of initial appraisal in order to determine the aims and objectives of the project and to establish any overall limitations on scope. Feasibility stage The feasibility study and the conceptual phase are where the design is first initiated and developed to a level where basic approval can be obtained. The level of design detail required for this phase will vary from project to project. There is generally a requirement for sufficient detail to allow a reasonably accurate costing of the proposals. Detailed development stage This stage covers everything from the outline proposals report to the issue of production information drawings. This phase will usually involve a design team, developing the design from the initial conceptual level up to a level of detail that is sufficient for the issue of contract documents and invitations to tenders. Production stage This stage includes the production of whatever the product is. For a construction project it would be the erection of the building itself; for a vehicle production line it would include the production of a particular model from the vehicle range. The size and cost of the phase will obviously vary considerably in relation to the nature of the project being considered. Project termination and system operation and maintenance stage This stage is where the project has been completed and it becomes operational. For a construction project, it would involve the normal use of the built project by the client. For a vehicle owner, it would be the point at which he or she buys a car and starts to use it. This phase would be where the majority of the maintenance costs are incurred. Maintenance is clearly more of a consideration in some projects than in others. System divestment stage, which is the last stage. The product is decommissioned or switched off, or its use is in some other way terminated. For a vehicle, it would be a matter of scrapping it and recycling the basic materials.

Additional Life-Cycle Phases A more complex project might include the following additional life-cycle cost phases. •

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Research and development costs This section includes all aspects of the inception and feasibility stages. It includes the cost of the initial investment appraisals and cost–benefit analyses, the cost of the market research and organisational surveys, modelling techniques, etc. Edinburgh Business School

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•

•

•

•

•

•

•

•

6.2.5.3

Prototype costs This section includes costs associated with the development and production of a prototype. This phase and cost would not be appropriate in all cases, but it would be essential in projects where a new manufactured product is being assembled and where there is a need for testing prior to going into full production. Full prototype production is usual with the development of a new highly engineered product such as a new model of vehicle. Design costs This section includes the costs of all aspects of the design process including the consultants fees, the costs of the meetings and reports, and all other costs associated with progressing the design to the productioninformation stage. Design costs typically comprise design fees for external consultants. Production costs This section is intended to cover the manufacture and assembly of the product. In some cases, this cost could be small in relation to the design cost (e.g. a new computer), or it could be relatively large (e.g. a piece of jewellery). Commissioning costs This section includes all costs in connection with getting the product up and running. In the case of large or complex buildings and organisations, this can be a major exercise. It can also be a major factor in a project such as the building of a new ship, where sea trials and ‘working up’ can last for weeks and months. Operational costs This section represents the cost of operating the project in its finished state. The operating cost can be very significant. In the case of running an office, lighting and telephone bills are major factors in themselves, together with heating bills, cleaning etc. Maintenance costs These can also be major costs. In most cases, maintenance costs can be split into programmed, responsive and cyclic areas. These costs would include the costs of maintaining the building itself and also its contents. LCC for maintenance can often exceed capital construction costs over a number of years. Decommissioning costs This section covers the cost of running the project down prior to recycling. In some cases these costs can be large, for example in terms of stripping out major items of plant and equipment, or removing radioactive or polluted items. Product retirement and phase out costs This section includes the demolition or dismantling costs, including any decontamination or recycling costs. Theoretically, it should include all costs necessary to restore the site to its original condition.

The Process of Life Cycle Costing Most life cycle costing methods use a common approach, as set out in the next five steps: •

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Establish the characteristics of the life cycle Life cycle costing is concerned with establishing costs for the complete lifetime of the project. In order for this process to be necessary there must be some costs that are unknown. These costs are likely to occur at some future point in the life cycle and are Edinburgh Business School

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likely to be significant. The project manager and project team are probably aware of these future costs. The feedback control system (for example) might indicate that they are likely to occur, based on post-execution data from previous projects. In some cases, this information is learned from previous experience. An example is the current UK nuclear power station decommissioning programme: the UK nuclear power stations that were built in the 1950s and 1960s were designed largely without regard for the decommissioning process. In the UK, it has not yet been possible to fully decommission any such station. Where attempts have been made to do so the partial decommissioning costs have been extremely high. In some cases, such as Dounreay in Scotland, the partial decommissioning costs have been greater than the design, construction and lifespan operating costs put together.

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•

Build a process cost model Life cycle costing is based on the design and use of an appropriate process cost model. The model incorporates all of the information that is known about the processes and costs that are involved. The model also includes all of the known functional characteristics of the input data. The functional characteristics include all of the various relationships between any variables that might impact on performance. For example maintenance costs might follow an exponential rather than a linear curve as the life cycle of the project continues. This characteristic is common to most mechanical items such as automobiles and aircraft.

•

Calibrate the process cost model The model itself is only useful for forecasting if it is properly calibrated. Calibration is the process of adjustment that is necessary in order to ensure that the model is accurately measuring what it is supposed to measure. Calibration accuracy is usually ensured by measuring the output of the model against a known standard. In order for the calibration process to be accurate, the characteristics of the standard must be known with absolute accuracy.

•

Input all relevant data The model is only as accurate as the data that is input to it. Inaccurate data will generate inaccurate results and incomplete data will generate incomplete results. If the model is being used to predict the consequences of an increase in (for example) fuel prices on the long term running costs of a piece of mechanical plant, it must allow for all associated variables such as increases in actual fuel prices plus any increases in fuel tax. One increase is based on supply and demand while the other increase is based on government policy. The two increases may be entirely unrelated but they both may influence running costs.

•

Generate a life cycle cost and establish a strategy Once calibrated, all relevant data is input to the model and a life cycle cost profile is established. This information is then interpreted and appropriate strategic decisions are made. If running costs are found to be very high, it might be decided that design changes should take place now, even if this increases development and production costs. The balance between capital costs and costs-in-use is always delicate. In the marketplace the trade-off is usually determined by Edinburgh Business School

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consumer demand. There is a tendency for development and production costs to be maintained at competitive levels even if there is a long-term cost-in-use implication. People tend to concern themselves more with initial rather than long-term outlay.

6.2.5.4

Advantages and Disadvantages of Life Cycle Costing Life cycle costing (LCC) offers a number of advantages over traditional cost planning approaches. Some of these are listed below. •

•

•

•

•

•

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Long range considerations LCC considers costs that are likely to be incurred during the life cycle of the product. In some cases (such as the UK nuclear power station decommissioning programme), the cost implications of ‘downstream’ considerations can be greater than the immediate cost considerations, even if they may seem less apparent and important. Life cycle viability LCC offers a long-term evaluation tool that can influence the overall viability of any given project. There are many examples of projects that have gone ahead, based on the immediate cost viability of design and implementation while costs in use and decommissioning costs have been disregarded. If full life-cycle costs had been considered, the viability of these projects would have been called into question. An obvious example of this is the UK Millennium Dome project. Strategic decision making LCC tends to make designers think more in terms of strategic performance rather than immediate performance. Designers who are designing for low running costs will approach a project in a completely different way to designers who are designing for low immediate capital costs. The whole decision making process during the design stages will be different in the two scenarios. Future awareness The UK nuclear power programme is a classical example of strategic planning that suffered from a lack of future awareness. The planning achieved the short-term objective of producing power from nonfossil fuels but it did not address the future environmental and technological problems that the achievement of the strategic objectives included. Manufacturers are now thinking more and more in terms of the decommissioning and recycling implications of their production processes. Failure to do so simply builds up potential problems for the future. Market position People have a tendency to consider short-term costs over and above running costs but in the longer term they also tend to develop an awareness of costs in use. There is also a tendency for developed societies to move towards greater environmental awareness so that in the longer term people become to some extent educated to expect more energy efficient and recyclable design solutions. Designing for more efficient use and recycling may to some extent as a long-term market investment. Compliance Government policy in developed countries is increasingly moving towards greater consideration of long-term efficiency and environmental awareness. For example, in the EC, there has been a whole series of recent legislation on pollution emissions covering everything from fossilfuel power stations to automobile exhausts. In most cases, there has been a Edinburgh Business School

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significant cost implication to meeting these increased standards. In many cases the cost implications had a significant impact on the LCC profile for the products or systems concerned. However, designers and manufacturers have realised that they must develop new products that do comply in order to compete and LCC allows them to develop accurate estimates of the cost implications. LCC has some obvious disadvantages including those listed below. •

•

•

•

•

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Prediction accuracy The LCC model is only as accurate as the assessment of the current and future characteristics that are applied to it. A designer today, who is trying to make his or her design as suitable for recycling as possible, has to make certain assumptions on the characteristics of the environment. There may be future environmental changes that render the current assumptions inaccurate. There may be unforeseeable changes in industry and society in the future that render current assumptions obsolete. Cost A full LCC analysis of any product is expensive. The various calculations and calibration processes are expensive and may take a considerable time to complete. The approach is justifiable only on large projects or in mass production where thousands of the same type of unit are to be produced. LCC is generally not appropriate for smaller projects. Sensitivity As with any other prediction model, the accuracy of an LCC model is time dependent. The further into the future it tries to predict the more vulnerable the prediction becomes to change. Any model can only allow for a limited number of changes, and the degree and number of imposed changes that can have a significant impact on any project tends to increase as a function of time. The further ahead an LCC model attempts to consider, the more likely it is to be inaccurate. Competition Manufacturers have to develop a trade-off solution between immediate costs and longer-term costs. Products that do not have the right balance between these two variables may be uncompetitive. Manufacturers can only use the trade-off within the limits of acceptable competitive behaviour. Risk It is one thing to develop an LCC model and to be able to see the whole life cost distribution of a particular product. It is quite another thing to use the information as the basis for strategic decision-making. A manufacturer who is designing a new product, may invest considerable sums of money in the development process, using strategic objectives that are set by the LCC analysis. If any part of the LCC process modes is incorrect or primed with inaccurate data, the cost implications could be very significant.

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6.3 6.3.1

The Project Cost Control System Introduction There are numerous different approaches to cost planning and control. Until recently, there has been no form of international or interdisciplinary standard approach. This has changed to some extent in recent years with the introduction of the various project management ‘bodies of knowledge’, and with the development of generic project-management standards such as BS6079 (see Module 4). The US’s PMI and the UK’s APM, together with BS6079, all now recommend the use of some form of standard project cost control system (PCCS). A PCCS is a format for the development of cost plans and for mechanisms for monitoring and controlling actual expenditure with planned expenditure. It is analogous to the project planning and control systems discussed in detail in Module 5. This section develops an understanding of what a PCCS is and how it works. A PCCS can be represented as shown in Figure 6.7.

Cost planning PCCS Phase 1

Statement of works

Progress reports

Cost performance

Work Initiation PCCS Phase 2

Cost Data Collection PCCS Phase 3

Generation of variances PCCS Phase 4

Monitor corrections

Corrective actions

Implement on remaining packages

Figure 6.7

Management reporting requirements

Cost reporting PCCS Phase 5

Cost report and Corrective strategy

Project Cost Control System (PCCS)

Most researchers represent the PCCS as a two-cycle system. The first cycle is the cost planning cycle. This includes all aspects of pricing, estimating, establishing targets and budgets and setting up accurate cost plans. The second cycle is the cost control cycle. This involves a number of separate phases. In its most simple form, a cost control cycle contains a work initiation mechanism, a methodology for observing and collecting cost data from the system (so that actual costs can be compared with targets), a comparison system and a reporting system. The reporting system initiates what is effectively a feedback loop. The report identifies areas within the project where there are cost problems. This report then acts as the basis for some form of corrective action. This is the project manager’s response to the problem. The corrective actions are initiated and any Project Management

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lessons learned are used to improve the efficiency of other work packages as they are released. Several cost-control cycle phases are generally recognised: • • • •

Phase Phase Phase Phase

2: 3: 4: 5:

work initiation; cost data collection; generation of variances; cost reporting.

Phase 1 is cost planning. These five phases, operating within the two cycles, provide the framework for the operation of the PCCS. The concept of the PCCS accepts that cost control and cost planning are intrinsically linked and have to operate as part of the same system. 6.3.2

6.3.2.1

The PCCS Planning Cycle Introduction The planning cycle acts as the initiation process for the PCCS. It involves breaking the project down into manageable packages, and then attaching individual budget totals to these packages based on an estimate of the likely costs involved. These costs are normally based on some form of historical or published data. This section considers the use of estimating and the process involved in developing a budget plan for a project.

6.3.2.2

Estimating Procedure There are two main approaches to who should undertake the estimating process: 1

2

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A professional estimator Most large organisations that organise projects on a regular basis employ professional estimators. Alternatively professional estimators can be commissioned as external consultants. The use of a professional estimator has a number of advantages in that he or she: • is specifically trained as an estimator; • has (hopefully) considerable estimating experience; • is aware of the limitations of estimating; • can make accurate assessments of the works involved in individual activities; • can appreciate the interdependencies involved in the use of multiple resources; • can make informed judgements on risk and risk allowances; • is free from project team influence and bias. The project team The alternative is to use the project team for the estimating function. In this case the project manager is in overall charge and he or she delegates responsibility for the estimating function to the individual element or work package managers. This alternative has a number of advantages in that: Edinburgh Business School

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• • • •

the people who make the estimates are also directly responsible for implementation; the project team are ‘on the ground’ and have the best knowledge of what is required and what resources are available; the project team are aware of the limitations of the system; where necessary, project team members can confer and, where necessary, negotiate on the availability of resources.

The project team may cost low in order to win a highly competitive tender. Alternatively, the project team may cost high in order to make achieving the subsequent cost targets easier. There are obvious disadvantages associated with either alternative. The professional estimator has no loyalty to the project team and his or her obligation is therefore restricted to professional competence. The project team are probably not professional estimators, and there is a greater risk of them making a mistake or making over-optimistic estimates. It should be noted that estimating is not just about cost. The cost of the project is intrinsically linked to the rate at which the work is carried out and to the required levels of performance; the estimate must take these variables into account. The estimate also has to be linked with the characteristics of the project as discussed below: •

•

•

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Project success criteria The estimating process has to recognise the success criteria of the project. The estimating process cannot consider resources that are precluded on the ground of project success criteria limitations. For example, a particular project may have a stated objective that noise is to be restricted to a certain level. It would be pointless for the estimator to assume the use of a piece of equipment that generates noise above this specified maximum level. Project linkages The estimating process for different elements and work packages is intrinsically linked. Assumptions that are made about one work package must also be carried forward to other work packages where the same estimating criteria apply. In some cases there may be resources where common usage can be made and overall costs can be reduced. An example is delivery. Depending on the supplier used, it may be possible to make multiple use of one delivery trip and arrange for the delivery of several different items that are required for different (and apparently unrelated) elements or packages. Standardised approach A company that uses estimating on a frequent basis should ensure that standardised approaches are used. A centralised control system should be established where individual (unit) rates for estimating items are stored and used by everybody in the organisation when estimating. This may seem obvious but it is surprising how many companies and organisations make use of estimating teams without a centralised control function. The UK police forces are a good example. Each force has its own set rates for providing services. There are set hourly charges for the various different ranks and types of equipment. There is however considerable variation between forces. One force might charge £46 per hour for a Chief Edinburgh Business School

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•

Superintendent while another force might charge £65 per hour. In some cases neither hourly rate bears much resemblance to the actual hourly cost incurred by either force. Feedback It is important that all estimates are subject to feedback. In order to develop proficiency an estimator has to be able to review his or her estimate after the event and see where he or she got it right and wrong. It is important that there is some kind of post-implementation review where the accuracy of the various estimates is assessed. Some organisations award their estimators ‘stars’ based on the accuracy of previous estimates, and this may be related to personal bonus payments they can achieve.

Estimating Elements As with most areas of project work, estimating is often carried out under significant time and resource pressures. It is often the responsibility of the head of the department to try to estimate the labour resource required to complete a particular task whilst simultaneously trying to run the department. Estimating is important. The accuracy of the estimating process determines the accuracy of the cost planning and control system for the project. Estimating generally involves a number of component parts. The most obvious of these are: • • •

labour costs; materials costs; plant costs.

Some projects have a large labour cost component. For instance, labour tends to account for around 90 per cent of the overall cost of a major police operation. Other projects may involve a large materials element. A contract for the supply of goods will normally be costed against the materials element rather than plant or labour. Other projects might have a large plant cost. An example of this is a high-technology tunnelling project: the borer is the most expensive single element in such a project. Projects also incur many other costs. Examples include: • • •

fuel; maintenance; waste.

In addition, there may be a contribution to the centre and other allowances to be included in the form of a mark-up. For the labour element, these could be built in as part of an all-in estimating rate, which includes provision for normal levels of holidays, sick pay, national insurance etc. For external plant, an allowance (contingency) might be made to cover non-productive time during bad weather or breakdowns. Estimates with a significant materials content would probably consider waste. Estimating has traditionally been carried out using a standard estimating sheet, as shown in Figure 6.8. 6/30

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COST ESTIMATE SHEET PROJECT TITLE:

ESTIMATE NUMBER:

JOB NUMBER:

ESTIMATOR:

CHECKED BY:

DATE:

sheet

Labour times and resulting costs by grade Code

Item

Quantity Hours

Figure 6.8

£

Hours

£

Hours

£

Hours

£

Hours

£

Hours

£

Total direct labour costs

Overhead %

of

sheet

Total cost Standard or Net Burden 10 + 11 + Cost % 12 + 13 Materials

Standard estimating sheet

Labour costs are usually relatively straightforward to estimate. They can be estimated by taking the total number of hours required multiplied by the various hourly unit rates. Most organisations have different labour rates for the various types of labour. The most common ones are junior and senior rates. In some cases, there may be a requirement for an overtime rate. Two types of estimate are required for materials and equipment. The first and most obvious is the financial cost. Included in this should be all the costs associated with the design, manufacture and delivery to site of the item, including: • • • •

packing; shipping; insurance in transit; port duties and import taxes.

Second, and not quite so obvious, is to estimate the availability of the item. For example, it would be incorrect to schedule the commissioning of a new computer system for week 23 of a project plan if the desktop PCs could not be delivered until week 27. Either the schedule has to be rearranged or an alternative source with earlier delivery times has to be found, perhaps with higher costs. From a practical point of view, it is normal for estimators to work alongside the company purchasing department at this stage. There are two reasons for this: 1

2

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The purchasing department has knowledge of a wide range of suppliers and may have experience of buying something similar. Alternatively, it may have valuable historical data on record that can be accessed easily. If purchasing staff are involved during the estimating stage of projects, they will be more efficient when the purchasing activity begins. Edinburgh Business School

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The main difficulties associated with estimating material and equipment costs in the project environment are once again due to the unpredictability of projects and the definition of scope in the early stages. The design work will not be complete at the estimating stage and therefore it is unlikely that all items of equipment will be specified accurately. For this reason, there are often several phases in specifying equipment. In each phase, a specification is issued. The first issue is a general specification detailing the type of equipment and, very roughly, its technical parameters. The second issue is more detailed and the technical details are defined to within ±10 per cent say. The third issue of the specification would be definitive. In this case the first issue would be used for estimating. It should be stressed that, in practice, project time pressures sometimes make estimating a guessing exercise without any real supporting data. Data Gathering Estimating procedure is usually based around the WBS. This isolates work into packages or sections that can be easily handled. Work packages are then generally split into separate labour, plant and materials elements, and individual costs are attached to the individual elements. There are several standard sources of estimating data, as follows: •

•

•

•

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Standard tables In many industries, particularly the construction industry, there are standard tables available stating the standard time required to carry out a common task (e.g. butt welding two 55 mm stainless-steel schedule60 pipes together; laying a standard brick at high level; installing a small pump). The depth of detail in some standard tables is very comprehensive, and with these it is straightforward to quantify task times. Company-specific tables Often, companies will carry out time-and-motion analysis for their standard activities and prepare company-specific tables. However, in most project work it is unlikely that there are details of each task at a level where standard tables are particularly helpful. The finer details of the project are considered after the estimating is complete. For example, in a construction project, it may be known that a pump will need to be installed. However, the size of the pump will probably be unknown until some time during the design phase. Previous project data Good records from previous projects will provide a valuable source of estimating information for similar tasks. It is vitally important for a project company to maintain clear and accurate performance records and procedural details of tasks as they are carried out on projects. It is an easier task for the estimator to compare what was done before with what has to be done this time, and to make adjustments for specific project needs, than to estimate a task from scratch. Estimator skill and knowledge Because each project has some degree of uniqueness, the chance of there being historical data to help estimate every task on a new project is very unlikely and some activities will have to be estimated from scratch. It then depends on the skill of the estimator to extract as much information from the project plans, including the work Edinburgh Business School

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breakdown structure, the network diagram and the schedule, to help make as accurate an estimate as possible. However, every estimator is different and two estimators analysing the same task are likely to arrive at different estimates. The shrewd project manager will understand the nature of his project team and have a wellformed opinion of the particular estimator. The project manager will classify estimators as follows, and make any adjustments that seem necessary: – Accurate Estimators are vitally important to the success of a project. They should be both accurate and consistent. These qualities contribute to overall risk reduction. – Optimistic The optimistic estimator is particularly dangerous. His or her estimates often win contracts because they underestimate the total project costs involved. These turn out to be unreliable in the long-term. The optimistic estimator ignores some risks and underestimates the magnitude of others. He or she underestimates the times required to perform activities and fails to allow for the full range of disruptions that can occur on a project. Optimistic estimating tends to be expensive in the long term. – Pessimistic The pessimistic estimator is only slightly less dangerous than the optimistic estimator. There are a number of dangers associated with a pessimistic estimator. Two significant relevant risks are: • the estimator will lose most contracts because he or she will overestimate the total project costs. • those contracts that are won will contain budget totals that are too high. This will allow inefficient working whilst maintaining a facade of efficiency. – Inconsistent The inconsistent estimator is perhaps the most dangerous type of all. Optimistic and pessimistic estimators can to some extent be tolerated and their estimates adjusted. Based on past experience of their performance, their estimates can be marked up or down respectively. The inconsistent estimator is more problematic because no simple adjustment is possible. Most project managers would agree that the best thing to do with an inconsistent estimator is re-assign them to some other task or remove them from the project altogether. Presenting the Estimate Estimates vary in terms of the level of detail that is included. This in turn depends on the level of cost detail that is required at a particular stage of project evolution. There are three generally recognised stages of estimate development: •

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The order-of magnitude-estimate This is made without any precise data. It may be based on past experience of similar work or on published output or cost information. The typical level of accuracy would be plus or minus 25 per cent to at least get a feel for the order of magnitude of the cost, e.g. £1000 or £10 000. For many kinds of work, similar types of contract have been carried out many times in the past, and hence reliable historical cost Edinburgh Business School

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•

•

data are readily available. This type of estimate is frequently used for initial order-of-magnitude appraisals and feasibility reports. Any measured works are accurately priced, but generous provision is made for contingencies and reserves. The indicative estimate The indicative level estimate is based on known information and published data. It would use data such as electronic database and published cost indices. Indicative estimates are generally accurate to plus or minus 10–15 per cent. This level of accuracy would normally apply at the bidding stage, where the project manager can forecast resource requirements with reasonable accuracy. The definitive estimate The definitive estimate is produced from reasonable standard drawings, supplier quotes, contractor and subcontractor prices, etc. It duplicates the process that the bidder will eventually carry out in pricing the contract documentation. It should be accurate to within plus or minus 5 per cent. This level of accuracy is usually considered to be acceptable for documents. It is never possible to make any measurement completely accurate, and ±5 per cent is generally regarded as being a reasonable working level of accuracy. Most sets of contract documentation would contain sufficient reserve to cover unknowns within this range. This development process is summarised in Figure 6.9. Level of estimating accuracy Upper variance limit

Required contingency provision

Lower variance limit Preliminary design stages

Figure 6.9

Intermediate design stages

Later design stages

Developing estimate accuracy

Initially, the estimate has a wide variance envelope as the amount of information is low. As more information is provided, more details become agreed and fixed. The estimate therefore becomes more accurate and the variance envelope diminishes towards a point. In addition, as the unknown element decreases and the variance envelope contracts, the degree of unknown information also reduces, so that the contingency provision required also decreases. 6/34

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6.3.2.3

Project Estimating Any project cost plan is only as accurate as the estimating process. The estimating process in turn depends on the accuracy of work measurement and the reasonableness and accuracy of rates that have been assigned to the measured works. The estimated costs must be accurate if the budget plan is to be realistic. An accurate estimate of project costs provides the essential elements of the project budget and therefore forms the basis of critical management tools. Cost estimations are prepared first and foremost to calculate the sales price, but they are generally needed on all projects to provide valuable input into a whole host of other management activities, including: • • • • • • •

milestone planning; valuing the likely cost of change notices and variation orders; periodically reviewing the likely final account total; assisting in cost control; assisting in trade-off analysis; assisting in performance monitoring; assisting in establishing productivity targets as a basis for bonus payments.

The complexity of the estimating process varies markedly from project to project, from industry to industry, and from company to company. Some organisations can estimate costs remarkably accurately using simple formulae derived from analysis of previous similar projects. Examples include the following: •

• •

A builder may know the approximate cost per square metre to build a factory shell and calculate the total cost by multiplying this by the proposed area. Shipbuilding costs are often estimated using an approximate cost per tonne. Complex power-generation plants are often estimated in the first instance as cost per kWh.

This type of estimate is usually only used to give a ‘ball park’ figure. Normally a lot more effort is put into estimating, although it is arguable as to whether the increased effort is totally justified. It may be that the client wants a detailed breakdown of costs or that the contractor wants to be sure that nothing has been missed in the estimated costs. It is generally accepted that the better the project is defined, the less chance there is for making estimating errors. However, estimating like all management skills is a matter of personal judgement, and given that projects are renowned for not going exactly as anticipated at the outset, the fact that any estimate does indeed coincide with the final project cost is probably as much due to good luck as to good judgement on the part of the estimator. The tendency therefore is to add allowances for contingencies to ensure that the project does not run over budget, but this inclination must be tempered by a sensible understanding of the market or the project costs will always be viewed as too high. For example, assume that a senior manager has the task of reviewing the performance of three project managers. Each manager has completed three projects and the budget performance is shown in Table 6.1. Project Management

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Table 6.1

Performance of each project manager Project 1

Project 2

Project 3

Budget

Actual

Budget

Actual

PM1

100

103

1 400

1 382

80

PM2

90

88

1 250

1 400

50

80

PM3

200

160

900

780

1 900

1 100

Budget

Actual 84

First, the senior manager prepares a table of variances to show the percentage difference between actual and budgeted spending (negative variances indicating overspend). These are set out in Table 6.2 for our example, and the conclusions are likely to be as discussed below. Table 6.2

•

•

•

Project variance Project 1

Project 2

Project 3

PM1

−3.0%

1.3%

PM2

2.2%

−12.0%

−5.0% −60.0%

PM3

20.0%

13.3%

42.1%

Project Manager 1 Having brought in all three projects within 5 per cent of budget, this is excellent project budget management, particularly on small projects where there is little margin for error. Project Manager 2 There is an obvious problem here with overspend on both projects 2 and 3. A variance in excess of 10 per cent is concerning and one of 60 per cent could be critical, not only to the project – which in any case would be considered a failure – but possibly also to the organisation. Variances of this level indicate incompetent project management control, which may or may not be exacerbated by poor estimating. In the case of project 3, the estimating process should be investigated. Project Manager 3 It is highly unlikely that good project management skills could generate underspends of this magnitude again and again. This performance is probably the result of overestimating costs, maybe as a result of conservation. Nevertheless, overestimating is poor estimating and should be discouraged. Budgets are used to predict project and consequently organisational cashflows. There are obvious opportunity costs associated with overestimating project budgets (i.e. the money set aside and not used could perhaps have been used to greater effect elsewhere).

Top-Down Estimating Top down estimating is very common and involves senior management setting the overall project budget. They do this by estimating the overall project costs – as well as the significant sub-project costs that comprise it on the basis of their experience, knowledge and accessible project data. These estimates are often fixed and then handed down to lower-level managers to break down the costs to individual activity and work package level. They then allocate budgets to these activities. 6/36

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Programme budget £10 000 000

Project A budget £6 000 000

Project B budget £4 000 000

Element A budget £1 000 000

Element B budget £2 000 000

Element C budget £1 000 000

Sub-element B1 budget £500 000

Sub-element B2 budget £1 000 000

Sub-element B2 budget £1 000 000

Figure 6.10

Top-down estimating

The flow of information is from the top to the bottom of the organisation. This is represented diagrammatically in Figure 6.10. The benefits of top-down estimating are that: • • • • • •

the budget is set by senior management and is therefore compatible with the overall strategic objectives of the organisation; the budget carries more authority since it originates from senior management; the budget is less likely to be changed or tampered with during the course of the project; any such changes are likely to be formalised; because the estimate originates from higher levels within the organisation, it is likely to be more reliable and accurate; local influence and bias are unlikely to be factors. The disadvantages are that:

• • • •

•

Project Management

the project team may feel that unrealistic budgets have been imposed upon them; where great incompatibilities are perceived, there may be a reduction in project team motivation; the senior management may be ‘out of touch’ with operational costs; politics may be a factor. Some element or package managers may receive a greater budget for reasons that may be not entirely justified in terms of their responsibilities; the inappropriate budget allocation can affect the entire cost control and performance management systems. Edinburgh Business School

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Bottom-Up Estimating At the other end of the scale, bottom-up budgeting relies upon the project budget being developed upwards from the individual activity level (see Figure 6.11). Each activity is estimated as accurately as possible in terms of labour hours, materials and equipment required to complete the task. These estimates are then converted into a financial cost estimate. The resulting task budgets are then aggregated to give the total direct costs of the project. The project manager or senior manager will then add indirect costs, any contingencies and a profit figure, to arrive at the total project budget.

Programme budget £11 000 000

Project A request budget £6 100 000

Project B request budget £4 900 000

Element A request budget £1 500 000

Element B request budget £2 200 000

Element C request budget £1 200 000

Sub-element B1 request budget £600 000

Sub-element B2 request budget £900 000

Sub-element B2 budget £1 000 000

Figure 6.11

Bottom-up estimating

The advantages of the bottom-up estimating are that: • • • •

the people ‘on the ground’ decide on what is required and on how much it should cost; the people are more likely to commit themselves when they have had a say in setting their own budgets; the people who set their own budgets are more likely to stick to them; provided budgets are allocated fairly, this eliminates the motivational problems associated with favouritism or other forms of inequitable budget allocation. The disadvantages are that:

• • • 6/38

the budgets may carry less status than those set by senior management; careful controls are needed to ensure that budgets are not altered; local influence and bias may be issues; Edinburgh Business School

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• • • •

it may be difficult to adjust budgets in line with strategic changes; the budgets are more easily overridden by senior management; senior managers sometimes feel threatened; element and package managers tend to over estimate to ‘be on the safe side’; the whole project budget can become driven by the process itself rather than by market conditions.

•

Iterative Estimating Iterative estimating is based on negotiation. Iterative estimating represents a compromise between top-down and bottom-up estimating. Element and package managers develop detailed action plans and corresponding estimates for the work which they are responsible for. They then present these action plans and estimates to senior management for approval. The idea is that operational managers and senior managers negotiate on the action plans and estimates, and that some re-definition and refining occur. The end result should be an action plan and estimate that lies somewhere between the market-driven conservative estimate of the senior manager and the process-driven generous estimate of the operational manager. This interaction is shown diagrammatically in Figure 6.12.

Senior management

Project manager

Individual activity (task) budgets)

Individual activity (task) managers

Figure 6.12

Interaction in iterative estimating

This approach has a number of advantages: • • • •

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the estimate is prepared by the operational manager; the estimate is tempered by senior management and is therefore more likely to be compatible with the strategic objectives of the organisation; the influence of market forces is maintained; the end result combines practical (operational) considerations with senior management (strategic) considerations.

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Some obvious disadvantages are that: • • • •

the negotiation process is time consuming and costly; adequate control procedures have to be put in place to prevent the senior managers simply overriding the operational managers; some operational managers might be better at negotiation than others and may secure themselves a better budget total than their less gifted colleagues; negotiation skills can become more important than estimating skills.

% complete

100%

Time

Figure 6.13

Project activity against time (typical project)

The negotiation exercise may be made less onerous, and perhaps less confrontational, by considering the nature of the project. Projects will have different characteristics, as shown below. Figure 6.13 has the traditional shape, which is typical of most engineering projects. The project starts slowly and then activity rapidly ramps up through the execution period. As the project completion nears, the activity slows down again. However, some projects, such as in computer software development or chemical engineering, have a shape more similar to that shown in Figure 6.14. In this case the project proceeds fairly slowly until a critical milestone is achieved and then accelerates towards completion. For example, this would be typical of a chemical engineering project where the project may hinge on the occurrence of a chemical reaction that transforms the level of activity associated with the project. In a case where the senior manager and the task owner have a substantially different opinion of the level of resources required for a particular task, the senior manager will normally estimate fewer resources, say Rs than the task owner, say Rt . Generally, a compromise would be agreed by straightforward negotiation and somewhere between Rs and Rt allocated to the task. If the latter part of the curve is concave, as in Figure 6.14 (which shows diminishing marginal returns), it would be acceptable to tend towards the senior manager’s estimate, Rs , because of the small impact on completion that would 6/40

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% complete

100%

Time

Figure 6.14

Project activity against time (specialist project)

result from withholding a small amount of resources. On the other hand, in the case where the latter part of the curve is convex, showing increasing marginal returns, as in Figure 6.15, the decision should tend towards the more liberal resource allocation Rt because of the drastic impact that a shortage of resources could have on the completion of the project.

% complete

100%

Time

Figure 6.15

Project Management

Project activity against time (convex later stages)

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Bidding Strategy and Estimate Reporting In the case of an internal project management system, once the project or work package has been approved in principle, the next stage is to prepare the bid for approval by senior management. In most cases, obtaining project approval for proceeding with a project (or subsections of a project) will involve some kind of bidding process. Bidding in this context is getting approval to go ahead with a proposed amount of work in accordance with the overall objectives of the project. In some cases, this may not be with the intention of creating a formal project budget plan. Indeed, in some organisations, project budgets are now virtually ‘taboo’. Cost allowances are supposed to be based on required expenditure and ‘this will be found when required’. Such attitudes seriously affect the efficiency of the cost control system, because the whole basis of the system is to set targets and then work toward them and monitor performance. In most cases, the development of the bid can be seen as progressing through eight stages. 1 2 3 4 5 6 7 8

Formulate a viable estimating strategy. Make initial (order of magnitude) minimum realistic estimate. Carry out any necessary preliminary refinement. Make realistic (indicative) minimum estimate. Add for profit and risk Compare overall price to projected cost limit. Make subjective evaluation of bid success probability. Develop final (definitive) estimate.

These stages are examined next. 1

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Formulate a viable estimating strategy The estimating process and the bid should form part of an overall costing and pricing strategy. An initial cost model and corresponding estimating strategy should be developed. The project schedule and master programme must be worked out in order to ensure minimum cost to meet the minimum requirements of the project success criteria. The strategy should include all the projected work elements required for the work package, plus due allowance for fees, overheads, contingencies and other forms of charges against the proposed project. Levels of contingencies, for example, will depend on a number of project variables. The more the design has progressed, the more fixed the design information will have become and the less opportunity there will be for change. As a result, contingency allowances in the estimate can be lower than they would be if the design had not evolved to such an extent. The estimating strategy also includes decisions on estimating allowances. Estimating generally assumes certain standard levels for certain variables. When pricing labour costs, there will generally be some attempt at working from a standard, with due allowance for individual project and company characteristics. There may be an in-house hourly labour rate that is used as the company standard. Edinburgh Business School

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2

3

4

5

6

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A large proportion of internal projects are dominated by labour charges only. The estimating process consists largely of calculating the total number of hours required for each team member and multiplying this by the agreed unit rate. There may be minimum or maximum permissible values, as set for the organisation as a whole. Make initial (order of magnitude) minimum realistic estimate The initial minimum realistic estimate is the first estimate based upon the planning and specification information provided. It includes no refinement or reductions for unnecessary elements. It is a first-draft estimate that is based on the obvious information contained within the project. Carry out any necessary preliminary refinement The initial minimum realistic estimate is then refined in order to eliminate any unnecessary costs. Typical refinement elements would include reducing the percentage allowed for overheads or contingency, or reducing resources if a longer completion time is allowed. The refinement process could make use of a trade-off analysis (see Module 5) in order to develop alternative cost outcomes by varying the cost–time or cost–performance functions. The estimate could also be refined by adjusting allowances for risk. This process is sometimes known as risk engineering. Overall project costs could be reduced by lowering the reserves and contingencies that have been allowed for in the estimate. Or, if the schedule contains buffers and slack periods as a safeguard against unforeseen delays, these could be absorbed, or crashed, by more rigorous programming. Insurance risks could be reevaluated, and some insurances could be omitted or reduced. Make realistic (indicative) minimum estimate The indicative minimum estimate is the minimum realistic estimate of what the project will cost. It is (as its name states) generally an indicative cost, based on the level of project information that is available at the time. It is circulated to all relevant people within the bidding organisation, and the go-ahead or otherwise of the bid/tender manager is obtained. The minimum realistic cost is meant to be an accurate estimate of what the package or project will realistically cost, based on the individual costs that are involved. This estimate should include all direct and indirect costs and all hidden costs. It should also contain reasonable provision for contingency and management reserve, and unforeseen events as allowed for in the refinement process. Add for profit and risk Margins to cover overheads and profit are added. These will vary depending on the nature of the project. Minimum profit levels may be set by senior management. Minimum overheads may also be directly set by the company, and will have to be sufficient to meet the net contributions to the centre required of operational projects. Risk would normally be evaluated separately and would be quantified as part of the refinement process. Compare overall price to projected cost limit In internal systems, there will usually be an established cost limit. The overall price can be compared with this to see whether it is competitive. In most external applications, the cost limit is not necessarily known or broadcast to bidders. The project manager, in seeking approval from senior management, will almost certainly Edinburgh Business School

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be aware of the ball-park figure, and may have to be prepared to tailor the bid accordingly. The bid could be positioned anywhere around the cost limit. Make subjective evaluation of bid success probability This stage is one of the most important aspects of the bidding process and in many cases is the largest single determinant of bid success. Bids are often adjusted before they are presented because the project manager knows that the original bid is too far away from what is actually expected. The bid is considered by the project management/executives and a decision is made as to whether to proceed or not. In internal systems, if the overall price is outside the organisational cost limit, then the decision would be made not to proceed, depending on the extent to which the bid is high. The project manager would then have to look at ways of reducing either the overall cost of the proposals or the associated long-term costs. The project manager might achieve this by reducing resources, by increasing time limits or by reconsidering the project logic. It may be possible to use some kind of phased approach, where the project manager might seek to increase the number of phases on the programme to reduce the number of units, of whatever type, to be produced each year. Alternatively, the project manager might be able to negotiate a system of deferred payments. It may be possible to agree special conditions that allow the project to reduce the amounts that have to paid to contractors in a given month. Deferring effectively spreads payments out over a longer period. In addition, it may be possible to agree reduced quality or scope. It may be possible to reduce the number of units, of whatever type, to be maintained each year, but cover the same number of units over a longer period. In external systems, the evaluation of a bid can be very complex. The bid for resources must include an estimate of what the actual works contained within the project SOW are going to cost. Estimating accurate tender submissions is notoriously difficult. Contractor and supplier pricing policies are very fickle and can change from day to day. Thus, the bidder’s policy for bidding or tendering very much depends upon the work concerned and the form of contract and measurement system used. It also depends on whether the work concerned is a one-off fixed-price contract or a term contract that will keep going for several years with a good chance of winning the next time it is issued. External entities that win long-term project contracts can use those contracts as security when seeking to acquire finance. The acquisition policy of the bidder therefore tends to have one of two definite acquisition characteristics: – A type (x) acquisition relates to a one-off project with little followon potential. This is to some extent, typical of new-build or one-off maintenance projects. The bidder sees an advert, applies to go on an approved list, and subsequently receives the documentation. Previous satisfactory work applies to some extent in receiving documents etc. The main objective of performing this type of acquisition is to complete the project at maximum profitability within the terms and conditions of the contract. Edinburgh Business School

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–

8

6.3.2.4

A type (y) acquisition relates to a project where there is a good chance of more projects of the same type, and therefore it is important to gain a foothold in the client organisation (if appropriate) so that more work will follow on. The main objective of performing this type of acquisition is first of all to win it, and then to perform it as well as possible in order to impress upon the client the justification for using the same organisation for the next phase. The next phase might take the form of a new contract or series of contracts, or even a negotiated extension to the existing contract. The bidding pricing policy will differ in relation to the acquisition type. In the type (x) scenario, the bid price is based upon the realistic minimum cost baseline. In the type (y) scenario, the bid price is based upon market forces. Develop final (definitive) estimate The final bid is submitted for consideration by the client or by the appropriate approvals committee.

Computerised Database Estimating Systems It is, of course, possible to generate manually a budget plan from a pre-tender costing and priced bill of quantities. However, on large projects there could be hundreds of thousands of different item descriptions, each with individual prices and overheads, and a computerised approach becomes essential. There are several specialised packages available for providing this service. They are broadly known as computerised database estimating systems (CDESs). There are several such packages available in both the EU and the USA. A CDES is simply a computer program that assists in the preparation of estimates and budget plans for projects. Traditionally, the person preparing the description of works or bill would have measured the amount and type of work required directly from the production drawings. The CDES allows the cost consultant to scan or digitise this same quantity information directly from the drawings and into the computer. The basic operational process is shown in Figure 6.16, based on an engineering environment. The CDES works by linking together several different databases. Each database contains a different type of information, described next: •

The description library The library stores information that is relevant to describing the works. It is a collection of standard descriptions. These describe the work that is to be priced. The descriptions are arranged in the same format as the WBS. Each item of work is broken down into more and more detail until a level of detail is arrived at where accurate pricing can occur. In a welding section, for instance, the various headings and subheadings might be: 12. Welding. 12.1. Arc welding. 12.1.1. Arc welding: fillet welding. 12.1.1.1. Arc welding: fillet welding radius 10mm in mild steel.

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Description library

Bill preparation systems

Library of standard method of measurement descriptions Form welded joints Form solder joints Install cables Apply solder

Priced bill (CDES rates) Estimate preparation systems Bill preparation Estimate preparation Profit schedules Specifications

Price code database Library of standard labour, plant and materials unit rates

Soldering Casings Joints Connectors Conductors Resistors Capacitors Cable

Pre-tender cost check

Priced bill and tender documentation Scanner

Project statement of works

Budget plan for project

Drawings

Figure 6.16

Typical CDES arrangement

The cost consultant can simply double click on ‘12.1.1.1. Arc welding: fillet welding radius 10mm in mild steel’, and he or she can then drag this description to the estimate preparation system. The library contains all the different works descriptions that are likely to be required for that type of project. Different databases are available for different industries. The welding descriptions given above might appear on a shipbuilding database. If the project manager is involved in a construction project rather that a shipbuilding project, he or she simply accesses the construction library database.

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•

The price code and unit rate databases This is another database and it works with the description library database. For each description, the price code database has a record of what individual components are included within the description. For the welding example, the price code database knows that this operation requires a welder and an arc-welding torch set. The price code might allow half an hour per linear metre of weld. This might equate to the following: Welder : 0.5hr/m @£25.00/hr = £12.50/m Torch : 0.5hr/m @£5.00/hr = £2.50/m Total : £12.50 (labour) + £2.50 (equipment) = £15.00 per metre

The price code database is pre-set with appropriate figures. For every library description, there is a pre-set list of labour, equipment and material, together with time allowances and unit costs. The price code database in our example will price 10mm fillet welding at £15.00 per metre. •

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Other database elements A cost consultant can use the CDES to digitise drawings (project statement of works). This allows the consultant to enter a series of standard descriptions into the computer. These descriptions reflect the work that is involved in the project and include the quantities of work involved. As the measuring process continues, the number of descriptions and overall cost estimate increases. When everything has been measured and described, the cost consultant is left with a complete works description or bill of quantities, priced using the unit rates contained within the CDES (via the estimate preparation systems and bill preparation systems). This allows the cost consultant to produce a very accurate pre-tender cost check. He or she can show the client exactly how much the project will cost and how the costs are distributed through the project. The contract documents are then issued to the tendering contractors. Once tenders have been completed, the priced bills are returned and the cost consultant simply transcribes the bill rates over the pre-tender cost-check rates. There are now two priced bills, one bill with estimated prices and the other bill with tender prices. The one with tender prices becomes the basis of the budget plan. The cost consultant now has a complete electronic version of the bill set out as a WBS. He or she can use this for cost control purposes down to level 6 if required. The importance of this level of control will be seen in subsequent subsections. In practice, for valuations and site measures, the cost consultant may only have to operate down to level 3 for much of the time. It should be emphasised that there is no additional work involved in setting up this data system. All this information had to be processed anyway in order for a priced bill to be arrived at. It is simply that, with conventional systems, it is not possible to store and use cost information to this level of detail; CDES systems allow a cost consultant to do so.

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6.3.2.5

The Project Budget Plan The planning cycle includes project cost control system (PCCS) Phase 1, which is the planning process. Some texts refer to phase 1 as the planning and control system. It consists of breaking down the project into separately controllable packages and then calculating a cost target or budget limit for each one. The collective cost total of each level of the WBS is summarised in the corresponding package total for the next level up. The project budget is therefore the end result of the planning phase. It is the sum total of all the individual work package budgets for the whole project. The project budget is another form of project plan. Most projects are now organised using some form of strategic project plan (SPP). The SPP acts as an overall strategy for the project and is developed from, and includes, a number of specific individual plans. These include the project master schedule (PMS), Gantt charts, quality plans and so on. The SPP also contains the project cost plan or project budget. Rightly or wrongly, this is often considered to be the most important form of project plan by senior management. Project budgets are likely to be reviewed and monitored in company board rooms in a way that time and resource schedules are not. The overall cost performance of the project is often perceived as being the single most important performance indicator. As a result, the content and presentation of the project budget often requires heightened political as well as practical consideration. In general terms, it is arguable that the importance placed on adherence to budget is often too great. Although it is readily accepted that deviating from the project budget can cause problems for the project manager, it does not necessarily condemn the project to failure in the long term. It is worth noting at this point that the Sydney Opera House cost sixteen times more than the original budget and it is widely known that the Channel Tunnel, connecting the UK to France, ran grossly over budget. Few people would consider either a failure! Initially, a project budget is developed from the original cost estimates used in the project proposal. This is then reviewed and adjusted until the final version becomes the approved authorised limit for spending on the project. This version is itself modified once the actual costs of the various work packages are established.

Sequence of Preparation of the Project Budget The project budget is normally developed in a number of stages. Most cost consultants develop an ongoing estimated project budget as the design of the project progresses. Increasingly, this continual estimating is carried out using a CDES. The cost consultants typically report on the estimated cost of the project at each of the design reporting stages. There would normally be a final pre-tender check just before the contract is awarded. The project budget is usually developed using some form of statement of works (SOW) as a starting point. The SOW could be drawings with a schedule of costs, some kind of specification, specific and general conditions of contract, schedules etc. In order to develop a budget plan or cost plan, this SOW has to be broken down into a WBS. Each WBS work package then has to be individually 6/48

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costed. These cost targets will thereby act as target maximum expenditures as the project progresses. In most project teams, the cost consultant is responsible for measuring the works involved in the project directly from the production information drawings. This involves measurement and quantification, usually in accordance with some form of Standard Method of Measurement (SMM). These standard forms exist in a number of different formats. They list how work is to be measured, what descriptions are to be used, what is and is not included, and what units of measurement are to be used. The measured works are generally assembled into some kind of bill of quantities. This is a summary of all the measured works in the project as prepared directly from the production drawings. It contains a description of all measurable works in a standard form so that a tenderer can price individual elements accurately and therefore arrive at an accurate tender sum. The bill also ensures that other tenderers measure the work in the same way. The only difference therefore is in the pricing strategy of the individual tenderers. This gives parity of tender and true competition between the tendering parties. The WBS that is established by the SMM forms the basic framework for the estimating and budgeting system. Once the WBS has been identified, the next stage is to set up the budget plan. This establishes budget totals or limits for each work package and for groups of work packages contained in the project WBS. Using a CDES, the cost consultant is able to prepare accurate estimates at different levels through the WBS. He or she measures the works involved at any specific level and then moves on to the next level. The CDES automatically prices the works as the works are measured. The program automatically calculates rollup figures so that the total for any level or any group of packages, together with the individual estimates for component packages, can be seen as required. The project budget is therefore the estimated cost for the whole project. It comprises a whole series of sub-budgets for individual WBS work packages. The project budget WBS is normally identical to the project WBS that is developed during the planning phase of the project life cycle (see Module 5). It is developed to a level where a pre-tender cost check is performed before contract documents are issued to prospective tenderers. The project budget is not the same as the selling price, or even (where applicable) the tender price. The project budget is the effective cost limit as authorised and set by the client, and as confirmed by the project cost consultants as the designs have evolved. The project cost consultants will use the project budget as a target when carrying out pre-tender cost checks, and they will increase or decrease the amount of work involved in the project in order to match the project budget with the anticipated tender totals. The final or baseline budget plan and the overall project budget are therefore the end result of a series of internal estimate planning processes, tempered by the external influence of tenderers who are usually free to price (and bid for) the same works in any way that they wish. This process is summarised in Figure 6.17.

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Project

Package A

Package B

Cost profile (A)

Cost profile (B)

Library of resource costs and output standards

Package C

Cost profile (C)

Computerised database estimating system (CDES)

Labour Plant Materials

Pre-tender cost check

Blank tendering document

Contractor pricing process

Priced tender document

Comparison and evaluation

Baseline budget plan

Figure 6.17

Preparation of project budget plan

The Role of the Project Budget At its most basic level, the project budget relates the forecast costs to particular project tasks. However, it is unusual for this to be its sole purpose and the project budget would normally be considered to be a management, planning and decision-making tool. Depending on its format and the relevant control and distribution procedures, the budget may also be used for: • • •

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establishing the overall budget baseline for the project. This baseline acts as the basis for subsequent earned value analysis; developing (in association with the project schedule) the projected cost curves for each element and work package; establishing a reference for variance analysis allowing the performance of individual elements and packages to be assessed throughout the course of the project; Edinburgh Business School

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• • •

moderating the spending of element and package managers; generating the basic data for scenario analysis in trade-offs; estimating the likely effects of change notices and variation orders.

The project budget can also have strong psychological effects on project stakeholders. It may be prepared to be intentionally, or unintentionally, motivating or demotivating. For example, an effective and experienced project team may be highly motivated by tough budgetary targets. The budget would be prepared with this specifically in mind. These same targets could have exactly the opposite effect on a newly formed team with little experience of working together, and could consequently destroy the morale of the team and the project’s chances for success. Budget Development and Layout To be an effective management tool, the project budget should contain at least: • • • •

project objectives and activities in terms of measurable outputs; the financial resources allocated to achieve these objectives and complete the activities; clearly defined start and finish points of each activity; the facility to compare actual and planned performance details.

The budget should spread across the project WBS so that there is a specified budget for each work package. This, of course, will relate to the project network and, as there may be a number of network activities associated with each work package, it might be necessary to break the budget down further so as to correspond directly with each activity on the network. The level of WBS detail required at the operational level will depend on the format and structure of the individual project time, cost and performance plans. Perhaps the most important aspect of the budget is the cost-coding format. For accurate monitoring and control, it is essential that each element of the budget corresponds to an identifiable and measurable work package and that the budget element and its associated work package must share a common, unique cost code. A popular method of cost coding is to use the same codes as used in the WBS. Most CDES estimating systems do this. A typical budget build-up is shown in Tables 6.3 to 6.6. The sequence shows typical build-ups for each stage in the preparation of a baseline budget plan for a sample project. The sample project is based on the demolition and re-erection of some railway lines and a platform within an existing railway station. Table 6.3 shows typical build-ups for preliminary, prime cost and provisional sum budget entries. Preliminary items are those that are considered to be general project overheads. Typical examples would include security systems and contributions to head or regional office overheads. Prime cost sums are those where the work is to be sublet to a nominated or named subcontractor, and where there will be a contract between this subcontractor and the prime contractor and also between the subcontractor and the client. Provisional sums are those where the exact extent of the works is not known and an exact cost estimate cannot be produced. For example, once excavations are under way, flaws in the underlying Project Management

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Table 6.3 1.

Typical build-up of budget plan for preliminaries, prime cost and provisional sums

Preliminaries

Unit

Qty

Rate

Sub-total

Item

Item

1

150 000

150 000

Total for preliminaries carried to summary: 2.

Total 150 000

Prime cost (PC) sums PC sum for track Allow £250 000

PC sum

1

250 000

Profit

5%

Item

1

12 500

Attendance

5%

Item

1

12 500

Total

275 000

PC sum for signals Allow £350 000

PC sum

1

350 000

Profit

5%

Item

1

17 500

Attend

5%

Item

1

17 500

Total

385 000

PC sum for train protection Allow £90 000

PC sum

1

90 000

Profit

5%

Item

1

4 500

Attendance

5%

Item

1

4 500

Total

99 000

Total for PC sums to summary: 3.

759 000

Provisional sums Additional excavations

Item

1

75 000

Dense ballast

Item

1

75 000

Sub-base preparation

Item

1

50 000

Land drainage

Item

1

25 000

Sump works

Item

1

25 000

Decontamination

Item

1

25 000

Total for provisional sums carried to summary:

275 000

275 000

ground may be discovered and require additional excavation and ballast, etc. A provisional sum is included to cover the likely extent of the works. Generally, provisional sums are expended through contract change notices, supervising officer’s instructions or other forms of variation orders. Table 6.4 shows typical build-ups for direct payments, dayworks and measured works. Direct payments are payments made through the project, but made to organisations that are not part of the actual project team. Examples would include payments for works by external supply authorities – for example, to install power supplies to an existing factory in order to allow a new production line to be installed. Dayworks are generally included to allow for unforeseen and unmeasurable works, which might nevertheless arise. An example could be hiring a specialist to debug a new software system. A software engineer might charge per hour for carrying out some unforeseen debugging problem. The client would have to pay the engineer on an agreed hourly rate for as long as required until the process is complete. Measured works are those items that 6/52

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Table 6.4 4.

Typical build-up of budget plan for direct payments, dayworks and measured works

Direct payments

Unit

Qty

Rate 25 000

Sub-total

Total

Power company Allow £25 000

PC sum

1

Profit

nil

Item

0

0

Attendance

5%

Item

1

1 250

Total

26 250

Local Authority Allow £23 000

PC sum

1

Profit

nil

Item

0

23 000 0

Attend

5%

Item

1

1 150

Total

24 150

Total for direct payments to summary: 5.

50 400

Dayworks Labour allow £20 000 OH & P

Item

1

200%

20 000 40 000

Total

60 000

Materials allow £10 000 OH & P

Item

1

100%

10 000 10 000

Total

20 000

Plant allow £10 000 OH & P

Item

1

50%

10 000 5 000

Total

15 000

Total for dayworks to summary: 6.

95 000

Measured works Demolition Remove old tracks

Item

1

18 000

Remove old signals

Item

1

8 000

8 000

Demolish old platforms

M3

2 500

40

100 000

Remove contaminated ballast

M3

30 000

35

1 050 000

Excavation to required level

M3

5 000

20

100 000

Sub-base preparation

M2

8 000

2

16 000

New ballast

M3

35 000

20

700 000

Surface preparation and levelling

M2

8 000

2

16 000

Total for measured works to summary:

18 000

2 008 000

are physically measured from the project drawings and schedules and that are measured for formal pricing in the statement of works. The measured works are generally described in terms of what is involved, together with some kind of quantity of work required and a unit rate. The unit rate is entered by the tenderer and represents the cost per unit quantity required for carrying out that particular operation. Project Management

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In all cases, section totals are carried forward to the overall summary, as shown in Table 6.5 in the form of a typical project budget summary sheet. This summarises the various sub-budgets for the different large-scale work packages. Typical overall additions would include allowances for contingencies, fees and taxes. A contingency or management reserve is generally included to allow for unforeseeable items that cannot reasonably be allowed for. Table 6.5

Typical project pre-tender budget summary sheet

1.

Preliminary items

150 000

2.

PC sums

759 000

3.

Provisional sums

275 000

4.

Direct payments

50 400

5.

Dayworks

95 000

6.

Measured works Demolition

2 008 000

Platform (say)

1 735 750

Frame (say)

12 000

Sub total:

5 085 150

Contingency @ 10%

508 515

Sub-total:

5 593 665

Fees @ 18%

1 006 860

Sub-total:

6 600 525

VAT @ 17.5%

1 155 092

Project Budget Total:

7 755 617

Contingencies could be as high as 25–30 per cent in the early design stages, reducing as the design becomes increasingly established and fixed. Fees are generally chargeable to the project unless some other form of recharging has been agreed beforehand. Most expenditure on capital projects in the UK is subject to tax, either directly or indirectly, and most costing systems would require this to be shown as a project cost. This level of budget plan is developed through the design of the project up to the point where (if appropriate) either all or part of the works are put out to competitive tender. The SOW is issued to tenderers with all the information required for accurate tendering. The priced tender might be significantly different from the pre-tender cost check budget plan. The baseline budget plan makes allowance for this and adjusts the original pre-tender budget plan to allow for the actual process adopted by the tenders. Table 6.6 shows a tender submission where there are differences between the pre-tender budget plan and the prices entered in the tender. Some sections of the budget plan could not have any such variance – for example, in prime-cost sums – because these values are stated in the SOW. Other sections, such as measured works, could have wide discrepancies. In each case, a variance is 6/54

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Table 6.6 (1)

Generation of baseline (revised) project budget plan and revised measured works budget plan (part)

Generation of baseline project budget plan Cost plan

Tender

Variance

Baseline

Prelims

150 000

155 000

−5 000

155 000

PC sums

759 000

759 000

0

759 000

Provisional sums

275 000

275 000

0

275 000

Direct payments

50 400

50 400

0

50 400

Dayworks

95 000

0

95 000

0

Measured works Demolition

2 008 000

2 200 000

−192 000

2 200 000

Platform (say)

1 735 750

1 580 000

155 750

1 580 000

12 000

8 000

4 000

8 000

5 085 150

5 027 400

57 750

5 027 400

Budget

Spent

Frame (say) Sub total: (2)

Revised measured works budget plan (demolitions) Remaining

D.01 Remove old tracks

110 000

D.02 Remove old signals

58 000

58 000

116 000

116 000

1 050 000

1 050 000

115 000

115 000

D.03 Demolish old platforms D.04 Remove contaminated ballast D.05 Excavation D.06 Sub-base preparation D.07 New ballast D.08 Surface preparation and levelling Total

110 000

26 000

26 000

700 000

700 000

25 000 2 200 000

25 000 0

2 200 000

shown and the budget plan is adjusted to show the revised baseline values. These baseline values are then used to prime the various WBS work packages. Each of these packages has a separate cost accounting code (CAC) identifier. The budget amounts are recorded against these CAC in the project CDES. The individual work-package budget totals act as the basis for all the cost control procedures that follow in cycle 2 of the PCCS. The final requirement for completion of the baseline budget plan is to calculate some form of expenditure profile for the project. This is normally performed by relating the CAC sums to the project draft master schedule (DMS). Modern project planning and control software does this automatically. The start and finish dates for each activity are used to show the start and finish expenditure dates for each CAC element. By knowing the spend duration and the spend curve characteristics of each activity, it is possible to calculate a spend profile for each package and for roll-up elements at each level higher in the WBS. In Table 6.7, it has been assumed that the expenditure on some activities, such as preliminary items, will be linear, while on other activities this will not be the case. The overall cost totals for the various months through the project are shown under the subtotal. Cumulative expenditure – in this case via twoProject Management

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Table 6.7 4.

Example cost profile calculations for the sample project

Expenditure projection Month

2

4

6

8

10

12

Total

Prelims

25 833

25 833

25 833

25 833

25 833

25 835

155 000

PC sums

0

0

0

500 000

200 000

59 000

759 000

Provisional sums

0

0

0

155 000

100 000

20 000

275 000

Direct payments

0

0

0

0

0

50 400

50 400

Dayworks

0

0

0

0

0

0

0

Measured works Demolition

1 000 000

700 000

500 000

0

0

0

2 200 000

Platforms

0

0

250 000

500 000

500 000

330 000

1 580 000

Frame

0

0

0

0

0

8 000

8 000

Subtotal

1 025 833

725 833

775 833

1 180 833

825 833

493 235

5 027 400

Cumulative total

1 025 833 1 751 666 2 527 499 3 708 332 4 534 165 5 027 400

monthly reporting periods – is shown, ranging from the initial month’s spend up to £5.03 million at the end of the project. The physical layout of budget plans that are actually used for the operation of projects vary widely. A typical representation is shown in Table 6.8. This gives a clear indication of the spend per task on a month-by-month basis. Table 6.8

Typical baseline budget-plan layout Monthly budget (£)

Task

Estimate

A

5 200

B

6 600

C

4 200

1

2

1 600

3 600 3 000

3

4

2 600

1 000

1 000

500

500

E

3 900

2 000

1 900

1 000

5 200

F

7 800 8 100

H

3 200

I

1 200 41 200

6

7

4 200

D

G

5

1 600 7 000

1 000

1 100 1 500

700 1 200

1 600

6 600

10 300

9 600

8 600

2 600

1 900

Budget Changes Budgets are generally not static, particularly in large projects where the exact scope of work is difficult to define precisely at the outset. They change throughout the life cycle of the project, and with every agreed project-scope variation (or change order) there is an associated variation in cost that has to be budgeted for. The budget should therefore be prepared in a manner in which changes are easy to accommodate. 6/56

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At any time during a project, its budget should be transparent enough to identify the original budget, the costs associated with approved change orders, and therefore the total current budget. For example, when installing a new kitchen it may be relatively easy to budget for the obvious buying and fitting of kitchen units, flooring, wall tiles, appliances, wallpaper and paint. What may be less obvious to budget for at the outset are items such as repositioning electrical and water services, necessary repairs, and the preparation of floors and walls for new coverings. It can often be difficult to determine fully the extent of the work at the start of a project, and the budget should be prepared with this in mind. Most changes to project budgets are necessitated by the issue of change notices. These are variation orders that are issued by the project manager or design team members. The effect of the change notice is a modification of the project’s work requirements. This may be necessary for a number of reasons. The most obvious ones are work items that have been overlooked during the design stage, unforeseen complications and additional works, and changes in client preferences and requirements. A change notice varies the work that is required, In contractual terms, it changes the terms and conditions of the contract since it supersedes the original item descriptions that formed those terms and conditions of contract. Change orders often provide an excellent opportunity for the contractors and suppliers to make a healthy profit. The project team is ‘locked in’ and the selling price for a change order is not normally constrained by normal market forces. Often, but most particularly when work is scarce, companies will take on projects at little or no profit margin, in the hope that there will be scope changes during project execution period where they can increase the sales price and realise a healthy return. It is clearly important that budget changes are controlled in some way. A budget is only useful to the extent that it is adhered to, and there is no point in establishing a complex budget plan if the cost limits contained in it can be disregarded without penalty. Large projects typically include some kind of change control section (CCS). The CCS is responsible for monitoring all change on the project and for predicting the implications of change requests before authorising them. A CCS could be a panel of members drawn from representatives of the client and design team, chaired by the project manager. As a design team member issues a change request, the request is classified in some way according to expected cost implications. The project’s configuration management system (CMS) might be set up so that changes estimated at under £5000 can be authorised by the appropriate section head. Changes over £5000 but under £25 000 might have to be referred to the project manager for authorisation, while changes over £25 000 might have to go to a formal change-review panel for consideration. On large projects, changes to the project budget are often formalised through the issue of a cost account variation notice (CAVN). This is a screen or section of the project’s CMS that stores and monitors all the various sections of the project’s budget plan and corresponding cost accounting code (CAC) values. As a change is authorised, the budget plan is updated and the cost accounting code Project Management

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entries that are affected are increased or decreased accordingly. This ensures that the budget plan remains up to date as changes occur. A typical CAVN would show the nature of the change, the estimated increase to the CAC entry brought about by the change, the reason for the change, and some kind of authorisation code. 6.3.3

6.3.3.1

The PCCS Operating Cycle Introduction The PCCS operating cycle is sometimes referred to as the cost and control system. The operating cycle is the section of the PCCS that implements the estimating and budgeting sections of the planning cycle. The operating cycle authorises commencement of the priced works and monitors the actual expenditure against planned expenditure in order to generate cost variances. These variances indicate the extent to which the project (and/or parts of the project) are running over or under cost. The PCCS operating cycle comprises four phases. These follow on from the planning phase in cycle 1. There are:

6.3.3.2

•

Phase 2: work initiation;

•

Phase 3: cost data collection;

•

Phase 4: generation of variances;

•

Phase 5: cost reporting.

Phase 2: Work Initiation In order to be able to control costs, there must be some form of controlled release of work. This could be done through the formal issue of a contract, or through change control notices such as variation orders or works orders. A typical example would be a project works order (PWO) and a change notice or variation order (VO). The PWO would typically describe the work, and any standards to be adhered to, and identify the cost centre to be charged. This is usually done through some system of cost accounting codes (CAC). The CAC system is usually based on the project WBS (see Figure 6.18). Cost accounting codes are essential in that they identify the cost centres that are to be charged for the work that is described on the PWO. Cost monitoring and control can only work if the correct cost centres are identified both on the PWO and any VO, and in the invoicing and recharging system. The CAC system enables this. Variation orders and works order documents can take numerous forms. More and more often, they are being developed as part of overall project communication and of configuration management software packages. Parts of the component information for the variation-order and works-order screens are imported directly from within the same software or from other operating systems. For example, start and finish dates for individual activities could be imported directly from the project planning and control application.

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Cost centre 1200 Maintenance

Figure 6.18

Planned maintenance 1200.01

Cyclic maintenance 1200.02

Responsive maintenance 1200.03

Electrical 1200.01.01

Mechanical 1200.01.02

Safety 1200.01.03

Components 1200.01.01.01

Cabling 1200.01.01.02

Circuits 1200.01.01.03

Typical CAC breakdown based on project WBS

Works order WBS WP No: Project Works Order: Date of original release: Revision Number: Dated: Configuration ref:

1–27–44 12334 01 September 2003 03 20 November 2003 22.112.445

Description Price code BZ001

Cost centres

Hours

Start

Complete

1200.1

40

20.11.03

27.11.03

BT145

1200.2

80

27.11.03

12.12.03

CS167

1200.3

80

28.11.03

13.12.03

Z0412

1200.4

28.12.03

1200.0

160 160

28.11.03

XY146

30.11.03

01.01.03

Authorisation code: Password: Distribution scope:

Figure 6.19

D1233, D3344, D7227

Typical works-order screen

An example of a works order screen is shown in Figure 6.19. This works order shows the WBS code and corresponding works order number. The document has a unique identifier within the overall project CMS. Individual activities are identified by price codes. These correspond to the activity descriptions as stored in the CDES. Each activity is chargeable to cost centre 1200, but individual Project Management

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sub-centres are to be charged for each one. The start and finish dates are also indicated. The start and finish data could be imported directly from the schedule software, and price code data and cost-centre data could be imported directly from the project CDES–WBS. Cost accounting codes usually work through predetermined and fixed budgets. In order to work, these have to be fixed and can only be increased through some kind of formalised control system such as cost accounting variation notices (CAVNs).

6.3.3.3

Phase 3: Cost Data Collection Actual cost data are recorded and entered into the system by individual work package. These data are then compared with the latest budget revision and variances are calculated. PCCS cost-data collection and reporting use earned value analysis (EVA) – see later in this section. Indeed, the APM, PMI, ISO10006 and BS6079 all require the use of EVA for this process. EVA is simply a way of comparing actual with target figures for performance and cost. EVA uses variance analysis as the basis for its calculations. Variance analysis is centred on two variances, cost variance and schedule variance. EVA is used in project management because traditional cost accounting and control systems are often inadequate for monitoring project costs. Traditional approaches often do not record materials and labour costs in ways that are required for project cost control. In addition, traditional accounting methods often do not provide reporting quickly enough and to the level of detail that is ideally required for project control. Furthermore, EVA offers the advantage that it records the value of work achieved alongside the cost of achieving that value. Also, it does so in relation to schedule and cost performance. The end result of the cost-data collection process is the generation of cost variance and schedule variance values. These are used as the basis for evaluating the performance of the project, and perhaps for corrective action.

Milestone Monitoring EVA is based on milestone monitoring. This involves comparing target milestones to actual progress in order to measure performance. Monitoring against milestones is one of the simplest techniques to compare actual costs and progress against those budgeted. A milestone represents a definitive stage in the project and is an appropriate point at which to measure performance. Provided that the scheduled milestone data are available (i.e. the date at which the milestone should be achieved and the budgeted expenditure on achieving the milestone), it is a relatively easy system of monitoring to set up and maintain, and it does not require a great deal of effort to operate. Milestone monitoring is most suitable for use when plans and schedules are not particularly detailed. Table 6.9 shows schedule milestone and budgeted cost information for a water cooling project. The current status of the project is that milestone 6 has been achieved (and therefore all earlier milestones). 6/60

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Table 6.9

Milestone mapping

Milestone number

Milestone description

Scheduled week number

Budget cost (£)

Actual week number

0

Actual cost (£)

0

Project authorisation

0

0

0

1

Cooling water process & instrument diagram approved

5

10 000

4

8 000

2

Cooling tower ordered

8

80 000

7

68 000

3

Pumps ordered

10

50 000

8

41 000

4

Piping layout drawings approved

12

15 000

11

18 000

5

Cooling Tower erection start

14

25 000

15

32 000

6

Pumps delivered

18

3 000

20

6 000

7

Pumps installed

20

16 000

8

Cooling tower complete

24

25 000

9

Piping installed

27

20 000

10

Instrumentation complete

28

23 000

11

System commissioned

30

12 000

12

System signed off by client

32

4 000

To make sense of the data, it is useful to plot the milestone/budget curve. The curve of budget expenditure is built up cumulatively by adding the cost estimates for the work necessary to achieve each milestone. The cumulative cost associated with achieving the last milestone is equal to the total project budgeted cost. As each milestone is achieved, the actual cost curve should be drawn for comparison with the budget cost. It is important to clearly identify each milestone (budget and actual) to ensure that a true comparison is made. Figure 6.20 shows the actual milestone curve plotted against the budgeted figures.

250 000 200 000 150 000 Budget Actual

100 000 50 000 0 0

2

4

6

8

10

12

14

16

18

20

22

Week

Figure 6.20

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Typical milestone values

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Milestones 1, 2 and 3 are all achieved ahead of budget and ahead of schedule. At milestone 5 the project schedule starts to slip, and slips even further behind at point 6 (although costs are still within budget). At this stage it would be reasonable to predict that the project (i.e. achieving milestone 12) will overrun unless some remedial action is taken. The two curves are more or less in parallel, which implies that the rates of incurring costs to achieve the milestones are almost the same. It may thus be deemed worthy to invest some of the budget savings made to this point to accelerate the future progress. If, at any stage, the project is rescheduled, future milestones will be rescheduled and the milestone/budget curve will need to be redrawn to maintain an up-to-date and true basis for comparison of actual performance against planned performance. Milestone monitoring is a simple way of monitoring and predicting performance trends; but as with any simple technique, it does have a number of disadvantages. Thus: •

•

•

•

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Reaction time lag Milestones tend to be separated by significant amounts of time. Typical reporting stages on larger projects could be several months apart. A milestone report could indicate a cost variance that originated in an element several months previously and it could be too late to fully correct whatever caused the variance. Residual accumulated overspend In cases where there is relatively late detection of overspending there can be a significant accumulated cost overspend. Even if the on-going expenditure levels are brought back into line, the accumulated over spend will remain unless the package can be improved still further and achieve levels of efficiency that are greater than allowed for the in the estimate. Even though the problem may be corrected it might not be possible to clear all of the pre-milestone consequences of the problem. Replanning issues Milestone programmes are very susceptible to re-planning and trade-offs. Milestones represent key completion stages throughout the project as originally planned. As the project schedule changes there is a corresponding requirement for the various milestones to change. A key reporting stage such as the submission of the outline proposals report will have to be rescheduled if there are planning problems with key dependent resources. Time scale issues Milestones are like gateways. They represent conditions at a particular point in time rather than along a time continuum. This is a limitation as the project is dynamic. Milestones represent a cross sectional view of a longitudinal process. Milestones do not allow for work in progress so a package could be ahead of schedule at a particular milestone but this will not be recorded. Elements or packages that cause a delay at one milestone may not cause a delay at the next milestone.

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Earned Value Analysis EVA is an attractive method of project control because it: • • • • • •

is dynamic; provides combined and simultaneous time- and cost-performance assessment; provides frequent reporting. The use of a good computerised EVA system allows daily reporting if required; demonstrates value as well as cost. It therefore gives a high frequency report on profitability; generates accurate assessment of the cost implication of delays; allows easier trade-off analysis in that the calculations include resource implications.

The earned value of the work performed on a project is the cost that the project estimator attached to that work when the project budget was defined. The term ‘work’ generally refers to an individual WBS element. This in turn comprises separate allowances for labour, plant, materials, fuel etc. These can all be measured and controlled separately using an EVA-based approach. EVA is a type of milestone monitoring applied specifically to determine cost and schedule variances for component sections of a project. The cost variance is the difference between the budgeted cost of the works and the actual cost. For both budgeted and actual costs, the value is taken in terms of the works actually completed or performed. Variances can be expressed in terms of measurable effort and support effort. Measurable effort relates to separate elements of work that are set within a defined schedule for accomplishment. Completion of the effort produces tangible results. Measured work packages within a project are examples of measurable effort. Support effort relates to project actions where it is difficult to isolate it into measurable units. Examples would include project support and administrative services. Variance analysis is designed to show how different parts of the budget plan are performing at any one time. There are seven major considerations involved in variance analysis, thus: •

•

Project Management

Identify and validate the variance Variances can occur for a wide range of reasons and progress on a project is very much time dependent. There may be apparent variances that are in fact products of the time delays that are always present within the project control system. For example, a particular element or work package might reveal a programmed rate of progress combined with an apparent under spend. The under spend may be a result of the package being executed more efficiently than expected or it may simply be a result of a late payment to a supplier or subcontractor. Good EVA systems make allowance for factors such as legally committed (but not yet paid) sums and goods delivered but not yet invoiced. Quantify the variance A good EVA system makes use of a variance envelope. This allows variances to occur within pre-set limits without necessarily generating an alert. There will usually be some variance on most Edinburgh Business School

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•

•

•

•

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elements and work packages and it is important that the system only alerts the project manager to significant variances. Without this safeguard, there is a risk of ‘information overload’. Determine the source of the variance Where the variance is significant, it is important that the project manager determines the causes and effects as quickly as possible. Good EVA systems run using the entire project work breakdown structure (WBS). The schedule data for each element or package is already contained in the project master schedule (PMS) and the corresponding budget and estimating data is stored in the computerised database estimating system (CDES). The EVA system needs to be able to abstract these data from the PMS and CDES packages and generate comparisons at all levels within the WBS. For example, a variance in a level 3 WBS element may in fact originate from one or more work packages at level 5 of the WBS. This may sound to be a laborious and complex process. In fact it is relatively straightforward provided: – the PMS is up-to-date; – the CDES is up-to-date; – the dynamic links between the two systems are accurate; – an efficient EVA system is used. Determine the impact of the variance on the project as a whole Some variances will have a greater potential impact than others. If there is any doubt, the project manager can use the project risk management system and risk profile (see module 3) to determine the potential impact of any given element or work package. A negative time variance on a critical activity is obviously more dangerous than a corresponding variance on a non-critical activity because the critical activity could have an impact on the overall completion date of the project. Both variances may be greater than the limit set by the variance envelope but one variance requires much more urgent project manager attention than the other. Determine the impact of the variance on other elements and packages In practice most variances do not have an immediate impact on the project success criteria, and their overall impact can often be mitigated provided they are adequately controlled. Variances more often have a localised impact, influencing elements or groups of work packages. A delay in one work package might delay the start of another work package where there is a direct dependency between the two packages. Such interdependencies may not be immediately obvious from the PMS or from the CDES. Different groups of work elements or packages may have different risk exposures and sensitivities than other groups. It is important that the project manager determines if any such characteristics and interdependencies are present before deciding on a tactical response to the variance. Determine the extent to which tactical response is already underway Significant variances usually develop over a period of time. It could be that a current variance is actually an on-going variance that has already been identified and addressed. On large projects, even with detailed recording systems, it can be very difficult to remember which variances occurred Edinburgh Business School

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previously and if any corrective measures have been put in place. It is obviously important that the project manager does not over ride existing corrective processes before they have had a chance to be completed •

Determine the range of possible outcomes of any corrective action Having identified and analysed the reasons for the variance the project manager has to determine what corrective actions are available and what affect these are likely to have. Numerous trade-off scenarios may be considered and the eventual choice will depend on a range of variables including: – the magnitude of the variance; – the availability of any time or financial reserves; – the absolute minimum acceptable performance required of the element or package; – the significance of the variance on the project as a whole.

Table 6.10

Example budget cost Monthly budget (£)

Task

Estimate

A

5 200

B

6 600

C

4 200

D

1 000

E

0

1

2

1 600

3 600

3

4

3 000

2 200

2 000

2 200 500

500

3 900

1 500

1 900

500

1 000

1 400

5

6

F

7 800

5 200

1 600

G

8 100

3 000

4 000

1 100

H

3 200

1 000

700

1 500

I

1 200 41 200

7

0 1 200

0

1 600

5 000

7 500

16 000

7 300

2 600

1 200

Consider the following example in which the budget costs are as shown in Table 6.10. Each task budget is assumed to be the work value of that task. Thus, the work value of Task E in the above example is £3900. Assume the project is now at the end of month 3 and the actual total spent on each task is as shown in Table 6.11. Table 6.11

Example actual expenditure

Task

Actual expenditure at the end of month 3 (£)

A

5 100

B

4 600

C

2 100

D

0

E

1 750

F

1 000

G

250

H

0

I

0 14 800

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The variance is calculated as shown in Table 6.12. At first sight, it would appear that the project was currently running at £700 over budget. This may indeed be the case if everything else is running as planned. However, without knowing what has actually been achieved with the expenditure to date, it is not possible to determine whether the project is on target or not. The fact that Task G has had some costs allocated to it before it is scheduled to start should give some indication that some parts of the project are running ahead of schedule, if not ahead of budget. Table 6.12

Example variance

1

2

3

Task

Actual expenditure at the end of month 3

Budgeted expenditure at the end of month 3

4

(£)

(£)

(£)

A

5 100

5 200

B

4 600

4 400

C

2 100

2 000

+100 −200 −100

D

0

0

0

E

1 750

1 500

−250

F

1 000

1 000

0

G

250

0

−250

H

0

0

0

I

0

0

0

14 800

14 100

−700

Variance (3

− 2)

To get a much fuller picture of the project’s status and to get real benefit from the data collected, it is necessary to estimate how much more has to be done on each task before it is completed. On tasks that are 100 per cent complete, the earned value is equal to the original budget, irrespective of the costs actually incurred on that task. If task A in our example is complete, then the earned value of the work done on task A is £5200 despite the fact that only £5100 was spent in achieving this earned value. Adding the estimated cost to complete each task to the actual spent so far will give the total up-to-date estimated cost. This is compared to the budget, as shown in Table 6.13. This now shows a much more positive position and forecasts the project to finish ahead of budget. Although the variances are relatively small, the project manager will focus on Tasks A, E and G to try to minimise these forecast overruns. This is the basic principle of the earned value method. Earned value analysis makes use of the following variables: • • • • • 6/66

Actual cost of the works performed (ACWP); Budgeted cost of the works performed (BCWP); Budgeted cost of works scheduled (BCWS); Scheduled time for work performed (STWP); Actual time for work performed (ATWP); Edinburgh Business School

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• • • • • Table 6.13

Cost Variance (CV); Schedule variance (SV); Budget at completion (BAC); Estimate at completion (EAC); Variance at completion (VAC).

Example of variance analysis

1

2

3

4

5

6

7

8

Task

Actual expenditure at the end of month 3

Budgeted expenditure at the end of month 3

Variance at the end of month 3 (3 − 2)

Forecast cost to complete task

Forecast cost of task (2 + 5)

Original budget

Forecast overrun / underrun (7 − 6)

(£)

(£)

(£)

(£)

(£)

(£)

(£)

A

5 100

5 200

250

5 350

5 200

−150

B

4 600

4 400

1 500

6 100

6 600

500

C

2 100

2 000

+100 −200 −100

1 700

3 900

4 200

300

D

0

0

0

1 000

1 000

1 000

0

E

1 750

1 500

−250

2 150

4 000

3 900

−100

F

1 000

1 000

6 500

7 500

7 800

300

G

250

0

−250

8 000

8 250

8 100

−150

0

H

0

0

0

3 200

3 200

3 200

0

I

0

0

0

1 200

1 200

1 200

0

14 800

14 100

−700

25 500

40 500

41 200

700

Each is described further below.

Project Management

•

Actual cost of works performed (ACWP) The actual costs of the works performed is the actual cost (in terms of payments or legally committed expenditures) incurred in order to get the project to its current level of development. This would include all invoices, overheads and other charges that have been allocated to a specific cost centre. The figure would be supplied directly from the cost control system. ACWP figures can be abstracted for virtually any part of any project. For example, ACWP figures for labour would probably come directly from the payroll section of the organisation; ACWP figures for squads of tunnellers could then be abstracted directly from the payroll database. ACWP figures for payroll would comprise a basic payment figure, allowances for overtime and bonus payments, and perhaps some kind of overhead allowance. This could be imported directly into the variance analysis spreadsheet or other software.

•

Budgeted cost of works performed (BCWP) The budgeted cost of the works performed is sometimes known as the actual earned value. It represents the budgeted cost (in terms of a priced bill or CDES values) that should have been required in order to get the project to its current level of development. The BCWP figure is generally calculated automatically within the software. The budgeted costs exist already in the CDES database, and these are simply Edinburgh Business School

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imported and processed directly for each individual work package. The works performed (WP) figure is simply an estimated percentage of works performed on each individual work package. This has to be calculated at each reporting period anyway, as it is the basis for agreeing all measured works for bonus payments and interim valuation purposes.

Activity budget cost = £1 000 000

Scheduled progress 60%

Actual progress 70% Activity start date week 0

Figure 6.21

Time now 6 weeks

Scheduled activity completion week 10

Example BCWP

Consider the activity example shown in Figure 6.21. Here, the total work package budgeted cost = £1 000 000 and the actual cost to date = (say) £750 000. The activity is programmed to start in week 0 and finish in week 10. The EVA analysis is taken up to week 6 (week 6 is ‘time now’). The budgeted cost of the work package is £1 000 000 and the actual progress or works performed is 70 per cent. This means: Budgeted cost of the works performed (BCWP) = £1 000 000 × 70% = £700 000

•

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Budgeted cost of works scheduled (BCWS) The budgeted cost of the works scheduled is sometimes known as the planned earned value. It represents the budgeted cost that should be required in order to get the project to any specified level of completion. The scheduled works are abstracted from the project planning and control software and are linked to the budgeted cost figure in terms of the proportion of work packages complete at any one time. The budgeted cost (BC) figures are imported as described above. The works scheduled (WS) figures are imported directly from the project planning software, which was used for developing the project schedules. For any given work package, the planning software has a start and finish date. By knowing these and by giving the programme a ‘time now’ figure, it can calculate the works scheduled total. The BCWS figure is then simply the budgeted cost multiplied by the works scheduled percentage. Edinburgh Business School

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Using Figure 6.21 as an example, we have: Total work package budgeted cost = £1 000 000 Actual cost to date = £750 000 Work scheduled to date = 60% Budgeted cost of the works scheduled (BCWS) = £1 000 000 × 60% = £600 000

•

Scheduled time for work performed (STWP) This is the estimated time required to perform a defined amount of work.

•

Actual time for work performed (ATWP) perform a defined amount of work.

•

Cost Variance (CV) The cost variance is the budgeted cost of work performed (BCWP) minus the actual cost of work performed (ACWP). This is normally abbreviated to the formula:

This is the actual time taken to

CV = BCWP − ACWP

Cost variance is therefore a comparison of how much the work has cost in relation to what it was budgeted to cost, both figures being in relation to works actually completed. •

Schedule variance (SV) The schedule variance is the difference between budgeted cost for the works performed (BCWP) and the budgeted cost of the works scheduled (BCWS). This is normally abbreviated to the formula: SV = BCWP − BCWS

Schedule variance is therefore a measure of the performance of the works in relation to budgeted costs. Using the same example, as in Figure 6.22, we have: Total work package budgeted cost Actual cost to date ACWP BCWP BCWS CV = BCWP − ACWP SV = BCWP − BCWS

= = = = = = =

£1 000 000 £750 000 £750 000 £700 000 £600 000 £700 000 − £750 000 = −£50 000 £700 000 − £600 000 = +£100 000

In other words, the activity is over cost but it is ahead of schedule. Significantly, it is ahead of schedule by a greater amount than it is over cost. This could be caused by a number of reasons. Examples include: Project Management

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Activity budget cost = £1 000 000 BCWS = £600 000

Scheduled progress 60% BCWP = £700 000 Actual progress 70% Activity start date week 0

Time now 6 weeks

Scheduled activity completion week 10

ACWP = £750 000

Figure 6.22

• • • • • •

Sample SV and CV values

inaccurate (pessimistic) initial time and cost estimating; better than expected team synergies; effective productivity related pay; expected delays have not occurred; better than expected performance of interdependent activities; introduction of new technologies, techniques and work processes.

In addition, this state of affairs indicates that the activity will probably eventually finish over cost and early. It should be noted that there is no direct causal relationship between CV and SV. The cost variance is based on a comparison of budgeted and actual costs for works performed, and therefore allows for work being ahead of programme or behind programme. The work package is likely to finish on cost because the schedule variance is considerably larger than the cost variance. This indicates that although the work has cost more than expected it is much further ahead on schedule. If the cost variance and schedule variance had been equal, that would have suggested completion on cost and early. The projection could be important if the work package is on a critical path. Consider Figures 6.23 and 6.24. Figure 6.23 shows the position at week 6, while Figure 6.24 shows the position at week 7. It can be inferred from the two diagrams that the position has deteriorated to some extent between weeks 6 and 7. The curves in Figure 6.25 illustrate that the activity remains over cost so long as ACWP is greater than BCWP. The activity remains ahead of schedule so long as BCWP remains greater than BCWS. The relative reduction in BCWP represents a fall in output. As this continues, the situation will worsen up to a point where the BCWP curve could meet the BCWS curve. At this point, there will no longer be any schedule advantage to justify the poor cost performance.

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Activity budget cost = £1 000 000

Scheduled progress 60%

Actual progress 70% Time now 6 weeks

Activity start date week 0 ACWP = £750 000 CV = –£50 000

Figure 6.23

BCWP = £700 000

Scheduled activity completion week 10 BCWS = £600 000

SV = £100 000

Position at week 6

Activity budget cost = £1 000 000

Scheduled progress 70%

Actual progress 75% Activity start date week 0 ACWP = £850 000 CV = –£100 000

Figure 6.24

•

Project Management

Time now 7 weeks

BCWP = £750 000

Scheduled activity completion week 10 BCWS = £700 000

SV = £50 000

Position at week 7

Budget at completion (BAC) The budget at completion is the sum of all the individual budgets (BCWS) that make up the whole project. It is sometimes known as the project baseline. It is what the project should cost in total to achieve its final level of completion.

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900 000

800 000 700 000

600 000

Week 6 ACWP

Figure 6.25

•

Week 7 BCWP

BCWS

Comparative positions weeks 6 and 7

Estimate at completion (EAC) The estimate at completion is the estimated total cost of the project. It is the sum of all direct and indirect costs to date plus authorised work remaining. Different textbooks give different methods of evaluating EAC, but generally: EAC = ACWP + estimate to complete (ETC)

and this is the updated estimate of the total project cost. This approach is sometimes known as the planned estimate approach because it relates the original planned estimate to complete (EAC) for the project to the amount of money that has been spent to date. The planned estimate approach effectively adjusts the planned estimate by the extent to which the project is currently under cost or over cost. The planned estimate approach is simplistic in that it assumes that the current underspend or overspend will continue for the remainder of the project. The current cost variance is revised at each reporting stage but the approach really only provides a ‘moving target’ revision of EAC which gradually becomes more accurate as the project approaches completion. The approach is sometimes referred to as the ‘moving gun sight’ approach. The EAC can also be expressed in terms of the budget at completion BAC as follows: EAC = BAC − CV

In this format the EAC is equivalent to the BAC minus any cost variance. A negative cost variance indicates a cost over run (BCWP < ACWP) and therefore has the effect of increasing BAC and therefore increasing EAC. EAC can also be expressed in terms of the cost variance index (CVI) as follows:   ACWP EAC = × BAC BCWP

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This approach is sometimes referred to as the current estimate approach. It is less simplistic than the planned estimate approach as it uses BAC rather than EAC. As such it includes an estimated value for the anticipated remaining work content rather than the original estimate of the cost to complete the remaining work.

•

Variance at completion (VAC) The variance at completion (VAC) is the difference between what the project should have cost (BAC) and what it is expected to actually cost (EAC). VAC = BAC − EAC

160 000 140 000 120 000

Budget

100 000

ACWP

80 000

BCWP

60 000 BCWS 40 000

Actual value

STWP

ATWP

20 000 0 0

Figure 6.26

1

2

3

4

5

6

Example EVA distribution

Figure 6.26 illustrates the basic relationships between the EVA variables in terms of project performance. In the example shown in Figure 6.26: CV = BCWP − ACWP = £75 000 − £90 000 = −£15 000 (i.e. a cost overrun of £15 000) SV = BCWP−BCWS = £75 000−£50 000 = £25 000 (i.e. ahead of schedule by £25 000) TV = STWP − ATWP = 3 months − 2 month = 1 month (i.e. one month ahead of time schedule)

The straight line relationship shown in Figure 6.26 is typical of the early stages of the work package. Most work packages will go on to exhibit the curved shape shown in Figure 6.27.

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Time now

Actual cost of project

Original estimated project budget Cost

BCWS

CV ACWP SV (cost) SV (time variance) BCWP

Time

Figure 6.27

Example EVA relationship

CV ratio =

BCWP ACWP BCWP

=

75 000 90 000 75 000

= 0.83

= 1.5 50 000 3 TV ratio = = = 1.5 ATWP 2 SV ratio =

BCWS STWP

=

Underperformance is indicated by a ratio less than one unity which confirms, in the current example, that costs are running above budget. In such circumstances, the project manager may wish to trade some of the schedule gains to bring the costs back into line. Multilevel Earned Value Analysis Another advantage of EVA, if used properly, is the ability to develop multilevel variance summaries for different levels in the project. In order to do this effectively, the EVA system has to work in conjunction with a CDES. Using a CDES, the original budget plan for a project is primed with budgeted cost (BC) values. These values remain constant throughout the life cycle of the 6/74

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project, except where official changes are made through the CAC change control system. The ACWP values for each cost centre are automatically charged to that cost centre by accounting control or through whichever section is responsible for settling invoices and paying salaries. The works scheduled (WS) figures are stored in the project schedule and can be automatically linked to the work packages elements, which in turn relate to the CAC network for the project. Linking the CDES, DMS and payment records allows BCWP, BCWS and ACWP to be automatically calculated at different levels through the project, thus allowing the development of a roll-up analysis as shown in Figure 6.28. A roll-up analysis is simply a progression upwards through a series of levels where individual cost centres are contained. The sum total of all the cost and schedule variances on a particular level form the total at the next level for the collective work element. In Figure 6.28, the cost and schedule variances are the sum of the cost and schedule variances for work packages 1.2.1. and 1.2.2. The analysis indicates that, in the example given, the overall project has a favourable cost variance and is on schedule.

Section 1.0 CV = +50 SV = 0

Section 1.1

Section 1.2

CV = –50 SV = –100

CV = +100 SV = +100

Section 1.1.1

Section 1.1.2

Section 1.2.1

Section 1.2.2

CV = –50 SV = –100

CV = 0 SV = 0

CV = +50 SV =+50

CV = +50 SV =+50

Figure 6.28

Roll-up for multilevel EVA

However, the two determinants of project performance in this example are sections 1.1 and 1.2. The performance of these two sections directly affects the overall performance of the project. In this example, section 1.1 is performing badly while section 1.2 is performing very well indeed. If section 1.1 is considered in more detail, It can be seen that the bad performance of section 1.1 is caused entirely by subsection 1.1.1. Overall, section 1.1.1 is the origin of the main problems for the project: by introducing negative cost variance and schedule variance figures, it is diluting the good performance of all other sections. It is also clear that corrective action should be taken against project subsection 1.1.1. If this subsection can be brought back to break-even performance on cost and schedule variances, the overall performance of section 1 will become Project Management

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positive, and the overall positive cost variance for the project as a whole will immediately double. WBS element 5 £25 000

£25 000

£50 000

Scheduled progress (75%) Work scheduled

Actual progress (50%) Work performed Level 1. WBS element 5.1 £12 500

£25 000

WBS element 5.2 £12 500

£37 500

£12 500

500

Scheduled progress (75%)

Scheduled progress (75%)

Actual (25%)

Actual (75%)

Work performed/ scheduled

Work scheduled

ACWP = £37 500

Work

ACWP = £37 500

Level 2.

Figure 6.29

Two-level WBS EVA analysis

Figure 6.29 illustrates the same principle in terms of actual ACWP, BCWP and BCWS values. In that illustration, level 1 element 5.1 is over cost by £25 000 and behind on programme by £25 000. At level 2, the analysis indicates that element 5’s components are performing as follows: •

Element 5.1 BCWP = 50 000 × 25% = £12 500 BCWS = ACWP = CV = SV =

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50 000 × 75% = £37 500 £37 500 BCWP − ACWP = £12 500 − £37 500 = −£25 000 BCWP − BCWS = £12 500 − £37 500 = −£25 000

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•

Element 5.2 BCWP = BCWS = ACWP = CV = SV =

50 000 × 75% = £37 500 50 000 × 75% = £37 500 £37 500 BCWP − ACWP = £37 500 − £37 500 = £0 BCWP − BCWS = £37 500 − £37 500 = £0

Element 5 thus comprises element 5.1 and 5.2 as shown in Table 6.14. The analysis shows that element 5.2 is performing satisfactorily, and is on cost and on schedule. However, element 5.1 is providing all of the cost and schedule problems that are affecting the whole work package at level 5. The next stage would be to look in more detail at the component sub-packages of element 5.1 (presumably WBS codes 5.1.1, 5.1.2 and so on) to identify where the losses are originating. This kind of top-down EVA analysis is sometimes referred to as an EVA diagnostic analysis because it is used to identify loss leaders or cost negative centres within the system. Table 6.14

Component performances

Element 5.1 5.2 Total (element 5)

6.3.3.4

CV

SV

−25 000

−25 000

0

0

−25 000

−25 000

Phase 4: Generation of Variances In applying EVA, variances are used to demonstrate project performance and the performance of individual component sections. A variance is any cost or schedule deviation from a specific and predetermined plan, and all projects have some variances. Having identified these variances, the next stage is to decide how to use them to define performance and to steer any necessary corrective actions.

Variance and Variance Envelopes Permitted variances are usually larger in the early stages of a project, becoming smaller as the project progresses. This is the origin of the concept of a variance envelope. In practice, all cost and schedule performances approximate around a mean. It is never feasible to expect performance to match projected levels precisely. Sometimes things go better than expected and sometimes worse. This produces a variance envelope around the mean projected curve (see Figure 6.30). The variance envelope defines the limits of acceptable performance around the mean, beyond which some kind of alarm bells should start to sound. The variance envelope should always diminish towards the mean as the level of design detail increases with time. Analysis of this variance envelope is one of the main applications for the monitoring and control aspects of EVA. The values for CV and SV can be used Project Management

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together to show the cost and schedule performance of any individual WBS element and also for groups of elements using a roll-up analysis. The variance generation process involves looking at cost variances (CV) and schedule variances (SV) in order to assess the performance of individual work packages and groups of work packages. This can be done in several ways. The two most common are by direct evaluation of the variances themselves or by conversion of the variances to indices.

Cost

Variance envelope Upper variance limit

Lower variance limit

Project final expenditure target area

Projected expenditure

Time

Figure 6.30

Typical variance envelope

Variance Interpretation In general terms: cost variance (CV) = BCWP − ACWP

Therefore BCWP > ACWP: BCWP < ACWP: BCWP = ACWP:

work performed has cost less. work performed has cost more. work on cost plan.

And schedule variance (SV) = BCWP − BCWS

Therefore BCWP > BCWS: BCWP < BCWS: BCWP = BCWS:

works ahead of programme. works behind programme. works on programme.

These values can also be shown as indices: Cost Variance Index (CVI) =

BCWP ACWP

so that 6/78

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CVI > 1.0: CVI < 1.0: CVI = 1.0:

good bad ok

And Schedule Variance Index (SVI) =

BCWP BCWS

so that SVI > 1.0: SVI < 1.0: SVI = 1.0:

good bad ok

It should be remembered that there is no direct causal relationship between CV and SV. For example a positive CV and a negative SV cannot be interpreted as a cost saving that is directly attributable to a delay. A positive CV means that BCWP>ACWP, in other words, the cost of each unit of production is lower than was expected and originally budgeted for. This cost performance is independent of schedule performance. The same basic saving in cost per unit could be evident with a schedule variance that is positive, negative or zero. The same consideration does not apply where a project or work package is over or under cost in relation to being ahead or behind of schedule, that is, where CV and SV as variables are not considered. A work package could indeed be ‘under cost’ as a direct consequence of a delay. In this context ‘under cost’ could mean that less money has been spent per unit time, as opposed to per unit production, than was estimated. In such cases, as opposed to where CV and SV are used, there may indeed be a direct causal link between cost performance and schedule performance. Example interpretations could be as follows: •

•

•

•

•

Project Management

CVI > 1.0, SVI > 1.0 Excellent. The project is running under cost and ahead of schedule. If the project continues like this the end result could be a net under spend and time saving. This condition could be even more favourable where the activities concerned are critical and any time saving will result in a saving on the overall time required to complete the project. CVI > 1.0, SVI = 1.0 Good. The project is running under cost and on schedule. If the condition continues like this the project will finish under cost and on schedule. This scenario could arise where the time required to do something is estimated correctly but the cost is over-estimated. CVI > 1.0, SVI < 1.0 Questionable. The project is running under cost but behind on schedule. If this condition continues the work package will finish under cost and late. CVI = 1.0, SVI > 1.0 Good. The project is running on cost and ahead of schedule. If this continues the project will be completed on cost and early. This could be especially useful if the activity is critical. CVI = 1.0, SVI = 1.0 Acceptable. This is the planned scenario. The project is operating at the correct level of cost and schedule performance. The project will finish on cost and on time if it continues like this. Edinburgh Business School

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•

•

•

•

CVI = 1.0, SVI < 1.0 Questionable. The project is running on cost but behind schedule. If it continues in this condition the project will finish on cost and late. This may or may not be acceptable depending on the priorities of the client. CVI < 1.0, SVI > 1.0 Questionable. The project is running over cost but ahead of schedule. This could be a consequence of increased output as a result of increased bonus payments resulting in improved production output. This could be useful where the activity concerned is on a critical path or where time constraints are more important than cost constraints. CVI < 1.0, SVI = 1.0 Bad. The project is running over cost and on schedule. If this condition continues the project will finish over cost and on time. This condition could arise as a result of low morale or bad work attitude where overtime and bonus payments are required to maintain production at planned levels. CVI < 1.0, SVI < 1.0 Very bad. This is the worst case. The project is running both over cost and behind on programme. If no corrective action is taken the end result will be completion over cost and late. In most cases the project manager should take immediate action to analyse and correct this situation.

Table 6.15 shows some calculations of CVI and SVI for a theoretical project. The project generally is showing negative values for cost and schedule variance. It is over cost and behind on programme. The figures indicate that the indices values are approaching a value of 1.0 (planned values) by week 6. Although the actual cost and schedule variances are not reducing significantly, they are becoming a smaller proportion of the overall expenditure on the project. Table 6.15

CVI and SVI figures for a theoretical project ACWP

BCWP

BCWS

CV

SV

CVI

SVI

Week 1

12 000

8 000

10 000

0.800000

21 000

18 000

20 000

0.857143

0.900000

Week 3

33 000

25 000

30 000

0.757576

0.833333

Week 4

44 000

36 000

40 000

0.818182

0.900000

Week 5

56 000

42 000

50 000

0.750000

0.840000

Week 6

66 000

55 000

60 000

−2 000 −2 000 −5 000 −4 000 −8 000 −5 000

0.666667

Week 2

−4 000 −3 000 −8 000 −8 000 −14 000 −11 000

0.833333

0.916667

These indices can be used as a direct indicator of performance by showing them against axes ranging from zero to unity. Any value above unity will be favourable and anything below unity will be problematical. This range of values and outcomes is represented in Figure 6.31. This kind of representation can be useful as it shows relatively easily the effect that different actions are having on the cost and schedule performance of the project. The eventual objective is to propel the project characteristics into the top right-hand zone on the diagram. In this area, CVI > 1.0 and SVI > 1.0, and therefore the project is ahead of programme and under cost. In the lower right-hand zone, SVI > 1.0 and CVI < 1.0, so that the project is ahead of schedule but behind on cost, perhaps because too much overtime is being 6/80

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paid to maintain an artificially high level of output. In the upper left-hand area, SVI < 1.0 and CVI > 1.0, and therefore the project is performing well on costs but is behind on programme. This could occur if the project has been depleted of resources. In the lower left-hand area, SVI < 1.0 and CVI < 1.0, so that the project is in trouble on both cost and schedule counts and the project manager should be taking remedial action.

CV

Schedule problem zone

No problem zone

Cost and schedule problem zone

Cost problem zone

1.0

0.0

Figure 6.31

1.0

SV

Cost and schedule variance performance grid

It is relatively easy to extend this approach to track the performance of a project work package over time as that performance changes in response to external adjustments and corrective actions. In the example shown in Figure 6.32, the project starts off in a bad position. CVI and SVI are both less than 1.0, and therefore the project has both time and cost problems. Some form of corrective action is then taken and the project moves from position 1 to position 2. In doing so, schedule performance has increased significantly but the cost problems have worsened. A typical situation that could bring this about would be a big increase in overtime or bonus payments. Output has increased but so have costs in large proportion. One response to this might be to reduce costs in the short term. It might be decided to shut down one production line and lay off staff. This has an immediate saving on salaries and running costs, but production is badly affected. The project therefore moves to position 3. Cost performance is now better, but production is unacceptably low. Project Management

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CV

SV problems

No problems 5

3

4 1.0 CV SV problems

CV problems

1

2

0.0

Figure 6.32

1.0

SV

Example variance tracking

The response then might be to restart the closed production line but make sure that it operates more efficiently. If this is done correctly, the cost curve will again increase, but the cost variance index should stay above the CVI limit of 1.0 (position 4). So long as it does this, the project will remain in the no-problem zone (NPZ) at position 5, say. Indeed, the objective of the project manager should then be to push the project performance as far away from the origin as possible (position 4 to position 5). The accounting process using EVA can also be used to track the effects of proposed corrective actions and to monitor the eventual effectiveness of these changes. Figure 6.33 illustrates the use of this approach for tracking and monitoring. Position 1 represents the original unfavourable position. Position 2 represents the second point after apparently disastrous ‘corrective’ action. The project manager realises that this position has to be adjusted. Some staff are laid off or part of the production system is closed down for while. The objective therefore becomes to reach position 3 prior to restarting with improved efficiency and moving the system to position 4. During implementation, the target loss in productivity is exceeded. A typical reason for this would be loss of morale and commitment by remaining staff after seeing a part of the system closed down. The project might therefore move to position 3a rather than position 3. Position 3a represents a condition where productivity has fallen below that targeted but this has not saved any additional money. This leaves a greater than targeted correction required in moving from position 3a to position 4. 6/82

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In all cases, proposed and actual corrections are plotted and monitored. The cost per unit change can then be demonstrated to the client as a measure of project manager effectiveness. Actual stage 3 SV correction Original stage 3 SV correction CV

SV problems

No problems

3

3a

Stage 3 CV correction 4 Target cost reduction 2–3

CV SV problems

CV problems

1

2

0.0

1.0

SV

Target loss in productivity 2–3 Actual loss in productivity 2–3a

Figure 6.33

CV and SV tracking and corrective monitoring

The Critical Ratio The ‘alarm’ system that operates in association with the variance envelope is critical. Most EVA software allows the project manager to insert different levels of variance tolerance. Variance within one set of limits does not generate any alarm. As variances reach a second level they do trigger an alarm, and variances above a third limit generate an ‘urgent’ alarm. Some software makes use of different colours for bringing attention to the relative importance of variances. Minor variances may be shown in green, with more important ones in yellow and very important ones in red. Project managers, who do not have advanced Project Management

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EVA software, can easily programme a spreadsheet (such as Excel) to perform the same function. The alarm trigger itself often makes use of the critical ratio. One format for the critical ratio is:     actual progress budget cost Critical ratio = × scheduled progress

actual cost

The critical ratio uses EVA principles in that is includes consideration of both time and cost performance. This means that performance in one aspect is linked to performance in the other aspect. From the formula shown above it is apparent that the ideal situation is where both elements are greater than unity. This case will generate a critical ratio that is itself greater than unity. Where the progress element is greater than unity and the cost element is less than unity, the value of the critical ratio will depend on the extent to which the values of each element are greater or less than unity. A particularly good timeperformance may be associated with a poor cost performance. This is logical as a team that is working faster than expected is usually consuming more resources than expected. Consider the example shown below. Actual progress = 2.0 Scheduled progress = 1.0 Budget cost = 10.0 Actual cost = 20.0    2.0 10.0 Critical ratio = × = 2.0 × 0.5 = 1.0 1.0 20.0

Progress is 100 per cent ahead of schedule and increased costs relative to the budget are up by 100 per cent. This means that the increased costs are justified by the increased progress. The critical ratio value of unity indicates that this is acceptable. The end result (if things continue unchanged) will be that the package will finish early and on cost. The critical ratio is also useful in that the project manager can apply relative weightings to the time and cost elements. Time may be more important than cost on a given project and the project manager might chose to give the actual progress component a corresponding weighting of two in relation to the cost element. The critical ratio would become:     0.5 × actual progress budget cost Critical ratio = × scheduled progress

actual cost

Multiplying the time element by a half effectively amplifies the importance of the time element relative to cost. Actual progress has to be twice as great for a time value of unity to be obtained. As an example, consider the following planned–versus–actual values for costs and progress for a project at the end of month 4, as shown in Figure 6.34 (cost performance) and Figure 6.35 (schedule performance). The critical ratio for the project month by month is set out in Table 6.16.

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Month number Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual

Figure 6.34

Task A

Estimate 5 200 5 800 6 600 5 700

B

0

1 1 600 1 750 700

4 200 4 400 1 000 100 3 900 3 200 7 800 5 900 8 100 2 800 3 200 1 000 1 200 0

C D E F G H I

1 500 1 000 1 000 900 300

4

6

5

7

2 200 700 2 200 2 000 500 100 1 900 2 200 5 200 5 000 3 000 2 500 1 000 1 000

500 500 1 600 4 000

1 100

700

1 500

0 1 200

41 200 28 900

Total

2 3 3 600 3 450 600 1 400 3 000 1 200 3 100 2 000 400 2 000

0 1 600 0 2 450

5 000 5 050

7 500 16 000 7 900 13 500

7 300 0

2 600 0

1 200 0

Example budget and actual costs to end of month 4

Month number Schedule Actual Schedule Actual Schedule Actual Schedule Actual Schedule Actual Schedule Actual Schedule Actual Schedule Actual Schedule Actual Schedule Actual

Figure 6.35

Project Management

Task A

0 0

B

0

C

0

1 31 26 0 10 0

D

0

E

0

2 100 80 21 15 0 10 0

3 100 96 67 65 48 55 0

0

0

0

F

0

0

0

G

0

0

0

H

0

0

0

38 30 13 8 0 5 0

I

0

0

0

0

Total

0 0

4 5

16 14

34 33

4 100

5 100

6 100

7 100

100 100

100

100

100

100 100 50 10 87 80 79 65 37 33 31 30

100

100

100

100

100

100

100

100

100

100

100

100

86

100

100

53

100

100

0

0

0

100

73 55

91 0

97 0

100 0

Example planned and actual schedule performance

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Table 6.16

Critical ratio values

Month number

0

1

2

3

4

Critical ratio

1

0.82

0.87

0.92

0.89

Critical ratios are often shown as diagrams. The critical ratio values are plotted month by month through the project as a curve. Where the curve dips below unity the project manager should evaluate the extent of the deficit and take action appropriate to the magnitude of the problem. The project manager also needs to watch values above unity. These indicate favourable time or cost performances but may of themselves be indicative of other potential problems. Critical ratio values of considerably greater than unity may indicate estimating or planning errors that could have an affect on the future performance of the project.

Critical ratio

1.5

1

0.5

0 0

1

2

3

4 Months

Figure 6.36

Critical-ratio analysis

Figure 6.36 shows the typical critical ratio curve for the data given in Table 6.16. The graph has been divided into separate zones that indicate the level of action that the system advises the project manager to take. The different zones will be determined by the sensitivity of the project and the level of risk that is involved in the activity concerned. Typical zone classifications are listed below. •

•

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Zone A: Take no action This zone contains minor negative variations that can be ignored for the present. The lower limit for this zone is established at the outset. In some cases the lower limit may be shifted upwards of downwards depending on the overall progress of the project. The lower limit would be shifted upwards if the project manager is trying to ‘tighten up’ on overall performance. Zone B: Record and monitor This zone contains more significant negative variations that cannot be ignored. The negative variation may not be Edinburgh Business School

Project Management

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regarded as critical but any variations that continue to move downwards through this zone may be a cause for concern. •

Zone C: Act immediately If the negative variance falls into this zone the performance is critical and the project manager has to respond at once. Immediate variance analysis and corrective trade-offs are required. Failure to do so could affect the overall outcome of the project.

•

Zone D: Emergency response required This zone represents negative variances that are super-critical. Performance can only drop to this level in exceptional circumstances and a structured emergency response is required. It is normal practice for the project manager to call an emergency team meeting if this occurs. Subsequent daily or hourly monitoring and control may be required.

•

Zone A1: Observe and note This zone contains small positive variances. These are to be encouraged and the project manager should note such occurrences for future reference. Activities that fall into this zone could be useful for feedback and for involvement in change notices (particularly those that include the possibility of additional related work!).

•

Zone A2: Investigate and correct This final zone contains activities with larger positive variances. It should not be possible for an activity to reach this zone so there is clearly a problem. Typical reasons include: –

pessimistic estimating;

–

poor quality control;

–

poor supervision;

–

undetected errors and omissions.

Example of EVA Analysis This example attempts to develop an appreciation of how an EVA system might be set up for a real project. Assume that ducting is being fixed by three teams of operatives on a new power station contract. The works have been priced by the contractor and an overall programme of works has been agreed. The services contractor’s project manager then monitors actual progress against theoretical progress to calculate cost and schedule variances. He or she then uses this as the basis for monitoring overall progress on the services installation. Each team has the same target of fixing 1000 metres of ducting per week – this is the rate of output that was assumed by the estimator when pricing the project. Each team should have fitted 1000 metres by the end of week one, 2000 metres by the end of week 2, and so on. The priced rate for ducting is £100 per metre. Table 6.17 shows the actual position at week 4. The actual rates would have to be carefully measured anyway because they act as the basis for the interim payments that are made to the contractor and any suppliers month by month throughout the project. Project Management

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Table 6.17

Actual installation rates as measured on site to week 4

Week

Team

Target output (m)

Actual output (m)

1

1

1000

1000

2

1000

1200

3

1000

800

1

2000

2000

2

2000

2600

3

2000

1800

1

3000

3000

2

3000

3800

3

3000

2600

1

4000

4000

2

4000

5500

3

4000

3200

2

3

4

It is clear from Table 6.17 that team 1 is on programme, team 2 is ahead of programme and team 3 is behind programme. The next step is to consider the actual costs that have been charged against each team for salaries etc. Some teams are costing more than others, but the various teams are working at different rates of progress. The next step is to gather all the information on actual costs from within the system. This is summarised in Table 6.18. Table 6.18

Actual costs in relation to target output and actual output

Week

Team

Target output (m)

Actual output (m)

Actual cost (£)

1

1

1000

1000

100 000

2

1000

1200

130 000

3

1000

800

100 000

1

2000

2000

200 000

2

2000

2600

260 000

3

2000

1800

200 000

1

3000

3000

300 000

2

3000

3800

400 000

3

3000

2600

330 000

1

4000

4000

400 000

2

4000

5500

600 000

3

4000

3200

430 000

2

3

4

The actual costs are the costs incurred by the organisation in carrying out the works. For the ducting teams, these would include the direct costs of the 6/88

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ducting works, including labour, plant and materials, and any variable costs. These costs have to be contained within the system anyway as they are needed for general cost control, salary payments etc. EVA values for BCWP and BCWS can now be calculated (see Table 6.19). The BCWP is the budgeted cost of the works performed. The budgeted cost is the cost per unit, which is £100 per metre of ducting constructed, multiplied by the works performed, which is the amount or quantity of ducting completed (or works performed) up to a given time. The ‘given time’ is usually today’s date or the time when the analysis is being carried out. Thus: BCWP = £100 × amount of ducting actually fixed (in metres)

The BCWS is the budgeted cost of the works scheduled. The budgeted cost is again £100 per metre, but the works scheduled is the amount or quantity that should have been fixed up to that point if the project had been on schedule: BCWS = £100 × amount of ducting scheduled to be fixed (in metres) Table 6.19

EVA variables for the three teams

Week

Team

Target output (m)

Actual output (m)

Actual cost (£)

BCWS

BCWP

1

1

1000

1000

100 000

100 000

100 000

2

1000

1200

130 000

100 000

120 000

3

1000

800

100 000

100 000

80 000

1

2000

2000

200 000

200 000

200 000

2

2000

2600

260 000

200 000

260 000

3

2000

1800

200 000

200 000

180 000

1

3000

3000

300 000

300 000

300 000

2

3000

3800

400 000

300 000

380 000

3

3000

2600

330 000

300 000

260 000

1

4000

4000

400 000

400 000

400 000

2

4000

5500

600 000

400 000

550 000

3

4000

3200

430 000

400 000

320 000

2

3

4

The cost and schedule variances are then calculated from the BCWP, BCWS and ACWP values. CV and SV values are either zero, positive or negative. Negative variance indicate that either ACWP (if a cost variance) or BCWS (if a schedule variance) is greater than BCWP. A negative value therefore indicates an overspend (cost variance) or a delay (schedule variance). The values for our example are given in Table 6.20. The figures in Table 6.20 indicate a number of immediate areas for concern. The negative CV values indicate that overspending is significant. Some teams are obviously very much over budget. The negative and positive SV values indicate that some teams are behind on programme and some are ahead. Project Management

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Table 6.20

Cost and schedule variance values

Week

Team

Target output (m)

Actual output (m)

Actual cost (£)

BCWS

BCWP

1

1

1000

1000

100 000

100 000

100 000

2

1000

1200

130 000

100 000

120 000

3

1000

800

100 000

100 000

80 000

1

2000

2000

200 000

200 000

200 000

0

0

2

2000

2600

260 000

200 000

260 000

0

60 000

3

2000

1800

200 000

200 000

180 000

1

3000

3000

300 000

300 000

300 000

2

3000

3800

400 000

300 000

380 000

3

3000

2600

330 000

300 000

260 000

1

4000

4000

400 000

400 000

400 000

2

4000

5500

600 000

400 000

550 000

3

4000

3200

430 000

400 000

320 000

2

3

4

CV

SV

0

0

−10 000 20 000 −20 000 −20 000

−20 000 −20 000 0

0

−20 000 80 000 −70 000 −40 000 0

0

−50 000 150 000 −110 000 −80 000

On a small services project, these variances and the distribution of positive and negative values would be obvious and could be acted on quickly. However, on a larger services project, with perhaps hundreds of teams working on installing all different kinds of ducting and ventilation equipment, these variances could easily be lost among large numbers of other variances, some of which require corrective action and some of which do not. In most applications, the reporting system would therefore use some kind of top-down analysis where the overall performance of the project would be considered initially, and this would then be broken down into smaller sections for individual scrutiny. This approach can provide a comprehensive diagnostic tool for highlighting variances requiring corrective action from within a large mass of other data. The cumulative values for the project as a whole (see Table 6.21) suggest that the negative cost variance is increasing and the positive schedule variance is also increasing. The cost variance has increased to a total of −£160 000 by the end of week 4 with a schedule variance of £70 000. The project is, therefore, running significantly over cost and ahead of schedule. If the project continues in this state, it is likely to finish over cost and early. In most applications this is not likely to be the most sought after outcome. Figures 6.37 and 6.38 show weekly and cumulative EVA values for the example project as a whole and for individual teams. There is an obvious disparity between the teams in terms of performance. Team 1 is working more or less on time and on cost. Team 2 is fast but expensive. Team 3 is the worst team: it is slow and expensive. Team 3 is the main contributor to the poor performance of the project. These facts are obvious from small tables of figures like those given above. However, on large projects with thousands of teams, it is necessary to use some more detailed analyses in order to make full use of the EVA system.

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Table 6.21

Cumulative values for the project as a whole

Week

Team

1

1

0

0

2

20 000

3

−10 000 −20 000

1

0

0

2

0

60 000

3

−20 000

−20 000

2

3

SV

Project total CV

−20 000

1

0

0

2

−20 000 −70 000

80 000

3 4

CV

−40 000

1

0

0

2

−50 000 −110 000

150 000

3

−80 000

Project total SV

−30 000

0

−20 000

40 000

−90 000

40 000

−160 000

70 000

In our example, ACWP value is continuing to increase relative to the BCWP value. This indicates that the overall project is over cost. However, the BCWP figure is increasing relative to BCWS, indicating that the overall project is ahead of schedule. The curves indicates that actual costs are creeping more and more ahead of budgeted costs for the ducting, and this represents grounds for growing concern. Actual progress is consistently ahead of scheduled progress, but not by an amount sufficient to justify the increased expenditure. Extending the analysis to consider the EVA performance of each individual team indicates that there are significant differences in performance. Figure 6.38 shows the variations in performance for team 2 over the first four weeks of the project. Similar graphical tracking of the teams would show easily and quickly that team 1 is progressing satisfactorily, while team 3 is moving around inside the danger zone. Performance of the whole project is therefore being more or less determined by team 2. EVA is a powerful tool for the analysis of project performance at different levels through the WBS. Provided that it is assembled carefully and is operated in conjunction with a good CDES, EVA provides the project manager with a monitoring and control system that is very accurate and powerful. It can be set to activate as soon as a variance limit is reached, and it can offer quantified comparisons of different alternative courses of action in relation to the degree of correction or adjustment that is required.

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Week 1

2

3

4

Team

Target output (M)

Actual cost (£)

Actual output (M)

BCWS

BCWP

CV

SV

1000

1000

100 000

100 000

100 000

0

0

2

1000

1200

130 000

100 000

120 000

–10 000

20 000

3

1000

800

100 000

100 000

80 000

–20 000

–20 000

330 000

300 000

300 000

1

1

2000

2000

200 000

200 000

200 000

2

2000

2600

260 000

200 000

260 000

0 0

60 000

3

2000

1800

200 000

200 000

180 000

–20 000

–20 000

660 000

600 000

640 000

300 000

300 000

300 000

0

400 000

300 000

380 000

–20 000

80 000

330 000

300 000

260 000

–70 000

–40 000

1 030 000

900 000

940 000

2

3000 3000

3000 3800

3

3000

2600

1

0

0

1

4000

4000

400 000

400 000

400 000

0

0

2

4000

5500

600 000

400 000

550 000

–50 000

150 000

3

4000

3200

430 000

400 000

320 000

–110 000

–80 000

1 430 000

1 200 000

1 270 000

1 500 000

1 000 000

500 000

1

ACWP

Figure 6.37

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2

3

4

BCWP

Week BCWS

EVA values for the project as a whole

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CV

SV problems

No problems

Week 3

Week 2

1.0 CV problems

CV SV problems Week 1

Week 4

0.0

Figure 6.38

6.3.3.5

1.0

SV

Team

Week

CVI

SVI

1

1 2 3 4

1 1 1 1

1 1 1 1

2

1 2 3 4

0.92 1.00 0.95 0.92

1.20 1.30 1.27 1.38

3

1 2 3 4

0.8 0.9 0.8 0.75

0.8 0.9 0.9 0.8

CVI and SVI figures for team 2 in weeks 1–4

Phase 5: Cost Reporting EVA offers a powerful and useful way for the project manager to identify and monitor the performance of individual sections of the project. However, the investment of time and energy in preparing project plans and budgets would be of little value if they were not used as a baseline against which to measure and control project performance. Reporting is the first step towards monitoring, analysing and ultimately managing the progress of any project. Good-quality

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information is the key to good project decision-making and therefore good project management. The quality and nature of the project reporting system will directly influence the quality, appropriateness, and timeliness of the information provided to managers and upon which they will base their decisions. Project reporting is notoriously deficient for many reasons, including the fact that: • • • • • •

•

• •

virtually all reporting systems inform retrospectively. They show what has already happened; reports are only as accurate as the information that is input to them; people sometimes feel that report production is secondary to some of their other responsibilities; people often feel that they spend a lot of time preparing reports that subsequently generate little interest or response; reports are sometimes rushed to get them ‘out of the way’; reports are often over-complex and contain more information than is actually needed. This means that they take longer to read and important points may be diluted; reports can be interpreted in different ways. It is important to follow up and make sure that important issues have been understood and any appropriate action has been taken; reports produced by different project team members are often not entirely compatible; reports often do not present the whole picture. They tend to favour the areas of most concern to the writer.

Some of these problems are compounded by the widespread use of advanced software. It is very important that reports are generated and used in context. In general reports should: • • • • • • • •

be produced on time; include only relevant information; allow for all interrelationships between the data contained in them; be honest and accurate; be issued to everybody who is involved; highlight particularly important issues; put forward proposed solutions (where appropriate); put forward clear responsibilities and time scales for implementation (where appropriate).

The level of solutions proposed and the extent to which these should include specific ownership and responsibility depends on who is writing the report. For example, the cost report might be produced by an external consultant. In this case the report is probably restricted to highlighting the primary cost variances and it is the responsibility of the project manager to devise solutions and assign responsibilities. Milestone reports that are produced by the project manager may include individual responsibilities, action plans and specific responsibilities. 6/94

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When used properly reports can be extremely useful. Timely well-written reports can: • • • • • • •

improve the overall understanding and efficiency of the project team; provide early warning of potential problems; act as an overall stabilising mechanism; contribute to the project audit trail; provide essential data to act as the basis for management decision making; assist in progress reviews; improve co-ordination of management response.

Basic Report Types There are numerous different types of report and the choice of type depends on the applications and objectives of the report. The primary traditional report types that are common to most projects are listed below. •

•

•

Project Management

Routine reports are issued routinely. The appropriate team member or consultant issues the report irrespective of the performance of the project. Routine reports are used primarily to keep team members up to date on the everyday performance of the project and do not address any specific problems or responses. Routine reports tend to be specific. Typical examples include: – cost reports; – schedule progress reports; – quality reports; – risk reports. Large projects tend to have routine review meetings. The appropriate team member or external consultant issues his or her report and talks the team through the contents. Any problems are discussed and input from all relevant parties is invited. Development review reports are used where the project or project team is undergoing any kind of development programme or where the project itself is subject to review. This type of report is typical on research and development projects where the precise work content is not known at the outset. In such cases it may be necessary to subject the project and the project team to detailed review from time to time in order to establish how well they are developing in relation to the established success criteria. In some cases the project team may not be developing in line with expectations and it may be necessary to adjust the composition of the team in order to achieve a better rate of development. Exception reports are issued primarily to highlight an exception (where something has occurred that is out of the ordinary). The project manager may issue instructions for an exception report to be generated where there is a significant time or cost variance. The initial report highlights the exception. Subsequent reports report on the origin of the exception and on the success of any corrective procedures that have been put in place. In some cases the Edinburgh Business School

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•

•

report contains an exception log. This is an on-going diary of the development of the problem and on the success or otherwise of any corrective actions. Exception reports perform a number of important functions. They act as an audit trail in that they record key decisions and actions that have been taken in order to respond to a problem. They also act as catalysts for implementing appropriate control mechanisms. Subject-specific reports are produced where a specific aspect of the project is causing concern and where detailed monitoring and control is required. Typical examples include areas where there are high impact high probability risks (see Module 3). An example is a significant delay to a critical activity. Such a delay has to be corrected or there could be delays to the completion date of the entire project. In such cases it is prudent to establish a separate reporting system so that the issue can be considered in minute detail. In some cases serious specific problems can be the subject of newly-formed trouble shooting project teams. These are teams of specialists that are tasked with resolving specific major problems. It is common practice to approach the resolution process as a separate sub-project. Project variance and analysis reports (PVAR) combine the approaches listed above. They use EVA as the primary analysis tool and address the full range of relevant information from routine reporting to the monitoring and control of specific problems. PVAR reports are discussed in more detail below.

PVAR Reporting The most common routine reporting system used in EVA is known as project variance analysis reporting (PVAR). A PVAR report is generated directly from cost data and would normally be assembled each month. The report shows the variance performance of the project as a whole and then moves down to finer levels of detail according to the WBS breakdown used by the CDES in assembling the system. The PVAR system would generally show the overall performance characteristics for the whole project as its initial level. It would then go on to produce CV and SV figures for all the work packages throughout the project. This is one of the great advantages of the CDES-based PVAR system. All the component work packages for the entire project are costed and stored as part of the CDES system. As actual data are fed into the system at each valuation, this information can be used to generate variance analysis data right down to level 6 of the WBS. The performance of individual sections or collective package totals can be observed, and then easily broken down into individual component WBS elements. A cost or time overrun at level 4 can easily be considered in more detail by looking at any component packages at level 5. The PVAR report itself would typically show: • • • 6/96

routine reporting information; development progress and review information; the performance of each level of the WBS in terms of: Edinburgh Business School

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• • • •

– ACWP. – BCWP. – BCWS. – CV. – SV. – EAC. – ETC. any significant cost or schedule variances; sources of such variances; reasons for such variances; proposed responses together with individual responsibilities, action plans and time scales.

A PVAR report includes most of the information that is contained in a range of traditional reporting systems. The primary aim of a PVAR report is to communicate all relevant information that has an impact on the achievement of the success criteria of the project. In order to function correctly the PVAR reporting system has to be intrinsically linked to both the PMS and CDES software. An example of the layout is shown in Figure 6.39.

Project: WBS code: Cost cencre/cost account code: Contractor/sub-contractor identity: Control level: Date: Responsibility: Cost performance data BCWP ACWP Month Project Reasons for variance

Figure 6.39

BCWS

CV

SV

EAC

VAR

Typical PVAR arrangement

A PVAR is produced for the project as a whole, with associated reports showing the performance of individual sections within the project. It should be stressed again that this is one of the most important aspect of a CDESbased PVAR system. PVAR analysis allows monitoring and control at the top (project) level down through the system to individual work package level. This is important in problem diagnosis because it provides a check within sections that appear to be performing well at one level while concealing loss-making sections at lower levels. The PVAR report indicates those cost centres where there are problems. For each one, it identifies ACWP, BCWP, BCWS and CV and SV values. It also Project Management

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typically makes an EAC and VAC projection (an adjusted final account total). The reasons for the variance are identified and the proposed corrective action is given. This is tracked in subsequent reports in order to ensure that the appropriate corrective action is taking place and that the action is being effective. For each problem cost centre, separate PVAR reports are generated showing: • • • • • • • •

WBS identifiers (project, elements, sub-elements etc); CAC identifier and approved budget limits; current values of ACWP, BCWP, BCWS, CV, SV, BAC, EAC, ETC and VAC figures; previous month (or other reporting period) corresponding values; year (or project) to date corresponding values (as appropriate); summary of differences between previous month and current month values; summary of significant differences (improvements and deteriorations); current EAC, ETC, ECTC, ETTC values.

The PVAR report summarises performance for the project as a whole and for each layer of component WBS elements. It would also specifically identify WBS elements where cost or time overruns are occurring. Negative variances would be traced back until an origin point is identified. Appropriate investigations would then be carried out to isolate not only the precise reasons for the poor performance but also any corrective action recommended by the project manager as part of the PVAR report. The loss-leader WBS element would then be tracked in subsequent PVAR reports in order to make sure that the corrective action was being implemented and that the package was being pulled back into line. Once the loss-leader package is back within the general project variance envelope, it will no longer be specifically referred to in subsequent PVAR reports unless it falls back out of line. The PVAR report would probably show the curves given in Figure 6.40 as an appendix while the interpretation would form the foundation of the report. These curves are an extension of the curves shown in Figure 6.27. The curves shown in Figure 6.40 could represent the project as a whole or could represent groups of elements or individual work packages. The PVAR report would illustrate the EVA performance of the project at ‘time now’. At current values it is clear that there are negative cost and schedule variances. The project or work package is therefore both over cost and behind on programme. The BCWS curve for the remainder of the project is already known and is shown as the solid line extending beyond time now. The BAC value is located at the end point of the BCWS curve. Actual costs can be projected forward based on observed performance to date. The EAC value is located at the end point of the ACWP curve. The vertical difference between EAC and BAC represent the projected cost overrun based on performance at time now. The forecast cost of the project is the sum of the ACWP and estimated cost to complete (ECTC) values at any time point. This curve is known up to time now and can be projected forward using known BCWS values and projected 6/98

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Planned completion EAC

Time now

Forecast cost overrun (VAC) Forecast cost of project Actual cost of project ECTC

Cost

BAC

Original estimated project budget

BCWS

CV

ACWP

SV (cost) SV (time) BCWP

ETTC

Time

Figure 6.40

Forecast project time slip

Earned-value performance measurement chart

(extrapolated) ACWP values. The end point of the forecast cost of the project curve coincides with the end point of the ACWP curve and represents the EAC. It follows that the vertical difference between the EAC and ACWP at time now represents the estimated cost to complete the project (ECTC). The horizontal distance between time now and the time value at EAC represents the estimated time to complete the project (ETTC). The horizontal difference between the time values at BAC and EAC represents the time over run or slippage that can be expected. It will be appreciated that using this type of approach as the basis for PVAR reports makes use of what is a very powerful and detailed performance analysis system. It should also be remembered that this level of control is not difficult to achieve. The only prerequisites are: – – – –

an effective CDES; a detailed WBS; a detailed CAC system; the periodic input of works performed values.

The WBS and CAC system exist anyway. They have to be produced in order to allow accurate pricing and planning of the project and they are the primary Project Management

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sources of data in project SOW documents. Values for works performed have to be calculated anyway as these values act as the basis for valuations, subcontractor payments, supplier payments and employee productivity payments. The approach to PVAR reporting discussed above is sometimes referred to as the ‘fishing rod’ approach. The project manager is effectively holding a fishing rod that adopts the shape and curve of the ACWP projection. The project manager can ‘reel-in’ and pull the fishing rod back horizontally by improving efficiency and performance in the project. Alternatively the project manager can ‘reel-out’ and level the fishing rod by allowing less control. Pulling back on the rod has the effect of reducing the overall project completion date although the end point of the rod may lift (EAC increases). If EAC has to be reduced the project manager has no choice other than to reel-out and allow the time slippage to extend. As the height of the rod decreases the overall EAC decreases accordingly and approaches BAC. The fishing rod analogy may appear somewhat fanciful. However once a certain level of familiarity and understanding is developed it will be seen as a very useful project control analogy. Again, it should be stressed that once the value in terms of performance variables has been established for every task, the only input required to make the system work is the approximation of works completed. Once this has been input, the EVA system can quickly and easily calculate the following parameters, which are: •

•

• • •

Earned value is the money that has been earned by doing the work to date. It is equivalent to the budget cost of the work multiplied by the amount of work completed and valued. Earned-value hours are the total budgeted number of hours multiplied by the proportion of total hours actually completed. This shows the proportion of earned value that has already been achieved and gives an indication of the proportion that remains. Anticipated final hours are the total budgeted number of hours divided by the proportion of total hours actually completed. Project efficiency is the earned value hours (see above) divided by the total hours actually completed. Project progress is the earned value hours divided by the total budgeted work hours.

Example of an EVA PVAR System The example below demonstrates how a simple EVA system can be established using standard spreadsheet software. Assume that an EVA cost control system is to be set up using PVAR reporting for teams of fitters who are fixing linings to a new tunnel. Assume that there are four teams of fitters, each working on the contract. Overall, the contract will last for several months. The target rate of lining is 20 metres per week and the estimated cost per metre is £500 – these are the fitting rates and unit costs that were assumed by the estimator when the contract was initially priced. 6/100

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The actual costs and rate of fitting could be greater or less than these figures, depending on actual progress on the works. Initially, a spreadsheet is created that records the input of actual worksperformed figures. These figures would have to be calculated anyway, as they are the basis for the monthly measurement and interim certification process. Table 6.22

Actual expenditure on each team in weeks 1–6

Team 1

Week Salary Overtime

2

3

2

3

4

5

6

10 000

10 000

10 000

10 000

10 000

0

0

0

0

0

0

Total

10 000

10 000

10 000

10 000

10 000

10 000

Cumulative

10 000

20 000

30 000

40 000

50 000

60 000 10 000

Salary

10 000

10 000

10 000

10 000

10 000

Overtime

1 000

1 000

1 000

1 000

1 000

1 000

Total

11 000

11 000

11 000

11 000

11 000

11 000

Cumulative

11 000

22 000

33 000

44 000

55 000

66 000

Salary

10 000

10 000

10 000

10 000

10 000

10 000

0

0

0

0

0

0

Total

10 000

10 000

10 000

10 000

10 000

10 000

Cumulative

10 000

20 000

30 000

40 000

50 000

60 000

Salary

10 000

8 000

7 000

7 000

5 000

7 000

0

2 000

4 000

5 000

7 000

7 000

Total

10 000

10 000

11 000

12 000

12 000

14 000

Cumulative

10 000

20 000

31 000

43 000

55 000

69 000

Overtime

4

1 10 000

Overtime

The values in Table 6.22 relate to the actual expenditure that is booked against each team for the first four weeks of the project. Some teams are being paid overtime, while others are not. The figures in bold represent cumulative totals. The actual expenditure has to be considered in the light of actual progress. The next step is therefore to consider the actual rate of progress of each team over the first six weeks of the contract. Table 6.23 shows the number of segments installed by each team per week. Team 1 installed 20 lining in week 1, and a further 20 in weeks 2, 3, 4, 5 and 6. Team 1 therefore installed a total of 120 linings in the first 6 weeks. Team 4 had a much lower rate of progress, with only 85 linings over the same period. The actual and planned values can be used to generate an EVA analysis as shown in Table 6.24. It is clear from the figures that the project is not doing very well up to week 6. The cost variance is negative and reaches a peak of −£10 000 in week 5. This point might be a peak and there might be decreases beyond this point; this would have to be carefully monitored over the subsequent few weeks to check for evidence of such a trend. Team 4 is the main area for concern on cost Project Management

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Table 6.23 Team

Actual and cumulative actual rate of installation Week 1

2

3

4

5

6

1

20

20

20

20

20

20

2

20

21

20

21

19

20

3

18

17

16

15

15

15

4

20

19

16

10

10

10

Cumulative totals 1

20

40

60

80

100

120

2

20

41

61

82

101

121

3

18

35

51

66

81

96

4

20

39

55

65

75

85

Table 6.24 Team

Variance analysis 1

2

3

4

5

6

1

10 000

20 000

30 000

40 000

50 000

60 000

2

10 000

20 000

30 000

40 000

50 000

60 000

3

10 000

20 000

30 000

40 000

50 000

60 000

4

10 000

20 000

30 000

40 000

50 000

60 000

40 000

80 000

120 000

160 000

200 000

240 000

1

10 000

20 000

30 000

40 000

50 000

60 000

2

10 000

20 500

30 500

41 000

50 500

60 500

3

9 000

17 500

25 500

33 000

40 500

48 000

BCWS

Total BCWP

4 Total

10 000

19 500

27 500

32 500

37 500

42 500

39 000

77 500

113 500

146 500

178 500

211 000

CV 1

0

0

0

0

0

0

2

−1 000 −1 000

−1 500 −2 500 −500 −4 500

−2 500 −4 500 −3 500 −10 500

−3 000 −7 000 −10 500 −20 500

−4 500 −9 500 −17 500 −31 500

−5 500 −12 000 −26 500 −44 000

3

0

4 Total

−2 000

SV 1

0

0

0

0

0

0

2

0

500

500

1 000

500

500

3

−1 000

4

0

−2 500 −500 −2 500

−4 500 −2 500 −6 500

−7 000 −7 500 −13 500

−9 500 −12 500 −21 500

−12 000 −17 500 −29 000

Total

−1 000

variance. This team is clearly over budget and the problem is increasing. Team 2 is also causing problems with no sign of improvement. The schedule variance clearly gives much greater cause for sustained concern. Teams 3 and 4 are well behind the scheduled rate of progress, and this problem is sustained over the first six weeks of the contract. The overall project values 6/102

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are clearly unacceptable and immediate action is required. Corrective actions must be directed against teams 3 and 4. Team 3 has consistently worked within cost limits, but has also worked slowly. From Table 6.22 it is clear that this team has been working purely on basic salary with no overtime. There are several reasons why this performance pattern may emerge: • • •

overtime has not been authorised by the management; conditions are more difficult than expected; basic pay does not match the effort required.

The project manager could try authorising overtime in an effort to increase output. This would increase costs in the short term. The trade-off then would be between the rate at which productivity is increased and the additional finance required. If the increase in pay is absorbed by the increase in productivity, then the project manager will probably continue to allow overtime within this team. Team 4 presents more of a problem. This team is both over cost and behind on programme. Table 6.22 shows decreasing basic salary payments and increasing overtime payments. However, increased overtime is not being matched by an increase in output. These figures suggest that there are problems with the team membership. The falling basic salary suggests high absenteeism or team member migration. It could be that the remaining team members are working overtime in an effort to maintain output despite low team numbers. Perhaps they are struggling to achieve the levels of productivity required. The PVAR report would therefore highlight the problem areas such as: • • • •

overall poor performance of the project; overall and continued deterioration of the position; low output of team 3; low output and high costs of team 4.

Typical investigation work in support of the PVAR report would be to discover the reasons for the low productivity in team 3 (poor estimating or lack of training?), and the reasons for the low productivity and high overtime in team 4 (absenteeism?). Typical proposed corrective actions would include:

Project Management

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Team 3: – authorisation of overtime; – re-evaluation of targets and conditions of work; – examination of use of provisional and contingency allowances; – examination of team efficiency and understanding of objectives.

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Team 4: – absence monitoring; – enforcement of reward and penalty systems; – disciplinary measures where necessary; – detailed future monitoring. Edinburgh Business School

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The tracking process would then include a detailed monthly analysis of how effective the proposed corrective actions are proving to be. The individual team CV and SV values would be monitored monthly or even weekly for the next six months or so. The efficiency of the corrective actions would be assessed as a function of the benefits they achieve.

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Cost planning and control is another essential project management function. Cost performance is often the primary criterion by which project success or failure is evaluated. In order to set up any kind of cost control system, it is first essential that some kind of accurate estimating takes place. This establishes the target or budget costs for individual activities. Actual costs are then compared with budgeted costs in order to generate variances. These variances measure the extent to which the project is running over or under on costs. For most practical purposes, the time and cost planning processes are intrinsically linked and use the same basic work-package elements as derived in the initial development of the project’s work breakdown structure (WBS). Cost control is similar in concept to time control and quality control. It involves the establishment of cost targets that are approved by the project team and act as project success criteria. Actual performance is then monitored against these targets in order to determine how close actual performance is in comparison with planned performance. Once variances have been identified, it is the responsibility of the project manager to take control of the situation and try to check adverse anomalies as early, as efficiently and as effectively as possible. In almost every case, the project manager will have to call on his or her general managerial skills to address any variances. A cost control system has to be accurate. The budget plan is only as accurate as the information that is used to assemble it. In order to be able to prepare accurate budgets, it is crucial that all the work input to a particular work package or task has been thoroughly and carefully considered, and that all the relevant information has been taken into account. The cost control system is only as accurate as the estimating process used to prepare it. Cost planning should be based on detailed calculations and good use of established data in order to produce accurate, fair and workable estimates of the required involvement of plant, materials and labour. In order to budget accurately, the parameters of the task must be clearly and unambiguously determined. The budget has to be fair and reasonable, and must accurately reflect the likely costs of performing within budget in a proficient manner. Edinburgh Business School

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In order to control expenditure against budget, there must be a clear and unambiguous system of authorisation. In order to work, the cost control system has to be dynamic. The accuracy of the output from a cost control system will be a function of the frequency at which analysis takes place. It is therefore important to design the cost control system so that it can perform rapid and frequent analyses of the data. Cybernetic control is the most common basic approach. This is the most common method of control and its key feature is its automatic response mechanism. To control the project, the outputs must be monitored and compared against a set of standards. Most cost control systems cannot operate as simple low-level systems. The main reason for this is that projects continually evolve and change as the factors influencing the project characteristics change. Typical factors causing change are client requirements, variation orders, and changing internal and external environmental conditions. While a high-level cybernetic control system is appropriate for tracking and controlling overall project performance, or at least performance of large work packages or sectors well up the WBS structure, an analogue system can be used on almost every aspect of a project. Analogue controls take a form of testing that determines whether specific preconditions are met – and for many facets of the project it is sufficient to know whether the pre-conditions have or have not been met. In practice, most projects incorporate some form of analogue control system in the form of gateways. Cybernetic controls are designed to be automatic and will operate as often as they are designed to, whereas an analogue control system will only operate when and if the people who are controlling the project use them. Cybernetic and analogue controls are directed towards accomplishing the goals of an ongoing project; feedback controls are applied after the project has finished, so as to improve the chances for future projects to meet their objectives. Feedback control takes an evaluation of performance on an existing project and uses this as a form of learning to try to improve control procedures for future projects. In preparing overall project budgets and estimates, it is necessary to consider the different types of costs that may or may not be incurred during the project and the allowances that should be included to mitigate the inherent risk of projects. Direct costs are the costs directly attributable to the job or project task; direct costs include the labour, materials and equipment charges directly related to carrying out that task. Materials, components and expenses directly attributable to a particular project should be classed as direct. Very often companies will take on projects at a sales price that only covers direct costs in order to achieve some strategic objective – for example, to increase market share or to try out a new technology. Edinburgh Business School

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Factory costs are applicable to manufacturing projects and are the total costs of the project before any additional mark-up for profit. They include all direct and indirect costs for materials, facilities, labour, equipment and expenses.

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Fixed costs are fixed and will continue to be incurred irrespective of the level of activity on the project. These include management and administrative salaries, rent, rates, heating, insurance and so on. Fixed costs tend to form the major part of a project’s indirect (or overhead) cost.

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Indirect costs or overheads include the facilities, services and personnel costs that exist in a company irrespective of the project. They include such costs as factories, office accommodation, personnel, training, accounts and marketing.

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In project organisations, the indirect costs must be recovered through the projects and they are often a serious cause of disagreement with project managers. The recovery of indirect costs is spread over a company’s projects and it is a matter for often heated debate as to how much should be attributable to any one project.

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Variable costs are those costs that are incurred at a rate that depends on the level of work activity. These are usually direct costs, but some may have a small indirect content. For example, if temporary administration staff have to be employed at head office for the duration of a particular part of a project, these may be classed as variable and indirect.

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Contingency allowance covers additional costs that are inevitable as a result of the highly unpredictable nature of projects.

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Historical data from previous projects usually provide a reasonable indicator of how much to add to a project for contingencies.

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Cost escalation is generally more relevant to longer-term projects and is the direct result of inflation. It is fairly easy to predict short-term rises in labour, materials and equipment costs in stable economies, although even they are not totally immune to surprises.

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Provisional sums are estimated to cover work that might arise during the course of a project. The project contractor may include a provisional cost to be added to the project price for work that is foreseen but not clearly defined at the outset.

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Foreign currencies are often problematical. Projects are often undertaken overseas or involve a number of overseas companies either as suppliers or project partners. It is sensible to price, be paid for, and pay subcontractors and suppliers in the client’s own currency (irrespective of the location of the project) so as to protect the price against any currency fluctuations that may occur during the course of the project.

•

Life cycle costing (LCC) can be defined as the total cost of ownership of a product, structure or system over its useful life.

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The LCC approach considers the costs of the whole life cycle of the project, not simply the costs of the work package or element that is being considered as part of an individual exercise. Edinburgh Business School

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LCC is needed because decisions made during the early stages of a design process invariably have an impact on longer-term performance in the later stages. LCC encourages long-range considerations. As with strategic planning, LCC forces the client and the design team people to look ahead and to consider costs well into the future, rather than restricting the consideration to straightforward development and construction costs. LCC encourages subsequent strategic budgeting and (theoretically) produces high-quality early estimates. This allows budgets to be imposed well in advance (strategic budgeting). LCC influences the overall cost viability of a project. A project is no longer seen as being in a cost window in real time: the execution phase becomes only one window of many. LCC influences early-stage decision making. For example, the capital costs of two products may be similar but the maintenance costs may be totally different. It would be wrong to consider them evenly matched in terms of the initial capital cost only. LCC relies on the assumption of a known and deterministic life cycle. Some projects may not have a wholly deterministic life cycle, and it is not always possible to predict the overall length of each life-cycle phase and therefore it might not be possible to cost each phase accurately.

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Most researchers represent the PCCS as a two-cycle system. The first cycle is the planning cycle. This includes all aspects of pricing, estimating, establishing targets and budgets, and setting up accurate cost plans. The second cycle is the operating cycle. This involves a number of separate phases. In its most simple form, an operating cycle contains some kind of work-release mechanism, a methodology for observing and collecting cost data from the system so that actual costs can be compared with targets, a comparison system, and a reporting system. The planning cycle includes PCCS Phase 1, which is the planning process. Some texts refer to Phase 1 as the planning and control system. It consists of breaking down the project into separately controllable packages and then calculating a cost target or budget limit for each one. Initially, a project budget is developed from the original cost estimates used in the project proposal. This is then reviewed and adjusted until the final version becomes the approved authorised limit for spending on the project. This version is itself modified once the actual costs of the various work packages are established. The project budget is usually developed from scratch using some form of statement of works (SOW). It establishes budget totals or cost limits for each work package within the project. The budget should spread across the project WBS so that there is a specific budget for each work package. Edinburgh Business School

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Budgets are generally not static, particularly in large projects where the exact scope of work is difficult to define clearly at the outset. They change throughout the life cycle of a project, and with every agreed project scope variation (or change order) there is an associated variation in cost that has to be budgeted for. Most changes to project budgets are necessitated by the issue of change notices. These are variation orders that are issued by the project manager or design team members. In large projects, changes to the project budget are often formalised through the issue of a cost accounting variation notice (CAVN). This section of the project’s configuration management system (CMS) stores and monitors all the various sections of the project budget plan and corresponding cost accounting code (CAC) values. As a change is authorised, the budget plan is upgraded and the CAC entries that are affected are increased or decreased accordingly. This ensures that the budget plan remains up to date as changes occur. Any project budget plan is only as accurate as the estimated costs that have been allocated against each work package. The estimated costs must be accurate if the budget plan is to be realistic. It is generally accepted that the better the project is defined, the less chance there is for making estimating errors. The estimating process involves the preparation of an accurate estimate of the cost of a work package or element by allowing for the costs of individual components of the package. Once the project or work package has been approved in principle, the next stage is to prepare the bid for approval by senior management. In most cases, obtaining project approval for proceeding with a project (or subsections of a project) either internally or externally will involve some kind of bidding process. The bid for resources must include an estimate of what the actual works that are contained within the project SOW are going to cost. Estimating accurate tender submissions is notoriously difficult. Contractor and supplier pricing policies are very fickle and can change from day to day. In most project applications there are three estimate types, each with a characteristic level of input and accuracy. The types are the order-of-magnitude estimates, the indicative estimate and the definitive estimate. The definitive estimate is produced from reasonable standard drawings, supplier quotes, contractor and subcontractor prices, etc. It duplicates the process that the bidder will eventually carry out in pricing the contract documentation. It should be accurate within 5 per cent. Sources of estimating data include estimating manuals, published data, databases and own records. A typical medium-sized project generates a need for a number of reports. Generally, there will be a requirement for a report to senior management detailing the revised estimate total and comparing this to the budget plan total from the overall SPP. Edinburgh Business School

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Top-down estimating is very common and involves senior management setting the overall project budget. They do this by estimating the overall project costs, as well as the significant sub-project costs that comprise it, on the basis of their experience and knowledge and of accessible project data. Top-down estimate budgets are often fixed and then handed down to lower-level managers to break down the costs into individual activity and work-package level. They then allocate budgets to these activities. Bottom-up budgeting relies upon the project budget being developed from individual activity level upwards. In bottom-up estimating, each activity is estimated as accurately as possible in terms of labour hours, materials and equipment required to complete the task. These estimates are then converted into the financial cost estimate. Computerised database estimating systems (CDES) are used during the estimate measurement process. In manufacturing/engineering/construction projects, drawing information is transcribed directly into the CDES either by manual measurement or by scanning directly from drawings using a digitiser. The CDES then stores an electronic version of the drawing data and builds up an automatic electronic budget plan. A CDES is usually configured so that information is taken from the drawings or other SOW information according to a standard method of measurement. The CDES usually has a series of alternative databases available. Each database contains a complete library of standard descriptions that are taken directly from a standard method of measurement. The project cost control system (PCCS) comprises planning and control cycles. The control cycle consists of work initiation, cost data collection, generation of variances and reporting phases. Most PCCS cost data analysis is based on earned value analysis (EVA). This takes place in phases 3 and 4 of the operating cycle. Variance analysis is designed to show how different parts of the budget plan are performing at any one time. The main variables measured in EVA are actual cost of the works performed (ACWP), budgeted cost of the works performed (BCWP), budgeted cost of works scheduled (BCWS), scheduled time for work performed (STWP), actual time for work performed (ATWP), cost variance (CV), schedule variance (SV), budget at completion (BAC), estimate at completion (EAC) and variance at completion (VAC). The actual cost of the works performed (ACWP) is the actual cost (in terms of payments or other legally-committed amounts) expended in order to get the project to its current level of development. The budgeted cost of the works performed (BCWP) is sometimes known as the actual earned value. It represents the budgeted cost (in terms of priced bill or CDES values) that should have been required in order to get the project to its current level of development. The budgeted cost of the works scheduled (BCWS) is sometimes known as the planned earned value. It represents the budgeted cost that should be required in order to get the project to any specified level of completion. Edinburgh Business School

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The scheduled time for work performed (STWP) is the estimated time required to perform a defined amount of work. The actual time for work performed (ATWP) is the actual time taken to perform that work. The variance at completion (VAC) is the difference between the planned and actual project cost. The cost variance is the result of a comparison of how much the work has cost in comparison with what it was budgeted to cost, both in relation to works actually completed. Schedule variance (SV) is the difference between budgeted cost for the works completed and performed and the budgeted cost of the works scheduled. The budget at completion (BAC) is the sum of all the individual budgets (BCWS) that make up the project. It is sometimes known as the project baseline. The estimate at completion (EAC) is the estimated total cost of the project. It is the sum of all direct and indirect costs to date plus authorised work remaining. The EAC can also be expressed in terms of a revised estimate. The cost accounting process of the PCCS involves looking at cost variance (CV) and schedule variance (SV) in order to assess the performance of individual packages and groups of packages. This can be done in several ways. The two most common are by direct evaluation of the variances themselves or by conversion of the variances to indices. The critical ratio can often be used to trigger alarm bells if project performance falls below a certain level. The critical ratio is equivalent to (actual progress / scheduled progress) × (budget cost / actual cost) A critical ratio of unity or more is good and means that actual performance is better than planned performance. Conversely, a critical ratio less than unity is poor and is an indication of underperformance. There are five main types of report required for competent project management: routine reports, development review reports, exception reports, subject-specific reports and PVAR reports. Routine reports are those issued regularly on a periodic basis; in some cases these may be submitted on a monthly, weekly or even daily basis. They may be triggered by regular project meetings or by milestones. Exception reports are useful where they are directly oriented to project management decision making, and they should be distributed to the project team members who have responsibility for these decisions or who have a clear need to know. The reports may also be issued when a decision is made on an exception basis, and it is desirable to inform other managers as well as to document the decision. Subject-specific reports are used to disseminate the results of special studies that are conducted as part of the project or that arise in a relevant way during the project. These reports are usually distributed to anyone who may be interested and may include issues pertinent to the project, such as Edinburgh Business School

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• •

alternative materials, new software capability, new government legislation and so on. The end result of the PCCS process is a report (or set of reports) for project variance analysis reporting (PVAR). The PVAR report itself would typically show WBS code, date, authorisations, cost centre/cost accounting number, item description/work package, BCWS, BCWP, ACWP performance data, scheduled and actual costs for variance, estimated budget, EAC and VAC variance, problem cause and impact, proposed corrective action, estimated extent of recovery (with dates), and all associated dates and signatures.

Review Questions True/False Questions Project Cost Planning and control systems 6.1 Cost planning and control can operate in isolation from time and quality considerations. T or F? 6.2 A cost plan is the same as a budget plan. T or F? 6.3 Budget plans generally use the same work packages and cost accounting codes as identified in the main project WBS. T or F? 6.4 Variance analysis is the only effective approach to cost monitoring and control. T or F? 6.5 Most cost control systems use a retrospective approach rather than a proactive one. T or F? 6.6 Cost control systems must be dynamic and responsive to changes in the project as a whole. T or F? 6.7 Most of the final cost of a project occurs through change notices after the original scope of the works has been agreed. T or F? 6.8 One of the main functional requirements of a cost control system is that it must be able to process project data quickly. T or F? 6.9 Cybernetic control is based on the concept of an automatic response to actual performance against target performance. T or F? 6.10 Cybernetic control systems are best suited to large complex packages. T or F? 6.11 Analogue systems are appropriate to all levels of work package. T or F? 6.12 Post control reviews are used as the basis for project performance feedback. T or F?

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6.13 ‘Below the line’ costs include all contingencies, provisional sums and other provisions for works that are unforeseeable or not directly measurable. T or F? 6.14 Direct costs are those costs that are directly attributable to the project, for example to cover project labour, plant and materials. T or F? 6.15 Fixed costs represent overheads that continue at a given level irrespective of the level of output or performance of the project. T or F? 6.16 Variable costs are those costs that vary in relation to the output or performance of the project. T or F? 6.17 Life cycle costs (LCC) can be defined as the total cost of ownership of a product, structure or system over its useful life. T or F?

The Project Cost Control System (PCCS) 6.18 A project cost control system (PCCS) has two cycles and five phases. T or F? 6.19 PCCS cycle 1 is concerned with the cost planning process. T or F? 6.20 Accurate cost planning depends on accurate estimating. T or F? 6.21 Most estimating is done manually. T or F? 6.22 Top-down estimating is based on the establishment of estimates by senior management that are then imposed on lower levels of the system. T or F? 6.23 Bottom-up estimating is based on the establishment of operational estimates by production units, which are then relayed to senior management. T or F? 6.24 A departmental budget set by section heads is an example of both top-down and bottom-up estimating. T or F? 6.25 A project manager’s bid for finance in support of the development of a new project within an existing organisational structure is an example of top-down estimating. T or F? 6.26 PCCS cycle 2 is concerned with the monitoring and control process. T or F? 6.27 ACWP represents the actual costs involved in taking the works up to a certain level of completion. It involves all overheads and other legally-committed amounts. T or F? 6.28 BCWP represents the budgeted costs involved in taking the works up to the programmed or scheduled level of completion by a certain date. T or F? 6.29 EAC represents the estimated total cost of the project. T or F?

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Multiple Choice Questions Project Cost Planning and Control Systems 6.30 Most cost planning and control systems are A

proactive.

B

reactive.

C

combination.

D

neither.

6.31 Cybernetic control systems are based on which of the following? A

Automatic reactive response.

B

Pre-programmed response.

C

Random response.

D

Other.

6.32 Which of the following does a first-order cybernetic control system utilise? A

Pre-programmed responses.

B

Conscious, memory-based judgmental responses.

C

Immediate comparison of performance with standard.

D

Other.

6.33 Which of the following does a second-order cybernetic control system utilise? A

Pre-programmed responses.

B

Conscious, memory-based judgmental responses.

C

Immediate comparison of performance with standard.

D

Other.

6.34 Which of the following does a third-order cybernetic control system utilise? A

Pre-programmed responses.

B

Conscious, memory-based judgmental responses.

C

Immediate comparison of performance with standard.

D

Other.

6.35 Head office contributions are an example of A

project direct costs.

B

project indirect costs.

C

project overhead costs.

D

project below-the-line costs.

6.36 Contingencies are an example of

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project direct costs.

B

project indirect costs.

C

project overhead costs.

D

project below-the-line costs.

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6.37 Project chargeable labour costs are an example of A

project direct costs.

B

project indirect costs.

C

project overhead costs.

D

project below-the-line costs.

6.38 Typical contingencies for a project at inception stage would be A

1%.

B

5%.

C

10%.

D

more than 10%.

6.39 Typical contingencies for a project at tender stage would be A

1%.

B

5%.

C

10%.

D

more than 10%.

6.40 Measured works are which of the following? A

Works measured in the SOW.

B

Works specified in the SOW.

C

Works shown on the project drawings.

D

Works included in the project specification.

6.41 The project final account figure is generally taken to be A

the total amount paid to the main contractor.

B

the total payments through the contract.

C

total design fees paid.

D

total direct payments.

The Project Cost Control System (PCCS) 6.42 A project cost control system typically comprises which of the following? A

One cycle, two phases.

B

Two cycles, two phases.

C

Two cycles, four phases.

D

Two cycles, five phases.

6.43 Which of the following is a cycle two, phase two?

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A

Work initiation.

B

Cost data collection.

C

Generation of variances.

D

Cost reporting.

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6.44 Which of the following is a cycle two, phase three? A

Work initiation.

B

Cost data collection.

C

Generation of variances.

D

Cost reporting.

6.45 Which of the following is a cycle two, phase four? A

Work initiation.

B

Cost data collection.

C

Generation of variances.

D

Cost reporting.

6.46 Earned Value Analysis takes place primarily in A

cycle one phase one.

B

cycle two phase two.

C

cycle two phase three.

D

cycle two phases three and four.

6.47 The least detailed level of estimating takes place in A

the order-of-magnitude estimate.

B

the definitive estimate.

C

the budget estimate.

D

the management reserve.

6.48 Computerised database estimating systems (CDESs) contain A

standard library of works descriptions.

B

ditto plus unit price databases.

C

profit schedules.

D

all of the above.

6.49 Cost variance (CV) is given by A

CV = BCWP − ACWP.

B

CV = BCWS − BCWP.

C

CV = ACWP− EAC.

D

CV = BCWP − BCWS.

6.50 Schedule variance (SV) is given by A

SV = BCWP − ACWP.

B

SV = BCWS − BCWP.

C

SV = ACWP− EAC.

D

SV = BCWP − BCWS.

6.51 The critical ratio is equal to

Project Management

A

(actual progress / scheduled progress) × (budget cost / actual cost).

B

(scheduled progress / actual progress) × (budget cost / actual cost).

C

(actual progress / scheduled progress) × (actual cost / budget cost).

D

(actual progress / scheduled progress) × (budget cost / scheduled cost).

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6.52 A critical ratio equal to 1.0 indicates that A

actual performance is worse than planned.

B

actual performance matches planned.

C

actual performance is better than planned.

D

other.

6.53 If SVI > 1.0 and CVI < 1.0, the package concerned is A

ahead on programme and over cost.

B

ahead on programme and on cost.

C

behind on programme and under cost.

D

behind on programme and over cost.

6.54 If SVI < 1.0 and CVI < 1.0, the package concerned is A

ahead on programme and over cost.

B

ahead on programme and on cost.

C

behind on programme and under cost.

D

behind on programme and over cost.

Mini-Case Study Background Big projects always seem to go over cost. No matter how carefully they are planned and controlled the cost always seems to get out of control. Why is this? Surely it can’t be so difficult to keep control over what is being spent? Consider the case of the Scottish Parliament. In 1707 the Scottish Parliament decided to combine with the English Parliament at Westminster in London. For 290 years there was no parliament in Scotland. In 1997 the people of Scotland decided by referendum that they would like their old parliament back. The British government, which had promoted the vote in favour of both a Scottish parliament and independent tax-raising powers was wholeheartedly in favour. It was agreed that the new Scottish parliament should be housed in a new building of suitable standing and grandeur. Provisional plans were agreed in 1997, and it was agreed that the new Scottish Parliament building would cost about £40 million. By 1999, architects had begun detailed design works and the estimated cost had risen to £50 million. The chief architect was Enric Miralles, a Spanish architect who had previously won a number of prestigious European architectural design competitions. The main problem was that the design was flexible. Miralles was asked to produce a design rather than being given a detailed and highly-structured brief to design around. The result was an interesting design but one that courted controversy. Many people said that the first proposal looked like a series of upturned fishing boats. A series of design changes were then made, all of which added to the overall cost and completion date of the project. By March 2000, the estimated final cost of the building had risen to £190 million. An independent report also put the completion date into 2004 for the 6/116

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first time. As a result a series of cost reduction exercises were initiated, including a reduction in the total car parking space and a significant reduction in internal trim and finishes in many areas of the building. The independent report also concluded that the possibility of moving to a different site would be expensive and time consuming, and that it would cost around £30 million to scrap the project as it had developed at that time. In April 2000, MSPs voted to continue with the current development. The vote (75 to 33 with 10 abstentions) was in favour of removing the £190 million estimate limit and dissolving the price limit. As costs escalated, the Westminster Public Accounts Committee became involved. Increasing controversy followed as Members of the Scottish Parliament (MSPs) insisted that control of the expenditure on the building had been devolved, along with the devolution of power vote in the 1997 referendum. By December 2002 the estimated final cost had risen to £325 million. This latest estimate represented an increase of £16 million on the previous official estimate of £309 million. The increase was blamed on two primary factors which were: • •

additional expenditure on delayed work packages; acceleration costs on other work packages.

Ironically, additional payments to suppliers and sub-contractors as a result of delays in related works (thereby incurring extension costs of about £6.6 million) coupled with the costs needed to fund acceleration (project crashing) in other work packages (amounting to about £9.9 million) together caused the bulk of the latest estimated final cost. At the same time, the estimated completion date for the new parliament was revised to August 2003, largely because blast testing of windows could not be completed until that time. The original specification had called for a blast-proof structure but the degree of blast proofing required increased considerably after September 11, 2001. This change in specification resulted in considerable time and cost increase implications. Questions: In the case of the Scottish Parliament the estimated costs of the project rose from £40 million to £325 million (December 2002). The final cost will probably be nearer £400 million by the time everything is completed. 1 Discuss how it is possible that such a high profile and politically sensitive project could go over cost by 1000 per cent. 2 The latest cost increases relate to both delays and accelerations. Explain how this situation can arise.

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Module 7

Project Quality Management Contents Introduction

7.2 7.2.1 7.2.2 7.2.3

Quality Management as a Concept Introduction The Traditional Japanese View Quality Standards

7/3 7/3 7/4 7/15

7.3 7.3.1 7.3.2 7.3.3 7.3.4

The Quality Gurus Deming Juran Crosby Imai

7/20 7/23 7/30 7/32 7/35

7.4 7.4.1 7.4.2 7.4.3 7.4.4 7.4.5 7.4.6 7.4.7 7.4.8

The Quality Management ‘Six Pack’ Introduction Quality Policy Quality Objectives Quality Assurance Quality Control Quality Audit Quality Assurance Plan and Review Quality Control Tools

7/36 7/36 7/38 7/39 7/41 7/42 7/45 7/46 7/51

7.5 7.5.1 7.5.2 7.5.3 7.5.4 7.5.5

Total Quality Management Introduction Definition of TQM TQM Structure TQM Implementation Advantages and Disadvantages of TQM Systems

7/61 7/61 7/62 7/63 7/65 7/68

7.6 7.6.1 7.6.2 7.6.3 7.6.4

Configuration Management Introduction Configuration Management System Components Configuration Management Baselines Summary

7/70 7/70 7/72 7/79 7/80

7.7 7.7.1 7.7.2 7.7.3 7.7.4

Concurrent Engineering and Time-Based Competition Introduction The Concept of Concurrent Engineering Phased and Fast-Track Concurrent Engineering Advantages and Disadvantages of Concurrent Engineering

7/80 7/80 7/81 7/85 7/88

Learning Summary

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Review Questions

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Mini-Case Study

7.1

Introduction ISO9000 defines quality as: The totality of feature and characteristics of a product or service that bears on its ability to satisfy stated or implied needs.

Quality is one of the main technical ‘non-people’ control issues in project management. It forms the boundary of the time–cost quality continuum discussed in Modules 1 and 2. Quality control is just as important as time and cost control. There is no point in completing a project early, or under the cost limit, if the end product is defective or does not meet the specification or minimum standards that apply. Equally, it is dangerous to trade off quality performance against cost or time. The negative effects of doing so may not be so immediately obvious, but can have equal or greater implications later on. Indeed, quality is unique amongst the classic success criteria in that it has a true value and cost that may be well above the immediate amounts quantified in standard trade-off analysis. It is one thing to deliver a project late; it is quite another to deliver a project on time but with defects. Such defects can affect the whole attitude of the client and/or the customer base. Once client and/or customer confidence in the product has been damaged, it can be extremely difficult to recover that confidence. There are numerous examples of companies that have experienced quality problems that have damaged their reputation to such an extent that they never recover. Some of these examples will be discussed in the module. Quality management extends beyond the quality assurance and control systems that are evident in most production systems. The establishment of quality assurance and control systems can be a relatively straightforward process in some cases. A system to check the repetitive manufacture of products such as bottles or screws can use a relatively simple sampling process, backed up by some kind of straightforward statistical analysis. The sampling process can take random samples from each production run and compare these against a standard product. Variations in quality can be established within some kind of limit. Bottle glass might be evaluated in terms of the number of imperfections that are visible within a sample area, or in terms of the weight of the bottle in relation to the standard. Bottles that fall outside acceptable limits are rejected, either individually or in batches. This kind of approach is not possible on all production systems. Projects are by definition non-repetitive, and it is therefore not possible to apply standard sampling techniques on batches of outputs. In addition, projects tend to be complex; there may be a requirement for large numbers of quality controls on a wide range of different parts of the system. This module therefore looks at the wider range of issues surrounding quality management as a concept, and it examines some specific applications of quality management in more detail. 7/2

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Learning Objectives By the time that you have completed this section, you should be able to: • • • • • • • •

7.2 7.2.1

understand the concept of quality management; understand the concept of configuration management; understand the main principles of concurrent engineering; define and discuss the quality management ‘six pack’; summarise the primary quality-control tools; understand the main principles of total quality management (TQM); summarise the main historical TQM ‘guru’ approaches; understand the concept of quality function deployment.

Quality Management as a Concept Introduction Quality Management is an increasingly important consideration for project managers. It has developed an increasing significance in most industries since the 1970s and has now reached a point where it is a central factor in most project decision-making processes. The emergence of quality management, and its role as a central objective for project managers, has had a long and chequered history. In the UK before the 1940s, much of industry was geared up to providing goods within a more or less protected economy. This allowed industries to flourish in an environment of little or no competition and therefore of low quality requirements. This all changed in the late 1940s and the 1950s. New producers began to appear all over the world, and these began to challenge the existing industrial base. This transition resulted in a general change in management perceptions about quality. Increased competition created a highly competitive environment. Many traditional industries declined and became extinct in the face of fierce competition from Asia. In the industries that survived, the basic objective of most organisations was to maximise output at the lowest possible cost. Most senior managers assumed that consumers wanted goods at the lowest possible prices and that this overrode any other consideration. This was very much a general attitude in most parts of Europe and the US into the 1960s. It endured for years as a philosophy despite the obvious collapse of many firms in the face of foreign competition (primarily at that time from Japan and other Asian countries). From the mid-1960s to the mid-1980s, the Japanese systematically dominated virtually every western industry that they targeted. Anyone over the age of 40 in the year 2000 will remember the proliferation of Japanese motorbikes, cameras, electronics, television sets and cars that appeared in the 1970s. Japanese companies such as Datsun-Nissan captured large sections of the UK car market; similar experiences occurred with a wide range of other products. This sudden change was not caused because the new Japanese products were significantly cheaper than their UK competitors. Instead, it had a lot to do with quality.

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Quality management was – and is – about being able to produce goods to a guaranteed standard of quality for a given price. Reducing defects encourages sales: more people realise that the product is reliable and of good value; more people buy the product; and this allows it to be produced at a lower cost while maintaining quality. In the 1970s, the Japanese used European and US goods as models. They developed their own versions to rival existing products. However, by making effective use of quality management, the Japanese were able to produce goods of equal quality at a slightly lower cost. The lower cost led to lower prices that increased customer interest and sales rose; this allowed the Japanese to invest in their production systems and produce the same quality goods at still lower costs, which could be sold at even lower prices. The lower prices increased sales to such an extent that the Japanese were able to invest even more in their production systems and develop completely new models, using the same quality-management approaches. This process allowed them to change the basis of competition, from goods of equal quality at a lower price to goods of better quality at the same price. The next stage was to offer better-quality goods at lower prices. These developments led to the formulation and establishment of quality management as a discipline. In line with the Japanese view, quality management is concerned with the production of goods or services that exceed the expectations of the client at any given price level. Quality management for the Japanese was seen as an integral part of creating competitive advantage. They foresaw that competitive products have to be produced to acceptable standards of quality as well as to cost and time limits. Western companies eventually realised this and quality management is now a primary objective. This growing measure of perceived importance is reflected in the proliferation of quality-management and quality-control standards, such as BS5750, ISO9000, BS6079 and ISO10006. These UK and international standards all perceive quality management and the so-called ‘total quality management’ (TQM) as being equal in status to cost and time planning and control. Quality is thus one of the primary responsibilities of the project manager. It is important to view quality management as one of the three primary project management objectives. Quality cannot, in most cases, be considered in isolation from time and cost. There is virtually always a trade-off to be made in setting standards for one or more of these variables. Standards of quality are generally set by the client. They are generally stated as minimum standards that will be acceptable. Where quality level is an option, such as for a manufacturer setting up a new production system, the level of quality that is required will take account of a range of internal and external factors. 7.2.2

The Traditional Japanese View The Japanese quality-management successes of the 1960s, 1970s and 1980s were based on their classic view of quality management. At that time, these were radical views as far as US and Western European companies were concerned. They were applied successfully by the Japanese at a time when customer affluence

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was increasing and, for the first time, customers had a wide range of competing manufacturers’ products to choose from. The traditional Japanese philosophy considered the following main areas (each of which is described more fully next): • • • • • • •

7.2.2.1

the overall value of quality; the overall cost of defects; quality dividends; involving people; proactive planning; involving the whole organisation; educating the customer to expect quality.

The Overall Value of Quality The Japanese recognised at an early stage that quality management is expensive. The ability to guarantee the quality of a product incurs a direct cost in the manufacturing and production process. In most cases, there is a clear functional relationship between the quality standards required and the unit cost of the product. As organisations increase the quality standard, the cost per unit tends to increase. This curve could be linear or curvilinear, as in Figure 7.1. As the organisation approaches zero defects, the cost of the quality management system can be very high.

Defect-free rate Zero-defect target?

100% 99%

Zero-defect premium

95% 85%

£800/ea

Range of unacceptable levels of defects

Figure 7.1

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£950/ea

Competitive manufacturing cost per unit

£1200/ea

Low level of defects at prohibitive cost

Defect rate versus manufacturing cost

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Most products would have a linear relationship between cost and quality for at least some part of their range. An example would be applying paint to a wall. Generally, if a person is paid an agreed amount to paint a wall, he or she will do it to a standard that is regarded as being reasonable. If the person is then paid twice as much to paint the same wall more carefully, it is reasonable to assume that he or she will paint the wall approximately twice as carefully (and therefore well) as he or she would for the original payment. However, this obviously only applies within limits: there will be a point where the linear relationship no longer holds. In practice, most quality–cost curves are curvilinear, with the cost per unit increasing more and more rapidly as the process approaches zero defects. For this reason, most organisations assess their production systems and decide on a reasonable level of defects. A company making portable CD players might decide that a defect rate of 5 per cent in terms of failure within one year of purchase is acceptable. This failure proportion can be covered with a one-year guarantee, where the customer can return or exchange the product free of charge if any problems arise within that time. Provided that the guarantee is valid, and repairs or replacements are carried out promptly, most customers would be happy with this arrangement. They would probably prefer it to an arrangement with no guarantee where the CD player costs three times as much. The organisation might find the cost of reducing defects from a 5-per-cent level to 4 per cent would add 10 per cent on to the price of the product. A reduction to 3 per cent might add 25 per cent. Add-ons of this magnitude would probably make the item uncompetitive in relation to competing products that are being sold with a similar defect rate. The most effective option might therefore be to manufacture a product where the known defect rate is likely to be 5 per cent. Acceptable defect rates will vary depending on the product and the industry concerned. It may be acceptable to have a 5-per-cent defect rate on car starter-motors as they can be replaced relatively cheaply and easily and the consequences of a defect are not too pronounced. However, a failure in a cylinder-head gasket, while a cheaper component, is a far more complex repair. As a result, cylinder-head gaskets are designed so that they rarely fail within their normal life cycles. As far as the customer is concerned, he or she might expect to have to replace the starter motor after 20 000 miles; however, he or she does not expect to have to change the cylinder-head gasket. A vehicle tyre is another example. The consequences of a tyre failure could be much worse than the consequences of a starter motor failure so even though a blown tyre involves a relatively simple repair, the consequences of a high-speed blow-out can be catastrophic for the people in the car. This leads on to the concept of the true value of quality and the true cost of defects. People expect tyres to have a limited life span and they are prepared to accept that most tyres will be punctured at some point before they are replaced. However, what is not acceptable is for that defect to manifest itself as a high-speed blow-out. If a particular brand of tyres becomes associated with high-speed blow-outs, customers will avoid them at all costs because of the consequences of the defect occurring. There are therefore two ways of defining the quality of vehicle parts, whether 7/6

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they be starter motors, gaskets or tyres. There is an apparent value of quality, which is what people will pay to get a good-quality product. This can be regarded as being equal to the cost of producing the product plus the cost of replacing a defective version, multiplied by the probability of a defect arising. There is also a true value of quality, which acts over and above the apparent value. This represents the premium that people will pay, and the goodwill and prestige that is formed, by a company selling a reliable-quality product.

Defect-free rate Overall true value of quality 95% Apparent cost

85% Cost of repairs under warranty and guarantee

Basic manufacturing cost

Production costs

Figure 7.2

Apparent and true value of quality

This idea is shown graphically in Figure 7.2. The apparent cost is the manufacturing cost plus any additional costs occurring during the remedy of defects. As the quality of the manufactured product increases, the defect rate decreases and therefore the cost of honouring guarantees goes down. There will be a cross-over point at which the cost of manufacturing is so high that there will be virtually no repair costs. At this point, the manufacturing cost will approximate to the total apparent cost. As the reliability of the product increases, the true value will exceed the apparent cost by an increasing extent, as shown in Figure 7.2. This effect is clearly seen with high-prestige products. Manufacturing profit on individual prestige cars such as BMW and Mercedes Benz are significantly higher than they are on less prestigious cars. The repairs element is lower and people attach greater prestige to the product because of its reliability and status. It can therefore be said that, in equation form: overall value of quality = apparent value + true value

7.2.2.2

The Overall Cost of Defects The true cost of a defect can be far greater than the apparent cost of fixing it. Products that are seen to have a high failure rate can lose customer confidence,

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and customers will change suppliers or providers. Most readers will be able to think immediately of products or services that they associate with low-quality or defective products. People tend to remember experiences with defective products, and it can be very difficult to overcome this perception once it has become entrenched. Generally, a bad reputation builds up over time. However, in some cases, even one incident of a defect can jeopardise the profile of the product or even the position of the entire company. An example of this phenomenon would be Perrier water. Perrier water used to dominate the bottled-water market in several countries. In the mid-1980s, there was an incident where random sampling of the product identified traces of contamination. It was found that contaminants including benzene had entered the production process, and several contaminated batches had already been sold. Sales of the product dropped and several other large players took advantage of this to increase their share of the bottled-water market. Today, there are several large bottled-water companies operating, and the Perrier water product has never recovered its former dominant market role. Traditional economic analysis of production processes dramatically underestimated the true cost of poor quality. Traditional analyses ignored the cost implications of losing customers or of failing to attract customers in the first place because of the effects of defective work. The Japanese view recognised the extreme importance of reputation and customer goodwill, and the very powerful influences of disasters such as loss of customer trust and the development of a bad reputation. The traditional Japanese view recognised the fragility of customer trust. They realised that this is crucial, and is worth considerable investment, as the cost implications of losing trust can be great. Once the true cost of defective work is realised, it is relatively easy to justify even fairly stringent quality-management methods, simply on the basis of overall cost. The overall cost is not simply the apparent cost of correcting defects but also includes the cost of the loss of reputation. It can therefore be said that: overall cost of defects = apparent cost + true cost

Where the overall cost is the cost to the company, the apparent cost is the actual cost of covering the warranties and guarantees that are issued, and the true cost is the cost of the loss of reputation and customer trust. In most cases, the true cost is very much greater than the apparent cost.

7.2.2.3

Quality Dividends Over and above the overall cost of defects, traditional analyses have also tended to fail to realise the true extent of the dividends that an organisation-wide drive on quality can bring in terms of employee motivation and a whole range of other performance indicators. Investment in new plant can have a remarkable effect on operative motivation and consequent output. Employee satisfaction and productivity can be increased, and this in turn can lead to higher efficiency and motivation. This improvement cycle can become self-perpetuating, and can in turn lead to higher and better overall output and improved customer

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satisfaction. This, in turn, can lead to better performance by the company as a whole. Quality dividends include: • • • • • • • • • • •

improved company status and image; improved performance based demand from customers; increased respect by competitors; increased share price stability (perhaps); improved staff attitudes and motivation; improved sales (perhaps); better industrial relations; improved and more stable risk profile; improved goodwill; improved prospects in potential mergers and acquisitions; improved prospects in potential alliances and partnerships.

These likely and potential benefits can make a real difference to the overall performance of a company, particularly in the long term, although the benefits themselves can be difficult to quantify in absolute terms. Employee motivation is a very important determinant of production efficiency. Motivation that is ‘bought’ through productivity related pay and direct financial incentives is not the same as motivation that is earned through association with a high quality product. This applies across all industries and at all levels of the work force. It can even be observed at the highest levels of management and professional practice. People develop a sense of inherent loyalty and ‘evolving’ motivation when they can associate themselves with a high quality product. Young lawyers compete to get jobs with high status practices because they realise that the experience to be gained there will be a good investment for the future and the appropriate entry on their CV will impress potential future employers. The same concept applies to graduates of prestigious universities such as Oxford and Cambridge or Harvard and Yale. Improved status and image are also important dividends and to some extent act as drivers for some of the other dividends listed above. A company that develops a reputation for high quality products tends to build up an image that influences the perceptions and behaviour of customers, competitors and shareholders. The correct balance can be difficult to achieve but companies that do get it right can use it to great effect. Companies like Mercedes have an image that commands respect and stability. Mercedes share values tend to be relatively stable compared to share price variations in less prestigious companies. Competitors tend to be wary of entering into direct competition with established Mercedes models, while such direct competition occurs as standard practice amongst less prestigious manufacturers. Mercedes customers tend to be relatively product-stable and loyal and are unlikely to move to other makes. Goodwill is another important dividend. A successful high quality MBA course is a good example. Students enrol on the course and find it to be both enjoyable and useful. Upon completion they find that the course has given them Project Management

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a range of new approaches and techniques that they are able to apply directly in their job. Graduates then recommend the course to their friends and colleagues. As a result a growing network of goodwill evolves. This generates increasing applications and enrolments and the goodwill network becomes self-generating. Once it reaches a certain ‘critical mass’ the goodwill network can become more important than the entire marketing system. In terms of any quality dividend there is a true payback that may be far in excess of the actual cost of implementing the processes and procedures that generate the dividend benefits. It can therefore be said that: true payback = overall benefits − implementation costs

7.2.2.4

Involving People The Japanese approach to quality was tempered by a constant drive and determination to minimise (or at least carefully control) the cost of achieving that quality. The quality–cost curve has always been one of the main considerations in the development and implementation of quality management and total quality management (TQM) systems. Reliable and powerful quality-management systems are expensive, both to design and to implement. In order for it to be cost-effective, the costs of setting it up and implementing it have to be kept down to a level that is acceptable within the overall performance constraints of the organisation. This leads to an uncomfortable compromise. The Japanese solution was to some extent cultural. They developed close links between the company and the employee, always ensuring that the interests of the employee coincided as far as possible with the interests of the company. The underlying philosophy was simply that there is less need for rigid and expensive quality control and assurance systems if you can trust the workforce to do their best to produce quality products as standard. In other words, there is less need to watch and check your employees if you know that they are motivated and committed to producing quality products in the first place. The Japanese were able to do this very effectively through the 1960s, 1970s, and to some extent through the 1980s. However, this same time scale was a period when Western countries were undergoing something of a social revolution. One aspect of this was the rapid growth in the power of the trades unions. There was a general increase in the level and frequency of strikes and disruption, and there was a general increase in the degree of alienation between companies and their employees. Some industrial actions had national significance, leading to widespread and damaging effects on national economies. The Japanese view has generally been based on motivating employees and trusting them to implement and control quality procedures. They were able to do this largely as a result of the cultural system that existed in Japan at that time. This was, and still is, very different from Western culture, and it enabled the Japanese to take a different path. The cultural differences between the West and Japan extended into the working environment. The Japanese were able to use this to organise their employer–employee relationships in a very different way to that from what was possible in the West. This allowed the

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Japanese to place great emphasis on the relationship between the company and the employee. They were able clearly to align the objectives of the employees with the objectives of the company. Companies went to great efforts to generate positive employee attitudes, and they formed close links so that employee and organisational objectives moved more and more toward a common point. The result was a highly motivated and committed workforce with great individual and group loyalty towards their company. The success of the company was directly linked to the success of the individual. This meant that quality management could be implemented much more cheaply than in the West, where employee attitudes were very different. In effect, Japanese employees could be ‘trusted’ to implement and run quality management and TQM systems using relatively simple and low-cost techniques. The Western approach generally has been based on establishing some kind of standard or objective as part of a quality assurance system, and then sampling the production to measure quality variances as part of the quality control system. Most approaches were based on the use of specialist in-house or external consultants who could observe the process and then decide on a suitable level or standard of output that was related to rate of production. Output and quality targets were then established, and actual output was sampled in order to allow a direct comparison between target and actual. Quality performance was then tracked and measured as a variance against a standard, in much the same way as time and cost performance are. Both the establishment of the standard and the monitoring of the production were – and are – expensive processes, and they can add significantly to the cost per unit of a product. The Japanese approach was therefore more effective in several ways, as follows: •

•

•

• •

•

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It was based on employee commitment. As a result, it could guarantee set levels of performance without relying on complex and expensive quality control systems. The relatively high degree of employee commitment made the systems selfregulating. Management involvement could be kept to a minimum as the process operatives and individual production managers were empowered and could be ‘left to get on with it’. Employee commitment and the absence of expensive quality control systems meant that the approach was quick, easy and cheap to install and operate. This in turn lead to a direct competitive advantage in that goods of a given guaranteed quality could be produced more cheaply than corresponding goods of an equal quality that relied on the expensive standard quality control systems. Employee commitment and self-regulation, while cheaper and simpler than traditional quality control systems, were also found to be more reliable. The approach was found to reinforce the bond between employees and the company. Individual and company goals were fully integrated and everybody shared in the overall success of the process. The approach was found to be compatible with the cultural characteristics of Japanese society. Approaches based on co-operation and team working were (and are) culturally favourable in Japan. Edinburgh Business School

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These Western and Japanese views are fundamentally different and account to some extent for the remarkable performance of Japanese industry through the 1960s and 1970s. The Japanese approach allowed companies to guarantee quality at a lower overall cost, and this gave them a significant advantage in their competition with European and US organisations, who could only match the Japanese standards by incurring higher costs. The only way that Western manufacturers could match Japanese quality was by charging more for their products. This in turn made them less competitive.

7.2.2.5

Proactive Planning The Japanese view as described in section 7.2.2.4 above represents another significant divergence from the Western view at that time. Standard sampling and variance techniques work on the basis of looking at what has already been produced and then measuring the quality of this in some way. The quality of the product could be measured in one or more different ways. Where there is a divergence, the extent of the divergence is measured, and if it falls outside some pre-set limit, corrective action is taken. This is a retrospective approach. It involves current testing of existing production. As such it has limited application and control during the production cycle, for defects cannot be detected until they have occurred, This can help with the performance of future production, but it will probably involve adjusting the production system and perhaps disposing of the defective production batch. The Japanese recognised early that prevention is better than cure. Their approach differed from the Western approach to quality management in terms of its orientation towards preventive rather than responsive action. The Japanese were able to have the mass of their employees use relatively simple qualitymanagement tools and techniques in order to ensure quality. This in turn allowed them to design quality systems that were both cheaper and more effective than their Western competitors. They were also able to base the systems on forward-looking, planned, approaches rather than on retrospective samplechecking approaches. The workforce would make every effort to avoid defects occurring in the first place because of the design of the system. The balance between preventive and responsive strategies is a choice that faces most quality managers at some point. Using Western approaches, preventive systems are very expensive if high quality standards are required. They tend to be used only where there are very severe consequences if a defect occurs. An example is the manufacturing system for high-pressure sea-water pipes for submarines. These simply cannot be defective, and so the production and testing systems for them are set up so that defects are more or less impossible. The Western approach to achieving this is to engineer the errors out of the system, aiming to design a production system so that it is not possible to weld the pipes incorrectly, or put them together in the wrong order, or install incorrect components. Another example is a hightechnology production line, such as in modern car assembly plant, where the systems are so complex and so highly configured that it is virtually impossible to install a wheel the wrong way around. Western methods can therefore approach the Japanese level in terms of pre-

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vention, but it is very expensive to achieve equality and it requires a complex and inflexible production system. Even then, it has to be backed up by a good quality-assurance and control system, and it requires constant monitoring and control. It can be cheaper and more reliable to use people as the control system. In any system, it is inevitable that there will be unforeseeable events that can lead to defects, and it is very difficult to allow for them all. In practice, most quality management systems use a combination of preventive and responsive systems. For example, a maintenance system for keeping a fleet of coaches going could be based on planned preventive maintenance for routine repairs such as servicing, brakes etc., but it will still need a reactive element to cover unforeseeable elements such as punctures and broken windscreens. The Japanese realised early on that the costs of improving quality could be significantly reduced if they were moved upstream in the process – in other words, if more attention was given to product development. This produced a higher quality of product with fewer inherent defects and a corresponding reduction in the demand for responsive maintenance later in the process.

7.2.2.6

Involving the Whole Organisation The Japanese realised that quality is a company-wide consideration. Improving quality requires an improvement in the quality attitude of people at all levels. The Japanese were the first quality managers to develop strategic qualitymanagement systems. This idea was the origin of the concept of total quality management (TQM), where an organisation is considered as a strategic entity and the quality plans and processes are set up for the whole organisation rather than for individual operating sections. This approach is centered on the concept that each individual component of a production system is important in the production of the finished product. This concept is vital in a complex manufacturing process such a car assembly line. In order to produce a guaranteed quality of car, system designers and quality managers have to design the system so that each aspect is controlled. There is no point in being able to guarantee that the engine block and gearbox assembly will be correct and in accordance with the specification, if the brakes retain the possibility of being defective. In addition, the Japanese extended this approach to embrace non-production process activities. The philosophy was that the quality efforts of the production workers would be wasted or diluted if other parts of the organisation failed to adopt the same high quality standards for their sections of the process. It therefore became standard practice that office workers and production workers developed the same quality management ideology and commitment to the process. This approach is often seen today where companies produce high-quality products and also ensure that sales, marketing, research and development and other non-production areas are as reliable and efficient as the production system itself. Similarly, it is no good having a good research and development and production section if the sales team is defective. In order to make the best impression on the customer base, it is essential that quality is seen to permeate all levels of the company.

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7.2.2.7

Educating the Customer to Expect Quality The traditional Western view of quality has assumed that the customers’ views of quality and quality demands were fixed and did not vary over time. In other words, customers would go on buying the same standard of product provided that it performed well and they were happy with it. This applied particularly to relatively simple products, where the rate of change and demand for change were relatively low. It was also particularly applicable in the low-competition Western markets of the 1950s. The Japanese took the approach that quality should be constantly improved and engineered. By doing this, the customer could be educated and programmed to expect innovations, new products and higher standards of quality as a matter of course. This may seem obvious to Western customers now, but the idea of constantly improving technology at a reasonable cost is a relatively new one. A good example is mobile telephones. In 1985, the only mobiles were bulky and required large battery packs and aerials. By 1990, technology had improved significantly, and easily portable handsets and batteries had been developed. By 2000, the extreme competition in the mobile phone market had led to the development of a range of new technologies, including pre-pay charging, remote Internet access, email, global satellite positioning and a range of other options that would have been unthinkable only a few years ago. These remarkable improvements in the technological characteristics of the product have not occurred by accident. They have taken place because the market has been very competitive. By 2000, there were over 23 million mobile phones in the UK alone. This degree of usage generates enormous potential profits for the network providers and telephone manufacturers. There is therefore a very good reason for both to invest heavily in new technology and in obtaining licences to operate – which they have been seen to do heavily in the last few years. Customers expect new products and options in such a rapidly changing market, and they will migrate to another provider if the original provider fails to deliver. The Japanese recognised this effect long before it became widely accepted in the West. In effect, Japanese companies educated the customer to demand higher standards than the competition could supply, and they then put themselves in a unique position of being the only supplier able to supply to that standard and cost. This allowed them to effectively take over a particular market and then charge a premium. There is, of course, a downside to this approach. By early 2001, the global sales in mobile telephones had started to level out. There were a number of reasons for this, the most significant one being saturation. The very attractiveness of the product and the sustained high level of global sales throughout the 1990s meant that, by 2001, perhaps 60 per cent of the EU population owned a mobile telephone. In other words, perhaps everybody who wanted one had one. This obviously led to great difficulties in sales, and reduced profits for many mobile telephone companies. The companies countered by introducing new technology, such as mobile Internet access (or WAP), built-in radio, and so on; but these innovations were not sufficient to cause any large-scale demand for new handsets.

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♦ Time Out Think about it: the real importance of quality. Quality is an increasingly important concept. Traditionally in the UK, it was regarded as the least important of the classic project-success criteria. More recently, quality as a concept has been emerging as an increasingly important consideration for project managers. Manufacturers of all kinds now accept that high quality standards attract a range of immediate potential benefits, including improved labour motivation and performance, productivity, market share and investment. It is crucial to realise that the true importance of quality goes far beyond the actual cost of implementing any improvements within the production area. Improvements in quality in the long term can affect the whole market base for the product. It is also important to realise that reductions in perceived quality can have implications that go far beyond the actual cost of correcting defects. Loss of consumer confidence can affect sales very significantly, sometimes to the extent that the organisation can no longer operate. The organisations that use quality management most effectively are those where quality becomes ingrained throughout the organisation. It generally starts with some kind of strategic decision to implement improved quality standards, and it progresses down through the system through section heads to individual employees. Good quality management can be achieved to some extent in virtually any type of organisation, by the development of realistic quality standards backed up with frequent and accurate testing to compare output with targets. It can be improved further by developing an organisation-wide approach to quality, so that the process becomes to some extent automatic. Questions:

• •

What organisational costs are associated with defective work? In what types of process would quality reduction costs be a particularly high penalty?

♦ 7.2.3

7.2.3.1

Quality Standards Introduction Quality standards are one of the earliest forms of standard known to humanity. In 2000 BC, the ancient Egyptians had a system of quality control for funeral goods. Producers who wished to achieve the national standard had to seek the approval of a government inspector. Meeting the national standard was identified by the imprint of his mark. As quality management has increased in importance in the West, so there has been a proliferation of quality management standards. Most of these standards are very lengthy documents and cannot be considered in any detail in this text. The first real attempt at a quality assurance standard was US military standard MIL–Q–9858A, which was released in 1963. This standard was characterised by its dependence on inspectors, who operated independently of the production

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process itself and who would inspect goods and reject any that were not up to the specified standard. This was a reversal of the previous US approach, which involved highly-skilled tool setters in constantly monitoring and adjusting specialist machinery that was operated by low-skilled operators. The first UK standard for quality was BS5179 in 1974. However, the first major UK standard for quality management was BS5750. It was perceived as a revolutionary and very important standard when it was first developed and released. However, it soon acquired a reputation for being bureaucratic and involving a lot of unnecessary paperwork. BS5750 was an attempt at the establishment of a UK quality management standard that could be applied across all industries. As a result, it became highly complex as it had to attempt to cover all eventualities. One of the main problems that most users reported with it was that it was a ‘snapshot’ assessment. Companies that became accredited or certificated to BS5750 had to show that they had the quality management systems in place in order to meet the minimum criteria of the assessment team. However, this was only a measurement of the systems that were in place at one particular time. The standard had no provision for ensuring continuous and continued performance at this level, other than eventual reassessment. As a result, certification to BS5750 was no guarantee that the company concerned was actually operating and producing at that level. BS5750 has since been superseded by ISO9000. This is the latest attempt at a generic international quality standard. Interestingly, it is a close copy of BS5750. The International Organisation for Standardisation (ISO) represents a consortium of the world’s top 100 industrial nations. It is essentially a European equivalent to the American National Standards Institute (ANSI). ISO9000 is therefore not a set of standards or codes of practice; it is a quality system that is applicable to any product, service or process anywhere in the world. ISO9000 contains five main sections: •

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ISO9000: Quality Management and Quality Assurance Standards – Guidelines for Selection and Use. This section defines the key terms and acts as a pointer to the other standards within the series. ISO90001: Quality Systems – Model for Quality Assurance in Design and Development, Production, Installation and Servicing. This section defines a model quality-management system and is used as the basis for the approach of a contractor or manufacturer in developing quality management systems for design, production or installation. ISO90002: Quality Systems – Model for Quality Assurance in Production and Installation. This section is a model for quality assurance in manufacture and installation. ISO90003. Quality Systems – Model for Quality Assurance in Final Inspection and Test. This section is a model for quality assurance in final inspection and testing. ISO90004: Quality Management and Quality System Elements–Guidelines. This section provides management guidelines for any organisation wishing to develop and implement a quality system. Guidelines are also available to determine the extent to which each quality system model is applicable. Edinburgh Business School

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ISO9000 is based upon a never-ending cycle that includes planning, controlling and documentation. It is about standardising and documenting the process. However, as with the former BS5750, the fact that a company is ISO9000accredited does not mean that the company produces only high-quality products. It merely shows that the necessary procedures are in place – or, more accurately, were at the time that the appropriate inspections were carried out. The main drawbacks with the standard are that, like BS5750, it is bureaucratic and only measures performance at one point in time. In addition, it attempts to apply a generic measure or standard across a range of countries where forms of standard, process and culture are completely different. For example, what is considered to be good practice in Greece might not necessarily be considered as good practice in the UK. This could apply especially to some engineering processes such as window specification and manufacture.

7.2.3.2

Brief Guide to ISO9000 This brief guide to ISO9000 takes the form of a series of questions and their answers. Thus: •

•

•

•

•

•

•

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What is ISO9000? ISO9000 is concerned with quality assurance. It is a standard that allows organisations to be assessed in relation to their quality assurance systems and procedures. Why is it important? Quality is an important issue and it is becoming more and more important all the time. Quality achievement has to be planned and monitored. ISO9000 provides a framework for this planning process. What is a quality plan? A quality plan should be a formal document that reflects the quality policy and objectives of an organisation. It should have senior management support and it should identify the various stages required, together with costings, timings and resource allocations, in order that the organisation can meet the quality objectives that have been agreed. It should also set out the specific quality processes that are to be adopted. What is quality assurance? Quality assurance relates to the customer. It provides an ongoing assurance to the customer that the organisation has the necessary processes in place to produce goods and services to the required levels. Who is affected by quality assurance? Virtually everybody in the organisation. Effective quality management has to operate organisation-wide. It includes production, design, research, administration, management, packaging and delivery. Almost everybody involved in the organisation has a responsibility and therefore a commitment to make. What does ISO9000 look for? ISO9000 is really a generic model for quality management. It can be used to build a quality management system in almost any company or industry. What does ISO9000 look like? ISO9000 has twenty main parts. These are listed below. – Requirement 1: Management responsibility and quality policy. Edinburgh Business School

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The quality drive has to have a definite strategy and programme. In addition, the programme has to be communicated and understood organisation-wide. Any internal programmes must be regularly reviewed by senior managers in order to make sure that they still comply. Requirement 2: Quality system. Every system or process that has any bearing on the end quality of a product has to be documented. The documentation has to be practical, accurate and reasonably easy to maintain. Requirement 3: Contract review. A company must ensure that it understands what the needs and requirements of its customers are, how these requirements are to be reviewed, how any changes to requirements are to be addressed, and the extent to which the current product meets these requirements. Requirement 4: Design control. There should be design control procedures in place in order to ensure that the design team design the product in line with customer requirements. Requirement 5: Document control. All working practices must be documented, kept up to date, and made available to people so that they can see what they have to do as part of the quality plan. Requirement 6: Purchasing. Any pre-assembled items that are bought in should be subject to the same quality standards and checks that are imposed in the company. All suppliers and subcontractors must be precisely aware of what standards are required. Requirement 7. Purchaser-supplied product. Customers may sometimes supply materials to be used in the manufacture of the product. In this case, the material itself must be subject to the same quality standards and checks that are imposed in the product factory. Requirement 8: Product identification and traceability. Each product should have a separate identity, and it should be possible to track both how far it has moved through the system and what work is still to be done on it. Requirement 9: Process control. The precise control mechanism for the production process should be stated. This should identify the checks and tests that are to be carried out through the system, and also the approvals procedure where appropriate. Requirement 10: Inspection and testing. Products have to be carefully inspected and tested in order to ensure that they achieve at least the minimum standards set. Defective products must be identified and removed, and accurate records must be maintained. Edinburgh Business School

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Requirement 11: Inspection measuring and test equipment. Inspection and testing equipment has to be fit for purpose and accurately calibrated and itself tested for defects. Records should again show dates for equipment testing and calibration. There must also be procedures in place for dealing with testing equipment that fails calibration. Requirement 12: Inspection and test status. The production cycle must have clearly defined stages and each product must itself be clearly marked as it completes each stage. The recording system should show when a product passed each stage. Requirement 13: Control of non-conforming products. Defective products must be accurately and immediately identified. The control system must ensure that defective products cannot be confused, or mixed in, with good-quality products. Requirement 14: Corrective action. All processes have to be constantly monitored and checked to make sure that they are working properly. Where necessary, immediate and effective corrective action is to be applied. Requirement 15: Handling, storage, packing and delivery. All products are to be carefully packed in packaging that provides an adequate degree of protection. Products are to be handled carefully and stored in an appropriate protected area prior to shipping. Requirement 16: Quality records. Accurate records must be maintained. These are to be used in order to demonstrate improvements in quality against an agreed benchmark or standard. They are also to be used for fault tracing and other forms of problem analysis. Requirement 17: Internal quality audits. Internal quality auditors are required in order to carry out impartial and independent comprehensive inspections and reviews of all parts of the process. Where necessary, remedial measures are to be taken if the process does not match the target. Requirement 18: Training. Full and appropriate training is to be made available for all employees. Accurate records of all training are to be maintained. Requirement 19: Servicing. This requirement applies where servicing of the product is required. In such cases, it must be well specified, carried out by fully trained and competent personnel, and completed within agreed time limits. Requirement 20: Statistical techniques. Appropriate statistical sampling and data-processing techniques are to be used to sample and test the product. Samples must be statistically representative of the whole product range. Accurate records are to be kept to assist in the observation of trends.

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♦ Time Out Think about it: quality management standards. Quality management standards are important, because they establish a benchmark against which the performance of a given quality-management system can be assessed. The first attempts at establishing quality management standards were met with great enthusiasm, both among consumers and among producers. In more recent years, the publicity surrounding these standards has been more reserved and, to some extent, negative. When people think about quality management standards, they tend to associate them with complexity and bureaucracy. Attempts at Europe-wide standards and regulations have tended to increase this perception. However, there is no doubt that, if properly designed and implemented, welldirected quality management standards can provide an excellent foundation for production systems. They require the producer to look in detail at the production system and methods of operation. In doing so, they encourage detailed evaluation and review of how things are being done, and they allow the production system manager to see areas where there are problems or inefficiencies in terms of quality production. Questions: Why have quality management standards received an increasingly negative press over the past few years? In what type of production process would quality management standards be particularly appropriate? Where would quality management standards be inapplicable?

♦

7.3

The Quality Gurus Most contemporary quality management and total quality management theory has evolved from the earlier works of a number of quality gurus. Gurus are people who advance knowledge largely by inspiration and original thought. The main quality gurus have been W Edwards Deming, Joseph M Juran, Philip B Crosby and Imai. These gurus all published different theories on quality management, and they all had different approaches and preconceptions. Some assumed one kind of approach and some assumed another. However there are five main areas where they all agree to some extent. These areas are listed next: 1

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Quality processes must be enterprise-wide The gurus all agree that an effective quality management system must embrace the whole organisation. Essentially there is no point in improving performance across 90 per cent of the company if the remaining 10 per cent lets the company down. Poor packaging and distribution can influence customer perceptions of what is essentially a good product. Effective quality management has to apply to everything from the production process to administrative support. Process defects should be considered before employee defects The gurus concur on the idea that most defects occur as a result of process defects rather Edinburgh Business School

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3

than employee defects. This pattern tends to apply to all systems. Most employees have some commitment to the company even if this commitment is limited to the fact that the employee needs the job and is (in most cases) financially dependent upon it. People tend to operate processes correctly provided they have adequate training and motivation and so long as the system operates correctly. Quality processes must be structured Time and cost planning use a structured approach based on a WBS. Quality management systems should operate on the same principle. The process should be broken down into elements so that the performance of each element can be controlled and managed. The level of detail depends on the degree of compartmentalisation that is required in order to achieve adequate control. This concept may seem obvious but it is common to find established quality management systems that do not extend adequately into detailed areas of the process. An example is the ordering of office stationery. It may be possible to operate at WBS level 1 (stationery), but it is more likely that a greater degree of control will be required. Level 2 (paper and pens) provides a greater degree of control, but there will probably be a requirement to operate at level 3 (paper types). Different sections and applications will require different qualities and standards of paper. Examples include: • headed letter paper for corporate communications; • computer printer paper; • photocopy paper; • specific documents and forms; • note paper. Each type has to be separately ordered and controlled and separate standards and variability limits will apply. This idea is shown in Figure 7.3. The WBS level at which control is required will vary depending on the application and level of variance that is permissible.

Stationery

Figure 7.3

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Pencils

Cartridge paper

Paper

Tracing paper

Pens

Listing paper

Specific cartridge paper specification

General paper specification

Quality control level and WBS layout

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5

Quality processes must ensure that the product exceeds customer expectations The gurus all agree that the customer is the most important single consideration. Customers generate sales and sales provide income. It is very important to ensure that adequate market research is carried out so that changes in customer demand and expectations can be tracked. Where demand and expectation are changing the company must respond by modifying existing products and innovate to develop new products. Customer expectations can change very quickly and it is important that product development matches and exceeds these expectations. The most satisfied customers are those who receive a product that offers them more than they actually demanded in the first place. This additional provision represents a demand margin that can be successfully exploited. Innovations in PCs are a good example of this. The sector is highly competitive and there are considerable similarities between the new models of PC that are produced by the various manufacturers. The level of competition often dictates that sale prices are more or less fixed, and hence the manufacturers may have to include additional features in order to encourage sales. Examples include ‘free’ software and peripherals. These extras may not have been foremost in the mind of the potential customer but they act to exceed his or her original expectations and may secure additional sales. Quality processes must be able to rely on commitment The gurus also agree on the importance of commitment. Generally the greater the level of commitment the more effective the quality management system will be. Greater commitment gives the possibility of reduced formal (expensive) quality control systems. Very complex and detailed control systems can still be compromised by uncommitted or demotivated employees. Long-term implementation is another important issue. It is one issue to achieve compliance with a given quality standard at one point in time. It is quite another issue to instill the commitment required to ensure that these achieved standards are maintained indefinitely. There is a natural tendency for organisations to gear up for a specific quality objective only to allow standards to slide after the initial achievement. Quality management should be part of an on-going process that permanently underpins the activities of the organisation.

♦ Time Out Think about it: the gurus’ common ground. The gurus generally had different views on quality and quality management. However, there are some areas where they all agree:

• • • • •

Quality has to be enterprise-wide. The process is as important to the system as is the employee. The system has to be considered in terms of components. The output has to match or exceed customer expectations. Everybody has to be committed and prepared to work as a team.

In other words, any effective attempt at quality management has to be developed as a strategy. It should be aimed at (and include) all component parts of the

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production system, and it should be organised so that these individual components can be controlled and monitored separately. The whole production system has to work together and all the people involved have to work as a team. The end result should exceed customer expectations. Questions:

•

Think of an example of a production system where the approach given above could be implemented relatively easily.

•

Think of an example of a production system where it would be much more difficult to design and implement suitable measures as given above.

•

What are the main determinants of whether or not this collective approach is applicable to a particular production system?

♦ The main approaches of each of the gurus are briefly summarised in sequence below. 7.3.1

Deming W Edwards Deming was most active in the early 1950s. His basic philosophy was that if a company improves its quality management then it automatically improves its production. There is an intrinsic link between quality management and production. The Deming approach suggested that better qualitymanagement allows a company to produce equal-quality goods at a lower cost, or better quality-goods at the same cost. Customers will choose these products and the company will improve sales. Deming was also very democratic in approach. He believed that operatives basically want to do a good job and will do so if given the right equipment and processes. Deming’s underlying philosophy was that company managers tend to be too interested in what is happening today and not enough on what may happen tomorrow. He suggested that only around 15 per cent of quality problems could be directly controlled by the people who are on the shop floor; the other 85 per cent were problems of a type that required action by management. For example, a production line making electrical components might be found to have a high defect rate. This could be as a result of a lack of investment by the company in new machinery. If the production line is not up to the standards required to make a defect-free product, then defects will occur and there is little that the people who use the machinery can do. The only way that the situation can be corrected is by installing new plant, and this is obviously a management decision. The Deming approach is very much worker-oriented and appeals to the democratic type of manager. It has a core of statistical analysis, supporting a fourteen-point plan for managers. These fourteen points are as set out next: •

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Create common sense of purpose Deming stressed that effective quality management has to be applied throughout the life cycle of a project, not just in one part of it. In the early stages of a project, long-term goals should be emphasised and long-term benefits should have a greater priority or Edinburgh Business School

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weighting than short-term immediate gains. This is easily said, but it is far more difficult to sell to a client and actually implement. An example of this is capital costs versus maintenance costs being considered in the early stages of the design process for a new car. Generally, capital costs are considered as the primary factor in the early stages of the project, while long-term maintenance costs are often considered to be less important. Most customers in the medium-quality market will look primarily at the selling price of the product and will not necessarily attach as much importance to the costs in use. Long-term life-cycle costs will generally only be considered as important as capital costs if the project weighting is adjusted in their favour, or if the client is already aware of the cost implications of longer-term costs such as running costs. The design process should therefore contain common purpose across the design life cycle. If running costs have to be kept to a certain level, this should be established at the outset, and there should be no deflection from this caused by more immediate considerations such as selling price. Common purpose on a project has to be instilled at the conception stage, and nurtured throughout the life cycle of a project. This depends on effective communication and sharing of aims and objectives. An effective teambuilding process (see Module 4) is essential in this respect.

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Create a new mind-set The traditional mind-set of many organisations and enterprises is that productivity and cost are all that really matter. This is acceptable where the company is in a basic survival situation. However, once quality becomes a major consideration, this survival philosophy has to be modified in order to ensure that everybody within the system is aware that quality is equally important in the short term and more important in the long term. The relative weighting of quality in the time–cost–quality continuum has to be prioritised and communicated throughout the system. The concept of overall cost of quality and true cost of defects (see section 7.2) has to become central to everyone’s thinking. This may seem straightforward, but it can be surprisingly difficult to implement in practice. People who have an ingrained cost-limited or speed attitude can find it very difficult to introduce a consistent and sustained quality element to their decision making.

•

Build quality into the system Quality has to be built into the product and into the process. In an ideal system, it should be more difficult to make a defective product than it is to make a non-defective one. As discussed in section 7.2, this safeguard could be engineered into the production process by technological design, or it could be achieved through operative commitment. Traditional approaches involve quality-control departments that take samples and inspect the work of others. The Deming approach said that what should happen is that quality should be built into the product so that it is an integral component; it should be an inherent part of what is being manufactured. Responsibility for delivering and providing quality should be assigned to all members of the system at their relevant position within it. Edinburgh Business School

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It should not be the responsibility of a specific unit that checks the work of others. This implies greater control by individuals and sections throughout the process.

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•

Review procurement strategy The Deming approach suggested that the decision on organisational structure should be based on performance and quality. Great care should be taken in the selection of suppliers and subcontractors, as these become powerful determinants in project and organisation success. The selection process for suppliers and subcontractors should not be based solely on lowest tender costs or quickest supply time, but rather on quality and standards, based largely upon known and proven past performance. What is now called prequalification is central to this area. Deming’s philosophy suggests the use of a smaller number of high-quality subcontractors as opposed to large numbers of poor-quality ones. It is also important to build in the idea of long-term relationships between clients and suppliers. This is often called partnering. Quality can be more readily achieved where the client and the various subcontractors have worked together frequently in the past, and where trust and close working relationships have had a chance to develop and evolve. Generally, the longer the history of the working relationship, the higher the standard of quality that is achieved. Loyalty and trust are important factors in building up a good quality system. Quality should be the primary factor in selecting main and subcontractors.

•

Research and innovate The quality system should be constantly analysed and checked, using relatively simple and straightforward analytical techniques, to identify and quantify any problems that are affecting overall quality. Any quality management system is only as good as it was on the day that it was implemented; it could even deteriorate if it is not properly controlled and monitored. Constant monitoring and action to deal with detected problems is therefore essential. In almost every case, where prevention in itself is not sufficient to avoid a defect or quality problem occurring, the earlier the problem can be detected, the easier and cheaper it is to correct. The control system and performance criteria should therefore be established and operated so as to indicate problems at the earliest possible time. This could include the establishment of limited-range variance envelopes for the quality implementation process.

•

Invest in staff development Training and staff development are central to any kind of quality management system. Relatively skilled staff may perform below their potential if they do not receive proper training. Individual team members should have sufficient knowledge of areas such as scheduling and cost control to enable them to identify when problems are occurring or (even better) where problems are likely to occur because of events that are occurring at present. Training and staff development have implications for long-term organisational development. Ideally, the quality management system should use experience gained on previous projects as the basis for training of staff to improve quality on other projects. There should be a Edinburgh Business School

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system of project performance monitoring and pooling of ideas and learned experience from all employees so that useful findings and discoveries may be circulated around the whole organisation.

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Enhance supervision The concept of supervision is based on the idea of providing a level of leadership and support that allows individuals to perform effectively. Deming suggested that while operatives basically want to do a good job and will do so if given the right equipment, they do not necessarily have the right knowledge, understanding and personal characteristics to allow them to achieve this. Supervision is one way of addressing potential operative shortfalls in understanding and attitude, allowing the operative to learn and develop the correct knowledge base and attitude to allow him or her to perform well.

•

Develop a system of open communication Generally, all communications should be open. Secrecy and confidentiality is to be avoided unless absolutely necessary. In Deming’s philosophy, democracy is paramount and openness is central to securing employee trust and co-operation. It is essential that everybody within the system is able to report problems without fearing the consequences. Most organisations have extensive informal communication systems where this type of information is circulated. Under Deming’s approach, this should be formalised so that communication is open, irrespective of the content or nature. It is essential that any problems are detected and corrected early. The longer the problem progresses, the more difficult it will be to correct it at some point in the future. In most cases, problems are detected earliest by the people who are working on the production line. These are the people who are performing the actual production. It is important that they feel able to report these problems as early as possible up the line of command so that appropriate corrective action can be taken. In order to do this, operatives have to be able to identify areas of inefficiency without fear of retribution from senior managers whose responsibility these inefficiencies may be. Organisations typically have barriers to efficient communication. Large functional organisations are often characterised by operational islands, as discussed in Module 4. This phenomenon tends to result in individuals or small groups that are separated by both functional and status boundaries, as shown in Figure 7.4. Operational islands act as semi-independent sectors within the overall organisational structure. Control and communications tend to flow down through the various functional divisions, but there tends to be relatively little communication and co-operation across the functional divisions. This is inefficient, as cross-transfer of co-operation could allow the formation of horizontal production units as well as those that run vertically. As a result, it can be very difficult for information and feedback to get from the people on the operational floor right up through the system to the managers who are developing and implementing the strategies of the organisation. It is relatively easy for information to flow up through the system between individual power levels. However, each level acts as a filter. As problems Edinburgh Business School

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Increasing power

Decreasing numbers

Senior management Power boundaries

Line management Operational levels

Functional boundaries

Figure 7.4

Organisational or operational island

Operational islands

are solved, information is absorbed by each level of control. Relatively little information from the base level reaches beyond the first level of control. It takes a very big push to get operational-level information up to level 3 and an enormous effort to get any of the information up beyond this level. The Deming approach calls for a simple bypass to this system, allowing free and effective communication from the operational level right up to the strategic planners. This concept is summarised in Figure 7.5.

Level 5

Executive

Level 4

Functional manager

Level 3

Line manager

Level 2

Supervisor

Level 1

Operative

Effort bypass

Figure 7.5

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Formal communication channels and impact required to progress between levels

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It is also important to remember that the people operating the machine know their job better than anybody else, and they are usually the people most able to detect problems and suggest possible improvements in efficiency or process. It is important that they are able to share this information through some form of open discussion. The best solution for this approach is for management to adopt an open-door policy, where people can discuss problems and provide suggestions for improvement.

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•

Encourage enterprise-wide open communication In Deming’s philosophy, effective quality management is best implemented by a process of breaking down barriers and improving communication between all the different sections within the organisation itself, and also between all the different organisations that are involved in the various projects that are being managed by the parent organisation. This includes breaking down authority and functional barriers (see Module 4), so that all members of the project team become literally one team working towards one known objective. In order to facilitate this, it is important that the OBS and the configuration management system (CMS) clearly define the channels of communication that exist between all the various members of the organisation and associated project teams. It is also important that informal communications between the various organisations and individuals involved is allowed and encouraged, provided that organisational and managerial controls are maintained at an appropriate level. Informal communication channels can be as, or more, effective than formal ones and must never be obstructed or neglected (see Module 4).

•

Avoid the use of output standards Deming’s philosophy on output standards is different to some of the other gurus’ philosophies. Some gurus argue that widespread use of slogans, posters and published performance figures should be encouraged. Deming’s philosophy argues that this approach is not correct and should only be used where appropriate resources are in place. It has been common practice for several years in the UK for companies to drive towards greater effectiveness by increasing staff workloads. Managers have demanded greater productivity and efficiency from staff but this demand has frequently not been matched by increased resources or improved training. Deming’s philosophy argues that this approach puts pressure on staff, can act as a source of conflict and is difficult to sustain in the long term.

•

If standards are used, use them carefully Deming’s approach recognises that output standards have to be used in some applications, such as in setting output targets as a basis for calculating production figures as a basis for calculating bonus payments. Where standards are inevitable, Deming’s philosophy suggests that great care should be taken when comparing projected or target performance to actual performance. Individual and team productivity can be influenced by a whole range of variables that are outside the control of the individual or team concerned. Individuals or teams that are penalised for negative events that are wholly outside their control Edinburgh Business School

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may develop resentment and corresponding reductions in commitment and motivation.

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Encourage pride The Deming philosophy considers it important that workers should be allowed to evaluate their own work and take a pride in it, rather than adopting an inspection and testing system. The underlying idea is to form a link between the satisfaction of the employee and the improvement in the overall production system. Employees can be encouraged to take an active interest in the quality of what they are producing in a number of ways. It is not necessary to base this interest purely on financial reward. This approach is more applicable in some industries than in others. For example, the construction industry has traditionally been segmented into isolated trades. Over the last twenty years or so, it has also been subject to general pressure to outsource and downsize. The end result is a system where the main contractors often only directly employ key management and support staff, operatives are all subcontractors, either working for large subcontracting specialists or for themselves as self-employed labour. The end result is a situation where the main contractor is effectively managing a whole group of smaller subcontractors. These subcontractors do not owe any allegiance to the main contractor and they certainly do not share the interests of the client. There is virtually no link between subcontractor objectives and client objectives. This has resulted in a situation where each subcontractor gives a specific contribution to a detailed whole and then moves on. It is difficult to impart a sense of pride in workmanship and quality in such circumstances, other than by a very careful selection process. Vehicle production is an example with both extremes. Most cars are mass produced on production lines, but some quality cars are still assembled by hand using teams of employees who build a car from scratch instead of using production lines. Employees accept different responsibilities by rota, selecting components from adjacent conveyors and parts bins. This makes it far easier for an employee to identify with the finished product. In terms of quality psychology, this can be a very important factor. It is very important to forge a link between product quality and employee satisfaction.

•

Invest in training The Deming approach requires the use of new technology and ongoing management training. These factors were important when Deming was developing his approach. They are even more important today. Technology is developing at an increasing pace, and adapting to changing technology is part of everyday business life. Most companies depend on computers, and are therefore vulnerable to changes in computer technology. Organisations tend to become more competitive and complex and, as a result, increasingly complex software packages are developed. Organisations face a constant requirement to upgrade and improve on their computer provision. Failure to do so means that the organisation cannot use the latest software, and therefore it becomes less effective and efficient than competitors. Edinburgh Business School

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As complexity and technology expand and develop, there is generally a need for greater management training. Managers have to understand the changing technology in order to be able to make best use of it. In addition, reporting becomes more complex and the potential use of feedback becomes greater. Lessons learned on one project can be used as feedback to improve performance on future projects, and information held by one section can be of direct use to another section, provided that it is effectively communicated. •

7.3.2

Encourage commitment The Deming approach requires the commitment of the organisation at every level. Any individuals or sections within the organisation that are not committed to the development and delivery of quality are potential threats to the system. There has to be a more or less total commitment from every component in the system. Everybody in the organisation, from the admin assistant to chief executive, should develop a commitment to the philosophy of quality management. It should not be restricted – as it has traditionally been in most industries – to specific quality-assurance and control departments or sections. Managers should resist the temptation to put forward solutions based only on their own experience and assumptions, and instead should invite comment and communication from all levels of the workforce. Senior management should insist that a basic TQM approach is adopted by every single department and operational unit within the organisation.

Juran Joseph M Juran was active in Japan just a few years after Deming’s initial inroads in 1950. Juran is famous for his ten steps to quality improvement and for the Juran trilogy. The ten steps for quality improvement are to: 1 2 3 4 5 6 7 8 9 10

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develop an awareness that products must evolve and improvement is necessary; establish a strategic plan for improvement and establish goals for improvement at different positions within the strategy; plan an operational system that allows the goals for improvement to be achieved; provide adequate staff training and development as required; where there are major problems, treat them as projects and set up a project team to resolve them; establish a regular and detailed reporting system; recognise good performance and reward it. Take appropriate corrective action in the case of poor performance; develop an open communication system and communicate results; maintain performance records and publish results. Use ‘league tables’; drive the system maintaining momentum and constantly introducing improvements and innovations. Edinburgh Business School

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Juran’s approach suggests that senior management must establish top-level strategic and annual plans for improvement in quality. It is a highly structured and co-ordinated approach based on complex planning and implementation control. It is far more controlled than the Deming approach. For this reason, it tends to appeal more to boss-type managers who identify with a rigid control system. Juran’s philosophy is basically to plan improvement, control implementation and then improve. The approach is directly analogous to time planning and control (see Module 5) and cost planning and control (see Module 6). The Juran trilogy comprises the following:

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•

Quality planning Quality planning is analogous to cost and schedule planning. It includes: – identifying and ranking all existing customers; – identifying individual customer demands and requirements; – developing a solution (product) that meets and exceeds these demands and requirements; – planning the development and implementation of this product; – establishing goals for achieving the product; – implementing the production process; – ensuring that the system is accurate and reliable. These steps are similar to the standard approach to total quality management (TQM) planning (see section 7.5.3) and now usually form part of any quality management or total quality management system. According to Juran, in order to achieve these processes, management has to establish planningoriented cross-functional teams to work with steering groups to make sure that subsequent implementation will work. As with Deming, barriers to communication must be broken down so that open and clear communication becomes prevalent throughout the system.

•

Quality control This process depends upon the collection and analysis of data for the purpose of determining how well the system is meeting the quality goals. The process is usually based on standard statistical techniques using meaningful sample sizes. The process will involve selecting sources for data and then establishing the usual variables of sample size, units of measure, type of distribution, performance measures, and confidence limits. The data are monitored before and after improvement actions in order to determine the level of success achieved. Baseline data and standards have to be established in order to allow the monitoring process to occur (see section 7.4.5).

•

Quality improvement Quality improvement centres on the process of breaking through to a new level of quality performance. The objective is to improve the system so that the end result is a procedure that operates at a measurably higher level of quality performance than it did before. The Juran approach, like Deming’s, stresses the need for open communication and the involvement of people from all levels of the organisational breakdown structure (OBS). Edinburgh Business School

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7.3.3

Crosby Philip B Crosby’s approach is based on the philosophy that quality has to become the universal goal of the organisation and that senior management must provide the leadership to drive an organisation forward in which quality is paramount and is never compromised. The Crosby approach is more aimed at the human-resources type of manager. Part of the Crosby philosophy is the assertion that quality is defined as compliance with organisational requirements, and that the quality is best achieved through the prevention, rather than the detection, of errors and defects. This is an important distinction. The Crosby approach is based on preventing defects, rather than setting up systems to check products and then product quality variances as the basis for subsequent management action. Under a Crosby approach, the organisation sets up a series of objectives and targets, and it then designs and builds a production system that produces goods to meet these standards. The Crosby approach thus encourages a performance standard of zero defects, so that the production system works up to its design standard and products of acceptable quality are always produced. This changes the role of the production manager from one of being a dictator to that of being a facilitator. Crosby, like Deming, produced a fourteen-stage process for quality improvement. It is interesting that both gurus arrived at the same number of steps. Crosby’s series is listed here as follows:

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Establish commitment of all levels of management There has to be management commitment. The Crosby approach recommends that this is formalised. The best way of doing this is by requiring senior management to make a formal assessment of current quality performance in relation to desired performance, and then developing the assessment into a formal quality policy. Individual quality objectives can then be derived from this policy. These objectives can then be communicated throughout the organisation, and be used as benchmarks of performance by individual sections and departments. This ensures that the quality objectives of each section and department are fully aligned with those of the company as a whole.

•

Establish specific quality teams Crosby raised the issue of forming specific teams to maintain and improve quality. Crosby suggested that quality standards and performance are best developed and then monitored and controlled by the people who are actually involved in the process. The idea was that small quality improvement teams that work in each department and section are more effective at developing and maintaining performance than a large centralised support unit. Quality improvement teams are now widely used in the UK. They often acts as sub-teams of the overall quality steering teams that are standard under a TQM system.

•

Establish measurement and evaluation systems Crosby’s approach requires the development of appropriate performance measures. The idea is to standardise reward systems throughout the organisation so that good performance is uniformly recognised and rewarded as appropriate. In the same way poor performance is uniformly identified and corrective action Edinburgh Business School

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is taken. The Crosby philosophy stresses the importance of perceived fair treatment across all sections and levels of the organisation.

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Establish cost implications Crosby’s approach requires a detailed cost analysis of the quality management system together with a comparison to associated potential cost implications if this was not in operation. This comparison is necessary in order to ensure that the cost management system is seen in context and its relative importance is appreciated. The cost comparison should include overall and true costs in relation to estimated and actual implementation costs. The analysis should also include an assessment of the cost implications of the various risks that impinge on the process. An example is the assessment of the likely true cost of a defective product being released to the market.

•

Promote awareness of quality Quality awareness is the proliferation of an improvement and quality-management philosophy throughout the organisation at all levels. Again, this is a prerequisite of most contemporary quality management and total quality management systems. It agrees with the corresponding sections under the Deming approach.

•

Establish appropriate corrective action Corrective action is the process of preparing plans and systems for the identification of problems and the control of the responsive actions that are necessary. This may seem obvious, but it is important that the design and implementation of a quality management system is treated as a strategic exercise. It takes a long time to plan a full system, and it may take as long again to implement it. The strategy will attempt to foresee any problems that might occur and to set up suitable corrective processes and contingencies where necessary.

•

Establish plans for zero-defects The concept of ‘zero defects’ is central to the Crosby approach. The overall objective of a zero-defect approach is to engineer a process that is as near to perfect as is possible. In such a system it becomes more difficult to produce a defective product than it is to produce a quality product. This approach is often used in the design of mass-production systems. The various processes and sub-processes can be linked together in such a way that it is almost impossible to miss anything out or install it incorrectly. Zero-defect approaches are also used in safety critical areas such as aircraft manufacture and pre-flight checks.

•

Initiate education programmes Crosby’s emphasis on education is similar to Deming’s ideas on spreading the concept of quality throughout the entire organisation and making sure that all employees – at all levels – are correctly trained in the requirements and operation of the quality management process. Employee education is the process of training and communication needed in order to understand that everybody is responsible for quality and it is an integral part of the job. Crosby’s philosophy stressed that this has to include everyone, from production staff right up to the chairman and including all administrative and support staff and anybody else who works for the company enterprise-wide. Edinburgh Business School

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Initiate Zero-defect Day This is an important milestone in the improvement process. Zero-defect Day is a target that is established well in advance and it marks the start of the zero-defect era within an organisation. It is the point at which the production system achieves its design level of performance and the point at which the system can begin to produce at guaranteed levels of quality. Up to this point, the system is not performing adequately and there will be no guarantee of the quality of the product.

•

Establish achievable quality improvement goals The quality improvement objectives should be established as organisational goals. Where relevant they should also be clearly linked to the strategic goals of the organisation. The quality improvement goals should be accepted by the organisation at all levels and should be generally perceived as being fair, reasonable and achievable. The individual emphasis on different departments should be fair and reasonable so that everybody is seen to be doing their ‘fair share’ of what is required.

•

Remove the sources of defects Removing the sources of defects may seem obvious but it can sometimes be very difficult to identify exactly what is causing a particular defect, particularly in a complex manufacturing system. It may be necessary to use a defect identification tool such as cause and effect analysis (see section 7.4.8). It is important that all detected defect sources are removed as any that remain will reduce the effectiveness of the quality management system.

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Recognise good performance and reward it Recognition is the process of ensuring that sections that meet quality improvement targets are recognised and rewarded. There should also be a system to ensure that innovations and new developments that improve the system further are recognised and the originators are rewarded.

•

Establish quality forums Crosby developed the idea of a quality forum as an interface between senior management and the various operational managers. The approach suggests that quality forums operate in addition to any strategic quality steering groups. In Crosby’s philosophy the quality forum acts both to facilitate and guarantee open communications. The idea is that representatives from all levels and all sections attend and everyone is encouraged to speak openly about any issues that relate to the implementation and effectiveness of the quality management system.

•

Ensure evolution and feedback The quality management system has to be dynamic. Customer demand changes and the production system has to respond accordingly. The quality management system must therefore always be dynamic and ready to change. Crosby also stressed the importance of effective feedback. The quality management system has to be able to assess itself and learn from any failings or shortcomings. Quality forums can be used as a mechanism for generating and circulating feedback.

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7.3.4

Imai Imai developed a philosophy based on continuous improvement with an emphasis on the production system and the immediate environment rather than on the product itself. Imai’s philosophy is more structured than those of the other three gurus. Imai is more appropriate to structured production-type managers. The idea is that the organisation should concentrate on making sure that the production system is exactly aligned to the characteristics and demands of the environment. The production system should then be continuously assessed and evaluated and improvements should continuously be made to each part of the system where there are any problems or areas where improvement potential exists. The theory is that by continually improving the process the product itself must improve as a direct consequence. Imai’s philosophy is forward-looking. It concentrates on processes rather than results. Imai’s theories became known as the ‘P’ approach (the process approach) because they concentrate on the process rather than the results. This was at odds with the approach of the classical motivational theorists, who tended to assume an ‘R’ approach (the results approach). In the ‘R’ approach, management sets target output results, usually specified by a management by objectives plan (a plan where management establishes objectives to be achieved and allows some degree of freedom in how the person or team organises themselves in order to achieve these objectives), and then rates the performance of the individuals or departments based on that performance measure. A performance variance is produced as a measure of how well the team or section is producing. The ‘R’ approach assumes that the performance of a department or individual is governed by reward and retribution, with retribution being the driving factor in most cases. In Imai’s ‘P’ approach, performance measures are still used but management supports individual and group efforts to improve the system, leading to improved results as a consequence. The emphasis is on improving the process rather than improving the result. This is consistent with Crosby’s drive to develop a system that produces what is required every time, provided that it is defect-free. This concentration on the process is sometimes referred to as the Kaizen approach. Under this system, change is slow and consistent rather than sudden and dramatic. The change is slow, and looks at the entire system instead of individual or group performance on a particular task. Financial input tends to be relatively low because the improvement is so long term, but there is often a requirement for continuous and high-level management support and input in order to ensure that the change continues to take place and that the change occurs where it is required. ♦ Time Out Think about it: the quality gurus. Much of the early development of the theories on quality management was driven by the quality gurus. They all developed similar yet different theories to explain how best to implement and operate quality management systems. The theories have some areas of similarity and some areas where they disagree. Some theories clearly appeal to some kinds of managers more than they do to others: some take a more

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democratic view, while others assume a more autocratic approach. The applicability of each view depends primarily on the characteristics of the production system and the style of management that is acceptable to the organisation. The various views were first put forward several decades ago, but they remain relevant and applicable in many respects today. Questions:

• • • •

In what areas of quality management theory do the four gurus generally agree? What type of manager does Deming’s theory most appeal to? What are the main differences between the views of Deming and Crosby? In the 1950s, why were ideas on quality management unacceptable in the US and yet highly attractive and practical in Japan?

♦

7.4 7.4.1

The Quality Management ‘Six Pack’ Introduction Quality management is an evolving discipline. Quality is increasingly being recognised as a definite management objective that can be aspired to, and achieved, in much the same way as time and cost control. There is no single definition of quality, and therefore of quality management. However, quality management is generally a direct responsibility of the project manager and can be one of the primary determinants of project success. In a competitive environment, quality is the level of performance required in order to win more of the same type of work and to acquire new customers. Quality management is the process of managing quality in order to ensure that certain established standards are achieved. This section considers quality management from the Western point of view. This is different from the traditional Japanese view (see section 7.2.), where quality management is fully integrated and is not treated as a separate process. Western quality management is about analysing the market and deciding on an acceptable level of quality that is to be attained, and then setting up monitoring and control systems to ensure that those quality standards are matched or exceeded. By definition, this process involves establishing some kind of standard and then measuring actual performance and comparing the performance to that standard. This approach is directly analogous to EVA systems used for cost variance analysis (see Module 6). Within any definition of quality management, there are six primary areas that should be established and performed in order to support any project. These six areas are: 1 2 3

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quality policy; quality objectives; quality assurance; Edinburgh Business School

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4 5 6

quality control; quality audit; quality assurance plan and review.

These six areas are sometimes referred to as the ‘quality management six pack’. Most researchers and practitioners agree that they are central to any kind of quality management system. The ‘six pack’ elements are components of the same system. They form a coherent and interlinked operational system, and the system is likely to fail if any element is missing. How these areas link together is as shown in Figure 7.6.

Organisational structure Strategic vision

Quality policy

Quality objectives

Quality control

Corporate image Quality assurance

Production system

Quality assurance plan and review

Figure 7.6

Quality audit

The quality management ‘six pack’

The quality policy represents the starting point and reflects the required image and vision of the organisation. The quality assurance and control procedures contain the tools and techniques that allow quality standards to be set and performance to be monitored. The development of a formal strategy takes place within the planning and review section and the performance of the whole system is evaluated and monitored through the quality audit process. Project Management

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The production system implements the quality plan. The plan involves both the strategic design of the production system and its implementation. The implementation process is monitored and evaluated by the audit system. Standards and levels of performance are introduced and checked by the control and assurance systems. These effectively measure and/or quantify the performance of the quality management system, at any particular time. These are developed from the quality objectives that are, in turn, developed from the company quality policy. Each of the six areas is discussed further below. 7.4.2

Quality Policy The quality policy is a statement of the overall organisation vision on quality. It clearly states the organisation’s attitude and approaches to quality and sets out overall success criteria for performance. These are usually stated as overall achievement goals and are designed to respond to customer objectives or concerns. The policy is a statement of overall strategic objectives. It does not specify individual performance requirements or the mechanics required to achieve the objectives. Generally, the policy has to be perceived as being authentic and central to the performance of the organisation. It should have the full support of senior management and this support should be advertised and communicated around the organisation. Increasingly, the quality policy is validated by sponsorship or association. Directors or the chairman might sign the policy statement and perhaps issue a short publicity statement that emphasises the importance of the policy and the support of the author. There is clearly a better chance of the policy being taken seriously and succeeding if it is supported by senior management. In addition, senior-level support and association set a good example to managers at all levels and to some extent it controls the tendency for senior management to delegate the implementation of the policy to lower-level managers. Increasingly, organisations are issuing quality policies in the form of organisation or customer charters. Hospitals often issue a patients’ charter that specifies performance levels in areas of greatest concern to patients. Obvious examples would include limits on waiting times to see a consultant or for operations. Another example is a government housing department issuing a tenants’ charter. This might state what minimum levels of windtight and watertight repairs are guaranteed, what levels of service tenants can expect from the landlord, minimum times for different types of repairs, perhaps with a simple classification system to illustrate what constitutes the different classifications of urgency. It could also include stated standards for inspection and testing in order to ensure that the finished repairs comply with the specification. The charter could include guarantees or insurance-backed warranties or performance bonds in order to ensure that the work is to the required standards – of importance where the income or profitability of an organisation depends upon the quality of the repair, for example for a university hall of residence central heating system in winter.

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The primary components of the quality policy are: • • • • • • • •

clearly stated organisational quality objectives; established measurable minimum performance levels; a clear reconciliation of the quality policy with the established strategy objectives of the organisation; clear and unambiguous senior management support; stated penalties or consequences for non-compliance; reference to any central or statutory restraints; some form of measurement and evaluation procedure; stated responsibility and ownership (where appropriate).

The quality policy should be (and be seen to be) in the interest of everyone. Measurable performance criteria should be established in order that actual performance levels can be determined. 7.4.3

Quality Objectives The quality objectives are effectively components of the quality policy. The objectives convert the overall policy into individual statements of what has to be done by individual sections in order to achieve the overall policy outcomes. The policy objectives represent individual performance-control elements. They are analogous to work breakdown structure elements (see Module 5) and cost accounting code elements (see Module 6). For example, waiting times for hospital beds depend on many factors, including the: • • • • • •

average consultation waiting times; average referral times; total number of beds available; general availability of surgical staff and support; availability of facilities; size of the existing waiting list.

The main thrust of the policy might be to reduce waiting times. In order to achieve this overall result, it might be necessary to reduce the time involved in each one of the contributory factors. In this case, it is of no benefit to reduce nine out of ten contributory factors if the last one is not reduced. Each of the contributory factors is effectively on its own parallel critical path; they all have to be reduced or the overall event time cannot be reduced. Another example can be found in the contributory factors that affect overall arrival times and delays for trains on a given route. For a railway operator, these could include individual achievement and maximum failure rates allowable by different sections including track, signals, security, repairs, locomotives etc. Overall improved performance requires individual section improved performance and it is important that each contributing component is fully aware of exactly what level of performance it has to achieve. It may be ineffective to Project Management

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spend a lot of money in improving rolling stock and locomotives if there is no corresponding improvement in the standard of the track and signals. This was the dilemma that faced the UK government and train operators when the UK–France Channel Tunnel was opened. Enormous sums of money were spent on the tunnel itself, largely as a result of the size of the project and the degree of new technology and operational procedures required. The French national railway company (SNCF) also spent a lot of money in designing and installing new high-speed tracks on the French side, from the portal itself to the main terminal in Paris. The French accepted that there was no point in having a high-speed and high-quality link through the tunnel without having a similar standard of track at the end of it. However, on the UK side, for political reasons, the government at that time was not prepared to commit to the development of a high-speed rail link between the UK portal and Waterloo Station in London. The main reason for this was that the proposed route ran through the heartland of the government’s South-East England constituencies. The government was scared of damaging the key Kent voting area by driving a high-speed (and noisy) rail link through the middle of it. The government therefore decided to retain the existing Dover to London railway line and use that as the link between London and the portal. The result was that brand new Eurostar trains were able to leave Paris and travel at high speed to the English end of the Channel Tunnel on brand new, state-of-the-art tracks, using modern signalling and safety equipment. Thereafter, the trains used the system that was built in the middle of the nineteenth century, with speed restrictions to match. This is an example of how the quality of the whole system depends on the quality of the individual components. The quality objectives of the track providers should have been the same for all sections of the project, not just for most of it. Even a relatively short section of the overall line affected the overall performance of the system. It is therefore important to view quality objectives as components within the context of the overall quality-management system. ♦ Time Out Think about it: quality objectives. Quality objectives are not always within the overall control of a project manager. It may be possible for the project manager to subdivide a project into a quality or performance breakdown structure, and to establish the minimum levels of performance that are required in order for the overall quality-management system to operate effectively. However, the decision on the levels of performance that are actually allowable are frequently outside the control of the project manager. In internal project management systems, these levels may be set by the functional units; in external systems, they may be set by the client. However, in all cases, the overall performance of the project will depend to some extent on the specific performance of each individual production unit. Performance of an good as the rest of ball player playing In order the avoid

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individual unit may be unsatisfactory because that unit is not as the system. An example of this is a second-division-standard footfor a first division team, where selection might be intermittent. compromising the performance of the whole system (the team)

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the project manager (head coach) has to replace the defective unit with a better one (make a substitution). This of course depends on the project manager having a sufficiently good unit to replace the defective one. If he or she only has further defective or substandard components, then there will continue to be a problem. Questions:

• •

How can a football manager avoid the problem of intermittent performance?

•

What happens if a key player is sent off and therefore cannot be substituted?

What determines the number and quality of substitutes that are available for any given match?

♦ In general, the objectives must be clear and practical, and must mirror reality and practical possibility. More specifically, the objectives should be: • • • • • • • • • •

clearly achievable and in context; linked to organisational and strategic goals; adequately resourced; associated with clear and unambiguous relevant operational support; related to some form of measurement and evaluation procedure; related to stated responsibility and ownership; related to any operational and/or statutory standards; related and apply to all relevant operational units; stated in the context of specific time scales for implementation (where appropriate); stated in the context of any implementation cost limits that may apply.

In the train operating company example, the quality manager might take samples of train arrivals and plot the average distribution. From this, the manager would then analyse the system to identify all the contributory elements and sample each one in turn for defects. For instance, 10 per cent of trains might be late over a given period, but only 10 per cent of these delays might have been caused by mechanical failure – perhaps 80 per cent were caused by vandalism. These results would give an obvious indication of where investment is required and where standards for improved performance need to be established. Research within the company might indicate that a 25 per cent increase in policing will result in a 50 per cent reduction in vandalism. The Railway Police would then be set an objective of reducing vandalism by a stated percentage. In order to keep this achievable, the Railway Police would have either to reorganise priorities or be given additional resources to enable the increased level of policing to happen. 7.4.4

Quality Assurance ‘Quality assurance’ is a general term applied to a wide range of tools and processes that are used as drivers to ensure that the quality management system performs and produces results that comply with what has been specified. Quality assurance is a proactive concept. It is primarily concerned with setting the

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standards that are required of the system in order to ensure project success. Quality assurance also includes the collection and use of information from outside the production process, and even from outside the organisation. This information is used for comparative purposes and as feedback or input for improving the system. Generally, setting up a quality assurance system involves establishing some kind of benchmark or target against which actual performance can be measured. These standards will be derived directly from the individual component objectives that were themselves derived from the quality policy. For a train operating company it could be a statement that: • • •

at least 98 per cent of trains will be run and will not be cancelled; at least 98 per cent of trains will arrive within 30 minutes of the advertised arrival time; at least 90 per cent of trains will arrive within 60 minutes of the advertised arrival time.

Normally these assurances will be backed up by some kind of customer refund or compensation system if the standards are not met. This system could include reimbursement of a certain percentage of the overall cost of a ticket for season ticket holders, or discretionary travel vouchers, or refunds. Generally, a good quality-assurance system will identify objectives in relation to workable standards. This is an important concept. It is no good setting standards of performance for a train operating company if these standards cannot be realistically met with the existing resources and infrastructure with which the individual managers have to work. A quality assurance system is generally multifunctional and operates as part of a continual cycle for system improvement, as defined by senior management. It will typically include a detailed analysis of the current structure and characteristic of the organisation, and any performance targets set will be based on existing systems. Generally, a good quality-assurance system will: • • • • • •

7.4.5

clearly identify the minimum standards of performance that are acceptable; be proactive (where possible); be reactive (where necessary); apply across all sections that are involved in production; establish procedures for the collection and analysis of performance data; be established in the context of any relevant audit and performance review procedures.

Quality Control Quality control is another collective term. It is usually applied to a range of tools and processes that are intended to create known or specific quality-performance levels. The main difference between quality control and quality assurance is in evaluation and physical measurement. Quality assurance is concerned with

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proactively establishing drivers and standards for performance. Quality control is concerned with the evaluation of how well these standards or targets are actually being achieved, and reacting to any deviations. Quality control is therefore based on a retrospective approach. The concept of quality assurance and control based on quality objectives is shown in Figure 7.7.

Quality policy

Unit A objectives Quality objectives Unit B objectives P Time Current performance levels by time

Quality assurance

Unit A objectives

P Time Projected quality improvements to meet objectives

Quality control

Unit A objectives P Time Actual quality improvements in relation to projected

Figure 7.7

Quality assurance and control

In this example, unit A is performing unsatisfactorily and a consistent improvement over the forthcoming production period is required. Unit B is operating satisfactorily and no improvement objectives have been identified for this period. The quality assurance system identifies the production stages and packages that can be improved and programmes these into an overall assurance plan. Actual performance is then measured against this projected phased increase as part of the quality control system. This last stage simply involves the identification and quantification of quality variances for each work package up to full project level. The assurance system defines the drivers and levels of required performance; the control system considers actual performance in relation to these benchmark standards. Quality control processes include continuous sampling, with results being analysed using some form of statistical analysis. These results are compared Project Management

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with the standards established as part of the quality assurance system in order to evaluate the quality variance performance of different levels of the OBS and WBS. Individual and collective quality variances are calculated in order to identify where in the system certain components are performing to the required standards and where there are problems. The process can involve observing, sampling, collecting and processing actual performance data, comparing actual to planned, calculating variances, and identifying reasons for divergences from planned performance. The most important function is using this data as the basis for management reporting. For every divergence identified, the quality control system has to be able to recommend the necessary remedial action in order to correct the situation. There are numerous statistical techniques for sampling and analysing quality data. For a train operating company this might include the random sampling of train arrival times for a particular line and comparing actual performance to the target that was set as part of the quality assurance system. This could show that 3 per cent of trains were late in any one operating period, against the target of 5 per cent required by the quality assurance system. The quality control system would compare actual with standard performance in order to isolate quality variances. These would then act as central points for subsequent remedial action or for redefining standards for the next operating period. The information would be reported to senior management in the form of a quality-control performance report. It would identify all parts of the system and indicate those areas that were responsible for the divergence, together with recommendations on corrective action. A quality control system should therefore: • • • • • • • •

measure and confirm actual performance; compare target and actual performance and generate performance variances; identify significant performance variances; identify the sources of significant performance variances; initiate suitable corrective actions; assign ownership and specific responsibilities; monitor the effectiveness of corrective actions; generate suitable reports and control outputs.

It is clear that this process is directly analogous to the generation of cost and schedule variances as discussed in Module 6. The generation of a quality variance is the last piece in the project management time–cost–quality function as discussed in Module 5, and it is summarised in Figure 7.8. In order to ensure delivery of the project success criteria, the project manager has to be able to calculate, identify and manage variances. Time and cost variances are controlled together using earned value analysis (EVA). Quality variances are controlled separately using the quality management approach discussed in this section. At present there are no formal project-management systems that measure and control simultaneously time, cost and performance. If it were possible to develop a sophisticated software package that could offer combined and comprehensive time, cost and performance control, it would be a best seller. 7/44

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Cost variance Time (schedule) variance

Cost Time A

Quality (schedule) variance

Figure 7.8

7.4.6

Quality

Typical project management time–cost–quality continuum

Quality Audit Any quality management system must have an audit process. The idea is that an independent check is carried out by impartial personnel in order to ensure that the project’s quality performance standards are being met. Most realistic quality-assurance and quality-control systems would be subject to internal and external (independent) audit. External audit generally provides a stronger and more reliable measure of performance. Audit, by definition, has to be performed by independent and qualified personnel. It is a form of guarantee that the process is being operated correctly and has not been affected by interference or corruption by project personnel. The audit process helps ensure impartiality, objectivity, and the correct and fair interpretation of results and implementation of the system. In general terms an audit system should confirm that: • • • • • •

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quality assurance procedures have been observed and complied with; quality control performance figures have been correctly assembled; all relevant issues have been included; all processes have complied with any relevant internal standards and with any external statutory regulations; all analysis and reporting have complied with any relevant internal standards and with any external statutory regulations; all proposed corrective actions have complied with any relevant internal standards and with any external statutory regulations; Edinburgh Business School

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• • • • • •

all monitoring and control systems have complied with any relevant internal standards and with any external statutory regulations; all reporting systems have complied with any relevant internal standards and with any external statutory regulations; any appropriate areas for improvement have been identified and correctly addressed; all plans and strategies for improvement have been correctly assembled and implemented; any possible areas of misdirection or misinterpretation have been addressed; the system is free of corruption.

An example of an audit system is the system of examinations boards that are used by a university department to ensure that the courses it is delivering are each of a comparable standard to courses that are being offered elsewhere within the university and externally at other universities. The individual course team members will generally have some contacts with other departments and other universities, but it is important that this system is formalised in some way so that standards are maintained and improved where possible. Internal checks are generally made through the system of internal examination boards. These usually include a collective assembly of course team leaders and team members from all undergraduate or postgraduate courses in the department. Student examinations and assignment scripts are examined and individual marks are presented and agreed. This process ensures that all course team members and course team leaders are familiar with (and agree with) the standards of courses within the department. The final list of student grades is then passed to the external examinations board. This includes a number of external examiners, who are generally professors or heads of departments from other universities. These external examiners are able to scrutinise the grades agreed by the internal examinations board, and also make observations on overall teaching standards and course content compared with courses offered by other universities. This process ensures that external (and therefore wholly impartial) advice is received on such matters as overall standards, and on how well or otherwise quality improvement strategies are working from year to year. The process also acts as a safeguard against imbalances in standards of marking or even victimisation of individuals, or groups of students. 7.4.7

Quality Assurance Plan and Review The quality management plan is analogous to the project master schedule (PMS) and project cost plan. It is a strategic plan for the implementation of the quality management system. It breaks down the quality objectives of the organisation and expresses them in terms of individual targets for different sections of the organisation. It establishes the basis of all the quality monitoring and control systems, and it sets specific time scales and cost limits for the implementation and review of the quality management system. The implementation process then

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takes place, structured around the overall strategy that is contained in the plan and review. The idea is that the work content of the project is broken down to such a level that specific quality tools and techniques can be applied to each section and the results and responses can be monitored and controlled to ensure compliance. In effect, it allows the project manager to ‘project manage’ both the implementation and the effectiveness of the quality management system. Generally, a good quality plan will: • • • • • • • • • • • •

establish clear targets for the achievement of any stated objectives; ensure that all targets are achievable; allow for any interdependencies between activities; allow reasonable provision for response to change; include reasonable contingency planning; clearly specify performance objective success criteria; establish relevant risk profiles for each affected section and activity; include provision for all performance variance corrective actions; include ownership and specific responsibilities; include provision for the monitoring and control of the effectiveness of corrective actions; include provision for the generation of suitable reports and control outputs; be fully accountable for overall performance improvement.

In our train operating company example, the plan would first break the system down in to the components for which individual quality objectives can be set. It would then establish individual targets or minimum performance standards that are required for each of these sections. It then clearly defines when each of these target levels is to be achieved and for how long, and it quantifies the amount of money that is available within the system in order to make sure that each component works. It also assesses the risks involved in implementation, and from this, establishes a risk profile to show the relative importance of each component within the overall quality-management system. It then monitors the implementation and execution in order to makes sure that the system is working as intended, and it generates quality or performance variances as the basis for detailed and frequent reporting to senior management. In addition, the plan (and review) has to be dynamic. It does not operate within a fixed system and it has to be able to respond to changes in the production system and client base. Typically, it has to relate the quality management system to customer requirements, and also to evolve in direct response to changes in the production system and client base. Provided that the plan is correctly designed and implemented, it will perform a number of valuable functions. These are set out next: •

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Strategic focus Some form of strategic focus is essential. The quality assurance plan QAP is a strategic initiative in that it established the long-term aims and objectives of the quality management system. It is important that the strategic aspect of the QAP is properly focussed and aligns with overall Edinburgh Business School

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organisational strategic objectives. Strategic focus is particularly important in systems that are complex and where there are a multitude of potentially conflicting performance variables. The QAP has to be clearly defined in order to be able to set specific targets for performance at individual levels within the organisation. The end result has to be a clear definition of what each section and individual employee needs to do in order to achieve overall success. The quality assurance review (QAR) acts as an on-going control of the QAP. The QAR ensures that the QAP is being implemented correctly and remains aligned to overall strategic objectives.

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•

Formal procedures and processes The QAP is effectively a network of procedures. The various actions that are necessary for effective quality management are intrinsically linked and cannot be regarded or treated in isolation. The QAP acts as the overall co-ordinating mechanism to ensure that all procedures work together towards the common set of objectives. This is an important function as the objectives will change over time. Variations in customer demand over time will result in changes in the levels of standards that are acceptable. In the Railway example, customers will expect higher degrees of punctuality when everything is going well. During times of upheaval (such as UK Railtrack being put under administration in 2001) timetables might be routinely disrupted so that punctuality falls and customers develop lower expectations of performance.

•

Internal performance targets and benchmarking The QAP sets individual section procedures and performance levels and makes these known to all parts of the organisation. Each section or division can see how its contribution fits in to the output standards of the whole organisation. This increases individual accountability and acts as a form of safeguard against corruption and the compromise of standards. This standardisation and publication is very important; without it, individual sections or people may feel that they are being pressured to achieve higher standards than other sections or individuals. Alternatively, the same sections or people might feel that they are being pressured to achieve the same standards as the others but having to do so with fewer resources or more limited support from senior management. The establishment of clear and fair internal benchmarks is very important, and quality plans act to ensure that people take notice of internal benchmark standards.

•

Support for tendered/bid resource allocation The QAP states the level of resourcing required to guarantee a given level of performance within the time scales and cost limits that are specified in the plan. This clear statement of resource-level requirements can act to strengthen a project manager’s hand when conflict over resources occurs. Once agreed, the standard resource limit becomes a kind of benchmark and, to some extent, acts as a safeguard against future reductions in resources. Any proposals for downsizing or reducing resources can be converted into a workable and useable probability as to the effects, based on the information contained in the quality plan. Edinburgh Business School

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•

Data for trade-off analysis The QAP acts as a time and cost plan for the project. It states the time and money required for each stage in the process in order to meet specific target performance levels. As such, it acts as the trade-off link between time, cost and quality for the project. This linkage is important: it establishes the QAP as the standard contract document that links time, cost and quality. (The EVA-based PVAR report links only time and cost.) In many project systems, time and cost are considered as more important than performance, and performance is often the first of the three trade-off variables to be compromised if there is a problem. However, performance is less likely to be cut if it is planned for specifically – i.e., if a sum is set aside for it and it is included as an item in the schedule network). It therefore becomes a stated requirement of the system being developed, and resources must be allocated to it.

•

Standardisation of procedures Large organisations with complex production systems can have wide variations in individual quality standards. The QAP tends to generate uniform quality. Different levels of experience, ability, style of work and even employee attitude can cause variations in quality levels within the same company or department. If quality plans are mandatory and produced according to standard guidelines, then the variations in quality should diminish. Generally, there are several major problems associated with the imposition of a quality system onto an organisation. These are as follows: – In the early stages of a project, performance management is often under-valued as there is an assumption that the specification contains all relevant information. – Immediate time and cost constraints tend to dominate early stage decision-making. – Design teams in particular tend to leave performance management until the later stages of the process. – It is only in the middle and later stages of implementation that clients tend to become concerned about the eventual performance of the system in relation to the other project success criteria. – Performance measures tend to be related to the degree of implementation of the remainder of the project. It can be difficult to assess actual performance until the various operational processes are in place and functioning. – Trade-offs place pressure on performance. The classical first response of a project manager who is faced with time and/or cost inconsistencies is to attempt to compromise performance. – Performance is often incorrectly interpreted as being a function of time and cost. There is often an incorrect assumption that allowing more time or money must improve performance. – Performance management is a subjective approach. The approaches to time and cost planning and control have already been discussed. It is not always possible to use such a direct and structured approach to performance planning and implementation. Edinburgh Business School

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–

Performance planning and control is much more customer-related than time or cost planning and control. – Advanced software packages link time and cost as standard using EVA. No advanced software at present includes performance as a functional variable. – Performance management in general tends to suffer from a lack of adequate planning. The lack of planning problem can often be the most difficult problem to overcome. It is important to remember that quality cannot be applied retrospectively to a system: it has to be planned at the outset and then carefully implemented so that it becomes built into the production cycle. The QAP itself can be formulated fairly easily by producing a quality assurance matrix using combined OBS and WBS elements, broken down into work packages and assigned using a task responsibility matrix (TRM). The quality assurance matrix is generally developed by a project quality-assurance team (if this exists as a separate entity), or alternatively by the project manager. It shows what is required, who is responsible for achieving it, and how that person is to achieve its objectives. It is essentially a TRM applied to quality management. ♦ Time Out Think about it: quality management. More and more organisations are adopting stringent quality-assurance and control systems. These are part of the overall quality management movement. Quality management involves establishing plans and then measuring actual performance against targets or levels of performance set in these plans. In this respect it is analogous to time and cost planning and control. Quality is still to some extent seen as something of an awkward link within project management. Time and cost control have well-established planning and control systems, and are in many ways intrinsically linked together. Complex software has been developed that offers sophisticated planning-and-control facilities for time and cost. However, there is a general lack of good quality planning-and-control software, and there are relatively few approaches for directly linking quality to the other two success variables. Quality still tends to be treated on its own, with separate specialists giving advice on design and implementation. Software houses are developing programs that can control individual aspects of quality management, such as information control, change control, phased events and so on, but these programs are still in the relatively early stages of development and it will be some time before they reach the level of sophistication of some of the more powerful project-planning and cost-control packages. Questions:

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Why is it more difficult to quantify quality benchmarks and performance than it is to establish corresponding measures for cost and time control?

•

Why is it so difficult to develop a comprehensive package that can give simultaneous control of time, cost and quality?

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•

What would be the sales potential of such a package, should it ever be produced?

♦ 7.4.8

Quality Control Tools Project managers use a wide range of tools to assist in the quality management process. These assist in all aspects, from quality sampling to problem identification and diagnosis. Some quality management tools work in similar ways to the tools used for the control of schedule and cost information. As with scheduling and cost control, a wide range of statistical approaches can be used. The main ones used in quality management concentrate on either identification of a problem, or analysis, or both.

7.4.8.1

Identification Tools Identification tools are used to identify where problems are occurring. The tools fall into a number of categories, described hereafter:

Pareto Analysis A pareto diagram is a type of histogram. The objective is to produce a graphical representation that identifies problem areas. It also gives an approximation of the relative value or size of the problem area. It isolates areas on nonconformity to standard and draws attention to the most frequently occurring element. Typical graphical representations would plot frequency, percentage and units on a three-way chart. Basic Pareto analysis identifies those elements that account for the highest proportion of quality problems in the system. Comparative Pareto analysis considers a range of processes or actions and compares them in order to determine a league table of problem causes. Weighted Pareto analysis allows consideration of factors that might not be obvious from the initial analysis. These could include quality determinants such as time and cost. Basic Pareto analysis, like data tables, shows the frequency of occurrence of different quality defects. An example is shown in Figure 7.9, where there is clearly a problem with commissioning. The figures could represent test failures per thousand trials. In the case of all four engineering types, failures are reasonably similar, although the type-3 job seems to be having problems during the prototype phase. However, there are large numbers of commissioning failures in every type job and this should be cause for some concern. It could indicate a high proportion of late-stage errors or a commissioning acceptance procedure that is too onerous. Either way, there is a problem and either the-late stage errors or the acceptance procedures need to be investigated. Pareto diagrams can also be used to demonstrate the effects of proposed and actual corrective actions in order to try to improve quality performance. An example comparison is shown in Figure 7.10. The remedial action has clearly improved the overall process, and the largest single improvement has been on bolt manufacture. This could, for instance, be as a result of a new supplier with a new specification. Project Management

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90 80 70 60 Prototype 50

Full power test Hot run

40

Commission

30 20 10 0 Type 1

Figure 7.9

Type 2

Type 3

Type 4

Pareto analysis for quality failures of different job types

Brainstorming Techniques Brainstorming techniques are widely used in the detection of defects or inefficiencies in quality management systems. The idea is that as many people as possible review the project scenario and try to identify as many defects as possible. These include internal and external elements, controllable and uncontrollable risks, and all other factors that could theoretically affect the project. In brainstorming methodology, a co-ordinator or facilitator is generally appointed to chair the brainstorming session. He or she steers the discussion and tries to keep the group focused on the problem. Brainstorming sessions are prone to becoming sidetracked from the original objective. The co-ordinator therefore needs to be strong, aware, and perhaps have a sense of humour. It is important that unusual or even apparently silly ideas are not rejected too quickly – a lot of good practice started with an apparently crazy idea. How could we put a person on the Moon without complex navigational computers? Most brainstorming sessions have two distinct phases. Phase 1 is the Creative phase. The idea of phase 1 is to invite as many ideas as possible from the brainstorming team. The team should include as many project-team members as possible, and also other individuals who have an impact on the project or who act as stakeholders. The co-ordinator usually extracts one idea at a time from team members. It is important that any risks or risk areas are identified. People are encouraged to think outside their own specialisation. Apparently improbable ideas should be positively encouraged. The ideas are generally written down as 7/52

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Before 50 40 30 20 10 0 Month 1

Month 2

Month 3

Month 4

Steelwork Welds Bolts

After 40 35 30 25 20 15 10 5 0 Month 1

Figure 7.10

Month 2

Month 3

Month 4

Sources of defects before and after remedial action

they are extracted from the session. No criticism or discussion is allowed at this stage. Phase 2 is the Evaluation phase. Once the list of ideas is complete (at least for this particular session), each one is evaluated by all members of the team. Technical expertise and experience can now be applied by individual members in order to identify those ideas that have potential and those that do not. It is important that ideas are not linked to individuals, so that free and open criticism and evaluation can take place. Each idea is considered in detail, and a final list is formulated. These are the ideas on risk that are regarded as having real potential and worth further development. It is essential to be aware that the final list is the product of collective group effort, rather than a list of individual contributions. furthermore, there are two widely used formal methodologies for brainstorming, namely the Delphi method and the nominal group technique. In somewhat more detail: •

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The Delphi method In the Delphi method, a panel of experts (or steering group) is selected from both inside and outside the organisation. They are all given an identical statement of the problem, with full associated data Edinburgh Business School

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and support information. The experts do not interact and do not know of each other’s existence. They therefore act purely as individuals. Each expert is asked to make an anonymous identification of, and prediction on, a particular risk. Once the identification and prediction are complete, each expert submits it to the steering group. The steering group assesses the evaluation and provides comprehensive feedback to each expert on the collective answer. Each expert therefore knows what the collective answer is in relation to his or her individual response. Each expert is then asked to make a new identification and prediction based on that collective answer. The process is then repeated as necessary. The Delphi method thereby uses individual and group decision-making processes. It is based on the principle that groups approximate to the most accurate answer, provided that group interaction is limited. •

Nominal Group Technique In this technique, a panel is convened. The panel is then asked to brainstorm the problem at hand and to list proposed answers in writing. The listing usually goes onto a flipchart so that the whole group can help develop the list and observe it as it develops. Each idea is discussed openly and in detail among the various panel members. Each panel member then individually ranks each idea in terms of its perceived suitability for the particular problem. A collective rank is then developed and the ideas are listed in order of this collective rank. They are then listed and discussed again as necessary until a final ranking can be arrived at.

Expert judgement techniques like the two just described obviously give potential errors, not least from bias and prejudgement. Error sources include: • • • • • • • • • •

loyalty to the project; the consequences of group think; political alliances between group members; personality issues; team balance issues; prior knowledge and experience; failure to assimilate all relevant information; inability to reach an acceptable solution within time limits; intuition; pre-established ideas and concepts.

SWOT Analysis A strengths, weaknesses, opportunities and threats (SWOT) analysis is a useful way of identifying defects and areas where there are potential weaknesses within a production system. Such an analysis provides a means for examining both the internal and external environment. In general terms, strengths and weaknesses are controllable internal factors and can theoretically be engineered if they are not acceptable as they are. Opportunities and threats are generally uncontrollable external factors, and cannot be engineered by the organisation. 7/54

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A SWOT analysis generally works on the same basis as a work breakdown structure (WBS). It can operate at the top level within an organisation and can be used to consider performance as a whole, or it can move down through the structure of individual projects and look at individual sections and departments. A company might make a range of individual products, and might wish to carry out a SWOT analysis of each product. A typical SWOT analysis for a university course might take the form, shown in Table 7.1. Table 7.1

SWOT analysis of university course Strengths

• • • • •

The course operates within a grade-5 research department.

• • • • • • • •

Student numbers have fallen steadily for the past three years.

• •

There is currently a growing demand for this subject area.

• • • • • • • • • •

University central funding will be reduced by 10 per cent next year.

The course attracts EPSRC-MTP funding. The course currently makes more money in fees than it costs to run. The course team is experienced and well organised. The course has a good international and national reputation. Weaknesses There has been a consistent lack of investment by senior management. Staff who have left have not been replaced. The course does not receive recognition/support in relation to its contribution. Some of the modules are inappropriate and obsolete. Distance-learning materials are expensive and of poor quality. No interactive Internet version is available. There have been senior management restrictions on the introduction of new modules. Opportunities The existing course provides an excellent foundation for future development. Threats No investment is likely in the foreseeable future. More senior staff are likely to leave. A buoyant economy will result in fewer home students. A strong pound will mean fewer overseas students. Competing universities are making large investments. Industrial sponsors are supporting the competition not us. More competing universities have much better distance-learning materials. More competing universities have interactive Internet-based versions. More competing universities have better websites than us.

In order to reduce the risk inherent in any project, the organisation needs to: • • • Project Management

build on and exploit strengths; address and mitigate weaknesses; take advantage of opportunities; Edinburgh Business School

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•

avoid or reduce threats.

The unfortunate university department that produced this SWOT analysis clearly needs to address the problem of competitors producing better materials for the distance-learning market. The analysis seems to indicate that the main risk to the future viability of the course is the lack of investment by the departmental management. This could be because their emphasis and priorities lie elsewhere. This is confirmed by the fact that the course is clearly making a profit, but this profit is not being re-invested in the course; it appears to be syphoned off and used elsewhere. The course has a good reputation and has therefore performed well in the past, but this good past performance appears to be obsolete now, and new investment is required in order to keep the course up to date with current trends, such as distance-learning versions and Internet-based materials.

7.4.8.2

Analysis Tools Analysis tools are used to analyse why a problem is occurring. They can be categorised as follows.

Scatter Diagrams Scatter diagrams are based on the concept of having dependent and independent variables. Variations in one as a function of the other are shown on a simple two-axis graph. The scatter of the points will indicate correlations (if any) between the variables – for example positive, negative or curvilinear. Dependent and independent variables can be isolated in most processes. In excavating a tunnel, for instance, the time taken (assuming constant rock conditions) will be a function of length. Length is the independent variable while time is the dependent variable. The time required will always be a direct function of the length required. Scatter diagrams are generally used to illustrate trends. They act as the basis for linear regression analysis (see ‘Trend Analysis’ below). An example scatter diagram is shown in Figure 7.11, which shows a simple distribution of quality rating against time. Figure 7.11 indicates a steady increase in quality rating over a period of time. The quality rating could be an overall measure of the performance of a product in relation to customer requirements. It could include price, value for money, reliability, running costs and so on. Figure 7.12 suggests no correlation between the dependent and independent variables and therefore no performance relationship. Figure 7.13 reveals a strong positive correlation, which indicates a definite relationship between the dependent and independent variable. Control charts Control charts exemplify a preventive approach. They attempt to prevent defects, rather than detecting and isolating them after they have occurred. Most forms of control chart are based upon the statistical concept of a standard normal distribution. Control charts can be used in a number of ways, including concordance analysis, which involves plotting the frequency of occurrence of two variables in 7/56

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concurrence. If this happens enough times, the association will become statistically significant. If this significance occurs at the 90%, 95% or 99% level, then there is clearly a strong association between the two variables.

x

x x

Quality rating

x x x x

x

x

x x

x

x

x x

x

x x x x x x

x x

x x

x

Time

Figure 7.11

Typical scatter diagram

x x x

x

x

x x

x x

x

x

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x

x

x

Figure 7.12

x

x

x

Scatter diagram indicating no correlation

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x x

x xx

Figure 7.13

7.4.8.3

xx

x

x

x

x

x

x

x

x

Scatter diagram indicating positive correlation

Identification and Analysis Tools These tools both identify a problem and analyse why it is occurring.

Cause and Effect Analysis The data table approach could identify the basic problem. Cause and effect analysis could provide the next level of analysis, to use diagramming techniques in order to identify the relationship between an effect and its causes. Cause and effect analysis comprises six major stages, as follows:

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•

Identify the source of the problem The first step is to identify the problem. This can be done using cause and effect or SWOT analysis or other identification methods as appropriate. Problem identification in large systems can be difficult. EVA for example can identify where there are cost and/or schedule variances but it does not identify the source of the problem. In some cases the apparent problem may not coincide with the source of the problem. A schedule variance in a WBS level-3 element may actually originate in a level-5 package. In the cement bags example, the production systems might be working correctly and the problem may actually relate to the storage conditions in which the bags are kept prior to distribution.

•

Brainstorm the source of the problem A brainstorming team should be established. The team should be multidisciplinary, cross-functional and include representatives from each part of the production system. The brainstorming process should analyse the problem and try to identify all factors that could have a cause and effect. It is usually possible to establish logical scope for the brainstorming process so that it does not become unmanageable. Edinburgh Business School

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•

Establish the problem box and primary arrow The problem is isolated in a ‘problem box’. The problem box represents the end result of whatever is wrong with the system. The ‘prime arrow’ represents the total inputs to the problem box that exist within the system. The prime arrow reflects the relevant scope limitations of the production system. If the problem is unsatisfactory cement, there are only so many factors that can contribute to this. The prime arrow represents the sum total of all the possible factors that could produce the problem.

•

Identify all possible primary causes and effects The next stage is to identify and add all primary possible causes and effects (within process scope limitations) of the problem. In some cases there could be a large number of potential causes and corresponding effects and it is important that each one is identified and added to the analysis. In practice there are a series of elemental areas that are generally considered. These are: – the production process; – the people who work as part of the production process; – the equipment and plant used; – the materials used; – the quality control systems that are in place; – the environment. The prime arrow, problem box and cause and effect categories are linked and added to the analysis as shown in Figure 7.14.

Labour

Plant

Materials

The quality problem Process

Figure 7.14

•

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Evaluation

Environment

Cause and effect diagram showing the prime arrow, problem box and primary cause and effect categories

Identify all possible primary cause and effect components The primary cause and effect categories represent collective headings. In each case there will be a series of cause components that generate the collective primary cause and effect. As discussed above in the cement example, a primary cause and effect might be bad storage prior to distribution. This primary element will in turn comprise a number of components such as storage time, storage conditions, checking and maintenance. If the primary cause Edinburgh Business School

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and effect is labour problems, the components might be (for example) pay levels, morale, motivation and working conditions. The relative importance of each component will directly affect the magnitude and characteristics of the primary cause and effect. The component causes are added to the analysis as shown in Figure 7.15.

De-motivation

Shortages Plant

Labour

Materials

Breakdown

Bad design Production system

Measurement

Environment Legislative changes

Unreliability

Figure 7.15

•

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The quality problem

Primary causes and effect and components

Develop a proposed course of corrective action The analysis so far has identified the problem and shown what the main causes and effects are. For each cause and effect the analysis has also indicated what the primary components are. The analysis is now reversed so that the problem box becomes the ‘solution box’. The prime arrow now represents a solution strategy rather than the total inputs to the problem. The analysis then takes a modular approach and develops solutions for each individual primary cause and effect component. Individual corrective solutions are identified as tactical responses for each component and collectively these correct the primary cause and effect. The result is a corrected primary cause and effect that acts as a corrective contributor to the solution strategy. The end result (in theory) is a corrective strategy that corrects the problem. The tactical response for each component is usually delegated to the individual managers who have control over the component. For example, the ‘pay’ component might be addressed by holding negotiations with employees and agreeing a new pay structure. The concept (yet again) uses a WBS approach, where individual problems or concerns are broken down into smaller elements where individual control can be applied. This is shown diagrammatically in Figure 7.16.

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Plant

Materials

Labour

Correct bad design by re-engineering Production system

Re-assess logic and efficiency of entire system

Figure 7.16

Measurement

Environment

The quality problem

Reduce unreliability by improving maintenance

Corrective action from cause and effect analysis

Trend Analysis Trend analysis (or linear regression analysis) is a method for working out a best-fit equation. It uses the assumption that the larger the sample size, the more accurate and representative the data become. Once all the data have been plotted, it then becomes possible to work out a formula that describes the data in terms of a best fit. The best fit, or trend line, is the line that most accurately represents the data. Trend analysis is most powerful when used to identify strong trends over relatively long periods of time. It is often used in opinion polls and by political analysts in trying to isolate and analyse long-term shifts in voting intention. The time scale could be relatively long, such as the typical period between general elections.

7.5 7.5.1

Total Quality Management Introduction The concept of Total Quality Management (TQM) was very much in favour in the West in the late 1980s and early 1990s. Its popularity has perhaps declined slightly since then, although it remains the ultimate objective of most quality managers. TQM is another Japanese invention. It originated in Japan in the 1960s, and became integral to the great Japanese expansion of the 1960s, 1970s and 1980s. Earlier in this module the authors referred to the Japanese capture of a wide range of lucrative Western markets by building quality into their production systems. They were able to produce goods of a higher quality at the same price (and later at a lower price) than their Western competitors. In many cases, the improvement in quality was modest, but it was enough to win customers over.

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The Japanese did this by making quality central to the process and, equal in importance, to cost and time taken for production. Importantly, the Japanese moved away from the already established qualitymanagement approach and into TQM. This involved designing the system so that the production process and the organisational structure were considered as an integrated whole. The management of quality became both a production and an organisational concern, and it became appropriate at all levels and in all sections of the organisation. This concept is especially important in the context of project management because quality is only one of the three project success criteria. In order for the project to succeed, the quality element has to be delivered in much the same way as time and cost performance. In project management, quality has to be considered as an engineerable entity alongside project time and cost. In the UK, TQM has evolved from a number of earlier approaches to quality management. In the early 1980s, companies talked in terms of ‘quality built in’. This referred to a series of processes and applications designed to engineer quality into all parts of the process so that it was built into the end result. This evolved into the idea of ‘quality circles’ and the use of BS5750 standards to assure quality. In the 1990s, companies moved increasingly towards TQM as the next phase, introducing the idea of quality assurance right through the organisation and ending the former reliance on observation and testing. 7.5.2

Definition of TQM TQM is a structured approach to organisation-wide quality management. It combines enterprise-wide quality management with organisational control. The key element is enterprise-wide. TQM has to be enterprise-wide and continuous. It does not apply just to some parts of the organisation nor does it have a finite life cycle. It has to be continuous and applied throughout the organisation in order to produce quality products that exceed the expectations of the customer. TQM needs committed employees. It is based on the overriding assumption that most quality problems originate from the process rather than from the operatives. There are some systems where it is easier to achieve high employee commitment than others. One might imagine that the crew of a ship would be very highly committed because if the ship founders, they sink with it. The same reasoning, taken to the next stage would apply to aircrew navigating and landing a passenger jet. The airline company can reasonably assume that the aircrew will give 100 per cent commitment every time because of their own self-interest in the successful take-off and landing of the plane. High commitment can also be engineered to some extent. In the case of a complex production line, the process may be designed so that human input is relatively small and that, where it occurs, there is no possibility of error or omission. For instance, a vehicle assembly line might be so designed that the gearbox assembly is lifted into position on a cross-over line that is linked into the main line. The gearbox falls into position right beside the fitter. The gearbox line ensures that the box is correctly oriented to the main assembly; all the fitter has to do is bolt it on. The bolts are automatically fed into the drill and cannot

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fall out. The drill is pre-set to disengage once a certain level of torque has been achieved on the bolt head. There is therefore virtually no room for error. The fitter cannot miss the gearbox out because there is nowhere else for it to go; he or she cannot fit it upside down or back to front as it is aligned correctly when it arrives; and the fixing process is very well defined. In both of these examples, there is little chance of error occurring – although mistakes will still inevitably occur sometimes because of inadvertent human error. However, the need for standard quality-assurance observation, sampling and testing are greatly reduced simply because the opportunity and likelihood of error are so much reduced. 7.5.3

TQM Structure A TQM system has to have a formal structure in order to function. Most TQM systems comprise eight major components:

7.5.3.1

• •

commitment phase (developing internal resolve); mission phase (defining objectives and strategy);

•

customer phase (identifying what the customer wants);

• •

process phase (tactical analysis); vision phase (generation of eventual outcomes);

•

risk management phase (risk assessment and management strategy);

• •

planning phase; breakthrough and implementation phase (tactical move and monitoring).

Commitment Phase The commitment phase is where the organisation makes a high-level commitment to implementing the TQM approach. The commitment could be for a number of reasons. The organisation may realise the relevance and importance of the true cost of defects (see section 7.2), itself arising because of an event occurring within the company or because of something that happens to a competitor. An example of this is a revised examinations structure within a university. One university might switch to a TQM system for the examination and assessment structure. As the output from this university becomes more reliable, competing universities also might commit to implement a TQM approach in order to remain competitive. Other common reasons include:

Project Management

–

changed perceptions of customer demands and expectations;

– –

changing organisational structures and policy; the introduction of new high specification products;

–

the introduction of revised industry standards;

–

the introduction of new technology and altered production processes. Edinburgh Business School

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7.5.3.2

Mission Phase The mission phase involves the organisation in clearly defining the aims and objectives of the TQM system in terms of a strategic outcome. These objectives have to be clear and precise and must also be measurable. The mission represents the process through which the organisation has to pass in order to achieve the desired end position. The mission also has to be broken down into individual components that are definable and achievable for each section of the process. These components can then be executed as part of a tactical execution programme.

7.5.3.3

Customer Phase In the customer phase, the organisation reviews its current customers and researches potential new customers in relation to the TQM implementation system. Companies always have to remember that their existing and established customer-base can change. It is very dangerous to assume that the customer will want the same products next year as this year. Some products, such as bank loans, do not change much over time. Other products, such as mobile telephones or computers, change rapidly and continual. In addition, there might be a large potential customer-base that is not currently being exploited. There could be a number of reasons for this, and the company’s approach to quality management could be one of these reasons. It could be that a slight improvement in quality could open up a large potential new market. TQM systems are complex and expensive and the extent to which the eventual system is effective will depend a great deal on the customer base. Customer research and marketing are therefore vitally important, and TQM systems often involve the commissioning of very expensive and detailed market research.

7.5.3.4

Process Phase TQM assumes that most defects arise from the process rather than from the people who operate the process. TQM therefore requires a detailed process phase that involves a very thorough scrutiny and examination of all aspects of the production system. The process phase is more or less a matching process. The customer phase has produced a detailed assessment of what the existing and potential customer bases want. The process phase involves taking a close look at the production system and evaluating the extent to which it is capable of meeting those expectations. If it is not capable of meeting customer expectations, major investment may be required to bring it up to the required standard. This phase can involve detailed and expensive research. It may involve consultations with the designers and manufacturers of the process equipment and possible investigations into alternative use of existing and new equipment.

7.5.3.5

Vision Phase The vision phase takes the customer and process phase results and establishes the outcomes as firm parameters. It then involves projecting alternative scenarios of customer requirements and alterations to the process, and choosing the optimum outcome. This outcome is usually the one that meets the most customer expectations within the limits of the process system, and it thus becomes

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the vision for the organisation. It is the objective or end point that the company is trying to reach by the development and use of the TQM system.

7.5.3.6

Planning Phase TQM is expensive and complex. It is intrinsically linked to many parts of the organisation. It is imperative that the TQM system is carefully planned and then monitored and controlled as it is implemented. The TQM system is usually planned at a number of different levels. The system itself has to be designed to work within the organisation. The implementation process also has to be planned. In addition, there has to be some form of tactical response planning to allow for unforeseen or non-quantified eventualities. In most cases there will be a TQM strategic project plan (SPP) that covers both the design and implementation of the process. Both aspects are normally treated as separate projects. There will also be a tactical response plan that sets out the operations and procedures available to cope with unplanned responses.

7.5.3.7

Risk Management Phase In most cases, a thorough and detailed risk assessment is required, and a detailed risk management system is put in place. There will always be a risk of failure somewhere in the system. It is important to ensure that the TQM SPP is supported by a detailed risk management system (see Module 3).

7.5.3.8

Breakthrough and Implementation Phase ‘Breakthrough’ forms the first part of the implementation phase, the whole of which is described further next.

7.5.4

TQM Implementation TQM implementation has three major components: • • •

7.5.4.1

breakthrough; daily application management; interdepartmental (cross-functional) management.

Breakthrough The concept of breakthrough is central to TQM. The breakthrough phase is effectively the mechanics that allow the strategic and annual plans to be put into operation. It involves clear and precise communication of the whole TQM system to each and every member of the organisation, with clear objectives and frequent appraisal and review. This ensures that the system is implemented organisationwide and that all aspects of the system are communicated to employees. Vision objectives have to be clearly established and communicated, and everybody has to know exactly what they have to do in order to meet the objectives. If necessary, training and staff development should be established so that any gaps in knowledge or expertise are corrected. There will usually be some kind of steering committee to monitor implementation and to respond to any problems

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that occur. This body will be responsible for reviewing the annual and strategic plans prior to the development and implementation of the plans themselves. The breakthrough applies to each individual section or unit within the organisation. It is based upon the strategic and annual plans that were produced in the breakthrough planning stage of the TQM planning process. Breakthroughs are generally large-scale, fundamental quality improvements. They may involve significant investments by the organisation – perhaps in new plant and resources, training courses, procedure changes and so on. The process generally involves section heads in establishing processes for the implementation of the goals that have been set. This is done by the selection of breakthrough items or activities. These breakthrough items are usually a small number (perhaps five or six) of immediate goals that will assist an organisation in moving towards its stated objectives. Organisations sometimes refer to them as quick-win activities, in that they make a good impression and contribution to the TQM implementation, but can also be executed relatively quickly. This boosts the confidence of the employees before tackling more difficult and complex elements. An example could be a run-down railway station in the centre of a city. The station owners might be in the process of implementing a TQM system in order to improve their overall performance and customer satisfaction. The station manager and the funding bodies might agree that a quick-win strategy is needed as a first step, so that staff and customers can see some immediate and obvious improvements. Obvious areas to improve quickly and relatively cheaply, but with great effect, would include areas such as: • • • • •

improved lighting; improved public address system; refurbished public areas; redecoration of public areas; improved information and departures/arrivals notifications.

These areas would give an immediate, cheap and effective improvement in image, and would be implemented immediately and ahead of the heavy improvement works, such as building new platforms or replacing the roof. The breakthrough process requires that every individual in each section is aware of the execution of the breakthrough activities and is fully aware of what their individual obligations and responsibilities are in order for the section vision to be achieved. Breakthrough also requires the establishment of some kind of structure for monitoring progress towards the vision. There has to be some form of monitoring and control procedure in place in order that the rate of progress of the organisation toward achieving the goals and milestones, and progressing towards the stated vision, is controlled.

7.5.4.2

Daily Application Management Daily application management (DAM) relates to the long-term implementation of the system. DAM is a process of establishing objectives followed by continual assessment and monitoring in order to assess performance, and then comparing

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this with the progress required in the plan to meet the overall goals and end vision. It requires the co-operation and involvement of all members of staff at all levels in order to monitor performance continually. It often involves the use of study groups with continuous feedback. DAM shows each employee what he or she has to do in order to keep the organisation running smoothly. DAM allows individuals and sections to understand clearly what actions are required of them in order to satisfy client or customer demand. Once these factors or levels of performance are clear, the individuals or sections can see what level of performance is required in order to exceed these requirements. Continuous improvement is achieved by the use of problem-solving teams. These teams identify customer requirements and problems, analyse the problem, find solutions and provide feedback to the rest of the system in order to allow these solutions to be implemented. The teams then monitor the improved process in order to ensure that enhanced customer or client satisfaction is achieved. Effective problem solving as part of the DAM process requires the formation of problem-solving teams throughout the organisation and the use of a multistep procedure.

7.5.4.3

Interdepartmental (Cross-Functional) Management Interdepartmental or cross functional management (CFM) is the control of the TQM system across the different organisational and functional boundaries that exist within the overall organisational boundary. CFM is the integration of team activities across functional divisions and departments in order to meet published organisational goals. It ensures that all groups within the organisation are working together towards a common purpose. ♦ Time Out Think about it: Total Quality Management (TQM). TQM is about making quality central to the whole operation of the organisation. Quality management relies on the establishment of standards or targets for quality and then monitoring actual performance against these. TQM is based on the philosophy that quality has to permeate all levels of the organisation, and all aspects of quality are the responsibility of each member of the organisation. If done correctly, this can end the usual quality management reliance on expensive quality assurance and control procedures because it is no longer necessary to set precise targets and then evaluate actual performance against these. TQM can therefore be more effective than standard quality management procedures and it can also be cheaper. The key to making it work is individual involvement and commitment throughout the organisation. This can be the main difficulty in implementing a TQM system. The quality commitment and motivation of the individual have somehow to be linked directly with the corresponding commitments and objectives of the organisation as a whole. There are numerous ways of achieving some degree of commonality of objective. These are mostly based on increasing the stakeholding of each employee within the organisation. Questions:

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What are the main differences between quality management and TQM?

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What kind of manufacturing or production processes would be most suited to TQM applications?

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Which processes would be most unsuitable for TQM involvement?

♦ 7.5.5

Advantages and Disadvantages of TQM Systems TQM is more useful to some organisations than to others. It is certainly easier to plan and implement in some organisations than others. The main advantages of TQM are:

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Increased organisational awareness TQM involves everybody who works within the organisation so that everybody becomes aware of the need for quality in all aspects of what they do. TQM assists in the development of an organisation-wide quality culture. This culture can be extremely effective provided it is properly supported and maintained.

•

Increased appreciation of the links between processes and performance The development of a quality culture tends to lead to a greater understanding of the links between what people do and the performance of what they produce. This can apply to any level. For example, a person operating a word processor will have a greater understanding of the relationship between what he or she actually does and the performance of the products of the organisation as a whole.

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Increased efficiency A TQM approach tends to make people look at detail. This in turn tends to require people to look at exactly what is involved in operational processes and assess how the process can be improved. Operational managers are likely to identify strengths and weaknesses that may not have been apparent before the TQM approach was adopted. Inefficient operational processes and waste are often highlighted and appropriate corrective actions can be instigated.

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Improved communications TQM requires people to talk to each other more and develop a greater understanding of what other people within the organisation are doing. It acts to break down the classical proliferation of operational islands (see module 4) that always tend to occur in functional organisations. Organisations that use a TQM approach often have more effective formal communications systems and very much more effective informal communications systems than organisations that use an alternative performance management approach.

•

Improved employee performance TQM as an approach can be very beneficial to staff. People understand more about what they are doing and about how their work interacts with that of other people within the organisation. People also feel more important in that they see that everybody understands that their input has a direct impact on the business processes of the organisation as a whole. Organisations that successfully implement a TQM approach tend to have more motivated and committed staff. Edinburgh Business School

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•

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Improved operational systems TQM tends to improve the performance of operational systems simply because it makes people analyse the processes in more detail than they might do normally. Improved external relationships TQM is an internal process but it can involve external suppliers and contractors. Increasingly organisations that have implemented a TQM approach require suppliers and contractors to implement similar standards within their own organisations as part of a prequalification process. Suppliers and contractors who initiate TQM systems become more attractive to potential collaborators and may improve their own workload and sector demand as a result. Improved reputation As discussed earlier in the module, the true value of quality can be far higher than the actual cost of achieving it. Companies that achieve a good reputation for reliable goods that meet or exceed customer expectations can rapidly build up a loyal customer base. This reputation can lead to considerable market advantages over competitors that fail to achieve the same standards. Opening potential new markets Some clients require that an approved TQM system is in place before including potential suppliers on their selective tendering lists. In the UK this approach is adopted by a wide range of organisations including central and local government. TQM also has a number of disadvantages. These include:

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Cost A good TQM system requires a lot of time (and therefore money) to design, implement and operate. The cost of the system has to be less than the value that it adds to the company. TQM systems for large companies can have operational costs of millions of pounds each year. Full TQM systems can be prohibitively expensive in the case of less profitable companies or in small to medium sized enterprises. Inconvenience Implementing a TQM system involves a lot of inconvenience to the company. There may be a requirement for large-scale changes in working practices. Some of these practices may be long established and there is an inevitable disruption in operational processes as practices are modified. There may also be a requirement for changes in administration and other support procedures. The requirement for change may extend outside the organisation as subcontractors and suppliers also have to change their working practices in order to comply with the company TQM system. Selling People in the West tend to have a natural scepticism about TQM systems. The systems are often seen as bureaucratic and inflexible and in some cases people see them as restrictive. Some parts of the organisation such as research and development sections may have difficulty in ensuring that their work falls within the TQM control structure. Researchers often feel that company TQM systems stifle innovation. There is usually a requirement for TQM systems to be ‘sold’ to the company employees. In some cases a considerable level of effort may be required for the system to be ‘sold’ to employees because of their original scepticism. Distribution Larger companies may use processes that are distributed over a significant geographical area. An automobile manufacturer might Edinburgh Business School

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7.6 7.6.1

assemble in the UK using parts that are produced in manufacturing plants in a number of different countries. In order to function correctly, the same TQM system has to be adopted and practiced in each geographical location. There are a number of potential obstacles to achieving national or international TQM integration. One of the most significant potential obstacles is cultural variation. The level of detail involved in checking and assessing quality that is considered sufficient in one country might be considered to be insufficient in another country. Training The TQM system is only as effective as the extent to which it is correctly applied by employees. Even with full commitment and acceptance there will usually be a requirement for extensive training and development programmes in order to ensure that employees know how to use the system and how to get the most benefits from it. This training requirement has obvious time, cost and disruption implications. Dilution Achieving a certain TQM status is fine so long as this is a distinction. As more and more competitors achieve the same or higher standards there is a certain degree of dilution in the status of the achievement. The only response available is to develop and apply still more demanding TQM systems. This need for constant evolution has a number of implications including using valuable time and incurring significant additional costs. The dilution effect also has the effect of reducing the amount of value that the TQM system can add in relation to the competition. As potential added value decreases, the cost effectiveness of the whole TQM equation reduces.

Configuration Management Introduction Configuration management or configuration change control is an essential aspect of any good quality-management system. It is also one of the most important functions of a project manager, particularly on larger or more complex projects. Configuration management is about controlling change. In particular, it is about controlling the information that relates to change. As projects evolve and develop, there will be a functional relationship between the project phase and the cost required in order to make given changes. Generally, as the project develops, the opportunity for change decreases and the cost of change increases. The shape of the curve will vary depending on the project concerned. In most cases, the change–cost curve will look something like that shown in Figure 7.17. It is rarely possible to take account of all possible contingencies when specifying a project. Thus, some degree of change will occur during the life cycle of most projects. Changes all involve time, cost or quality, and so they affect the overall success or failure criteria for the project. Change management is the process of ordering these changes so that they can be contained within the overall objectives of the project. Changes must be communicated to the people impacted by them, with adequate provision made for them. Cost estimates and budgets have to be revised accordingly. New designs have to be produced and

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all revisions have to be issued on time and circulated as required. It is essential that a system is put in place so that this happens effectively. In general terms, the larger and more complex the project, the higher the probability that change will be required and the greater will be the need for efficient and effective change management.

Opportunity for change

Opportunity/cost

Cost of introducing change

Life cycle

Figure 7.17

Typical change–cost curve for a large project

Configuration management is a control technique for formal review and approval of changes proposed to a project. It is based on the assumption that the components that form a project also form a configuration that defines the project. This configuration should only be changed in a formal and systematic manner, or the project will be adversely affected. If properly executed, a good configuration management system (CMS) provides a comprehensive change-control and management system; it also acts as a focus for change proposal consideration, and as an interface for client and contractor responses and communications. The main advantage of using an effective CMS is that it manages change and, in doing so, it controls the impact that individual changes have on the overall project. Configuration management on larger projects will usually be carried out using some kind of computerised CMS. Specialist CMS software has been available for some years, with a number of software companies currently working on developing more advanced CMS packages. Within the operational capacity of such CMS software, authority for approving changes is usually established at several levels within the project organisational breakdown structure. The project manager will generally have authority to approve some changes, probably with an overall limit on the cost of the change. Larger changes might have to be approved at a higher level, and so on.

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7.6.2

Configuration Management System Components Configuration management requires clear identification of all the relevant components of the system. For a major project, each drawing and change notice would have a separate identification code so that it can be traced by the CMS. Project managers are increasingly using barcode systems with laser scanners. A drawing can be given a unique identity and other information when it is produced. This identity and information can be stored as one entry on a central database within the CMS. The location of this entry can be stored on the barcode. The CMS then tracks the drawing as it moves around the system. The main components of a CMS are as follows: • • • • •

configuration configuration configuration configuration configuration

format and layout; identification specification; change control system; status accounting and reporting; auditing and feedback.

Each is described in turn next.

7.6.2.1

Configuration Format and Layout A complex project can involve a large number of different suppliers and contractors. These could be based in different cities, or even in different countries. The CMS has to link them all together into one information highway controlled by the project manager’s central control system. Consider the example of a road construction project. The various consultants and contractors involved are as shown in the schematic representation Figure 7.18, although there may be a number of other contractors working on a number of different sites and separated by large distances. The CMS has to be set up in such a way that it links all these people and organisations together in order to control change. The most obvious change on a road-building contract would be an unforeseen extra amount of work. Extra rock blasting would be an obvious example. The CMS has (among other things) to control the information that arises from any such additional requirement. A subcontractor in our example cannot just go ahead and blast away. He or she has to get approval for the extra work, and then some kind of record of the additional expenditure has to be kept. In addition, the impact of the additional work on the overall work package and on the project as a whole has to be calculated. A central computer server sits in the middle of the communication system. The CMS software located on the server is programmed to allow subcontractors to submit variation requests to the main contractor. In practice, there is usually some kind of standard screen where the subcontractor inputs the nature of the request, the estimated additional work and costs, and perhaps some form of justification. The CMS then sends this request to the project manager (see Module 5). The project manager can approve or reject the request. If the project manager is not happy with the request, he or she might ask for further information

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before giving approval. Alternatively, if the estimated cost is too high for project manager approval, the request might be relayed to a change control section or somebody within the client organisation that has sufficient authority to make the decision.

Subcontractor 1 Main contractor Subcontractor 2 Cost consultant

Change control

Client representative Project central server

Client cost consultant

Design engineer consultant Project Manager Geological consultant

Local authority planning department

Figure 7.18

Basic layout of a CMS

As and when agreed, the approval is issued to the project manager and a formal change notice or variation order is issued. Copies are relayed to the various consultants, because additional design information may now be required. There will certainly be a cost implication, and so the variation is copied to the surveyor or other cost consultant so that he or she can adjust the final account estimate. The variation order is then issued to the main contractor, who in turn instructs the subcontractor to go ahead. The CMS therefore acts as an electronic information network. It is designed to relay all relevant project information to the members of the project team that require access to that information. A CMS generally uses a central server with dedicated links to a series of PCs at remote sites within the project structure. Each piece of information has to have a separate identity, and each PC or user also has to have an identity. The software then simply works by sending the right information to the right people. This may sound trivial, but it is a very important communication function on large and complex projects.

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7.6.2.2

Configuration Identification Specification A clear identification system is essential in order for the CMS to function. The identification system includes the process of identifying each component within the system and allocating some form of unique identity. The configuration identification process comprises three primary considerations, as set out below:

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System characteristics System characteristics define the way in which the CMS is assembled in relation to its environment and the characteristics of the project. The CMS will be very much restricted by the limitations that are applied to the project. There may be rigid cost limits, in which case change may be restricted unless any additional costs can be absorbed elsewhere. Alternatively, cost limits may be less rigid and change is therefore more flexible. In some cases, the approach may be to design and construct to a cost limit. This is sometimes known as the scope limiting approach. In this approach, the cost limit or budget is established at an early stage, and the design team works within these cost limits in producing the best possible design solution for the available finance. This is the most common type of approach for engineering projects, although it does not necessarily give the most efficient solution. It does, however, allow rigid budgets to be put in place and provides accurate cost planning and control. The alternative is the cost-effectiveness approach. Here, the design team works to minimise the ratio between the cost of the solution and the cost of its effectiveness. In both cases, there is a need to define and estimate the value of some performance measures for cost and effectiveness. This in itself tends to result in a more efficient and effective project, although costs at the outset are more difficult to establish. The approach would generally be applicable to research and development projects, and perhaps to the production of prototypes. For example, a trade-off in such a case might involve spending an extra 15 per cent on the capital cost to make a prototype 3 per cent more efficient. In doing so, projected sales may go up by 10 per cent, which would offset the additional increased capital costs within five years. Both approaches are considered when looking at the applicability of the CMS.

•

Project-relevant information The CMS delivers information. The main objective of the concept is to provide and communicate information that is useful to the project team, for there is no point in providing information that is not useful. Typical information relating to a drawing issue that might be useful to the project manager, which the CMS can readily provide, includes: – date of drawing issue; – drawing revision number; – drawing author, authoriser and checker; – date when drawing received by project team members (with receipts); – electronic receipts from all recipients; – flags for action. The drawing may be issued on paper or electronically. The CMS tells the project manager when the drawing was issued, who produced it, who Edinburgh Business School

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authorised it, and the CMS also confirms who received it and when. This reduces the possibility of abortive works caused by people reading the wrong drawing, or reading a correct drawing that has in fact been superseded by a later version. It also establishes deadline dates by which a response has to be received from the appropriate person or body. An effective CMS depends very much upon the accuracy of the identification system used for data and entries. Identification consists of the selection of configuration items. Configuration items are components within the CMS that are assigned a unique identity. Typical examples might include: – project team members; – other involved individuals and companies; – individual PC and other hardware ports; – project information systems (drawings, schedules, letters, instructions etc.); – project change orders and history. The selection of configuration items is of crucial importance, because too few will lead to insufficient management control and, in contrast, too many may overload the system so that people are unable to cope with the mass of information that it provides. Either way, this could have the effect that people will stop using the system. This choice of number of items applies to any identification system and is analogous to the decision required on level of detail for project WBS development (see Module 5). •

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Data analysis and classification In order for information to be useful, it has to be classified in some way. Having identified the useful information that is to be presented by the CMS, the next stage is to classify the components of that information in some way. This stage is usually achieved by assigning a simple code to each component. The codes are designed to provide a range of specific information that is unique to each configuration item. A typical arrangement of configuration identification codes would include items such as: – equipment specification number; – equipment identifier number; – drawing and part number; – revision number and date of revision; – change identification number; – manufacturer’s code identification numbers. For project team members, typical code systems might include: – full name; – individual identification code and system user name; – personal settings and configuration control reference; – organisation; – direct report; – project authority level; – project security clearance level; Edinburgh Business School

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– primary responsibilities; – change control approval limit. The project manager might have a security rating of 5 on a five-point scale, and he or she might have an authorisation rating of 6 on a tenpoint scale. The CMS would be programmed to allow for this. If a user is sending a confidential memo, for example, he or she might give it a security rating of 5. Only users with this level of security clearance or higher (as programmed into the CMS database) are allowed access to this communication. In addition, the CMS would probably be programmed to send an automatic receipt to the sender as soon as the message is opened. This could also trigger the countdown to any pre-set deadlines. For example, there might be a seven-day time limit for people to reply to a particular form of communication.

7.6.2.3

Configuration Change-Control System There is generally a requirement for some form of change control on large and complex projects. Change can include everything from minor specification changes right up to major strategic modifications. The requirement for the change could originate from anyone within the project team. A typical change-control system involves the development of procedures that govern three steps: 1 2 3

identification of a change requirement and submission of a change request; appropriate consideration and approval or rejection of the change request; authorisation and issue of an appropriate change order followed by implementation.

Some special considerations related to these aspects are the following: •

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Procedural considerations Under a formal change control process, a formal change request is prepared and submitted. A change request is generated, sometimes automatically, by the CMS. There may be numerous people within the CMS who are authorised to generate a change request. For instance, an engineer might realise that a component has been designed incorrectly and a modification is required in order to avoid problems later in the process. The modification estimated cost might be above that allowed for low-level authorisation; hence a change request is necessary. The change notice itself might specify: – the identity of the WBS element, sub-element or work package concerned; – relevant cost account code details; – current EVA and PVAR status; – any existing PVAR corrective actions that affect the work concerned; – reasons for the change request; – linkages to any other work and possible consequences of authorisation or refusal of the change request; Edinburgh Business School

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– – – – –

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records of any previous change requests that affect the work concerned; details of the level of authorisation required; likely time scales involved if higher level authorisation is required; estimated time and cost implications of the change request; implications for the project as a whole (including effects on the overall cost and duration).

•

Authority clearance The evaluation process would be carried out either by the project manager directly or by a team of project representatives. These generally represent all of the main organisational functions that could be affected by the change. In most cases, the client or an appointed representative would also be present and would probably have the final authority to approve or reject. On large projects, a permanent change-control and review board (CCRB) would consider all change requests before approving or rejecting them. Changes could be classified as either permanent or temporary. For example, temporary changes might be needed for full-power testing or trials, or for software commissioning and debugging. Permanent changes would relate to changes to the process or product itself. The CCRB therefore evaluates the change request on the basis of the costeffectiveness and risk of the change in relation to implementation and overall life cycle costs. Approved changes are then integrated into the design. A well functioning change-control system ensures tight control of the technological and financial aspects of the project. It also provides permanent records of changes that have occurred through the life cycle of the project. Large or complex projects might use a configuration administrator. This person acts as the first point of contact for change requests and ensures that they are relayed to the correct level of the change control system. Smaller and less complex projects might not require a formal CCRB. With correct CMS application, some changes can be authorised through named change-item controllers. It will be appreciated that the configuration management process is always changing. As changes are implemented, the project changes and the configuration management process adapts to suit the changed environment. A CMS is therefore dynamic and has to be designed as such. The status of the CMS will change from one point to the next. Status changes are monitored via a configuration accounting process.

•

Schedule constraints The timing of a change is generally important. The project is planned carefully and the various activities and durations are interlinked. Change in the design stage often involved modifications to the design that has already evolved and there may be some resultant abortive design work. The change may introduce a requirement for new design work which may have a considerable time implication. It is therefore advisable to identify and develop any associated design requirements before the change order request is submitted. The further the associated design has progressed the more chance there is of the change order being approved. Once the change order has been accepted and approved as a CMS adjustment, the Edinburgh Business School

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change becomes fixed and there can be no further adjustment without prior approval. If the change takes place too early (before sufficient design work has been carried out) the implications on the project schedule could be considerable as the change may delay associated works. If the change takes place too late the overall risk profile changes as there may be insufficient time to implement the change before it has an impact on associated critical activities. •

7.6.2.4

Gateways and checkpoints The timing issues discussed above generate another problem. The original change that is adopted as a configuration item may continue to evolve separately. The individual designers and engineers may continue working on the design or product after it has been introduced to the change control system. In addition, there may be several versions of the same item. A checkpoint is a way of making sure that design changes are put into the public domain and that continuing design changes are not hidden or kept private. The idea is that the designer agrees a series of pre-set dates where the latest version of the changed design will be updated and issued.

Configuration Status Accounting and Reporting The idea of configuration status accounting and reporting (CSAR) is to keep a record and history of all the changes that are being made to the project. This allows a continuous comparison to be made against the baseline (see section 7.6.3) and it ensures traceability for changes. CSAR provides updates showing actual project performance against projected performance. It effectively involves a comparison between the baseline and current values. The audit process is a full part of the CMS, and effectively acts to monitor change. The accounting process would normally be centralised on a separate database. This database would contain details of all approved changes together with calculations showing the effects of each change and the revised estimated project time and cost completion values. The database itself is sometimes referred to as the bill of variations. Typical database entries would include the following items: •

configuration item identity;

•

relevant WBS element, sub-element or work package identity;

•

date of creation of configuration items;

•

history of change requests relating to the configuration item;

•

history of approvals or rejections of previous change requests;

•

reasons for previous rejections (where appropriate);

•

history of approved change requests and performance of subsequent work;

•

history of estimated impact on project time and cost objectives;

•

history of any previous monitoring and reporting outcomes.

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7.6.2.5

Configuration Audit and Feedback Review and audit is essential to any quality management system. It is important that the CMS contains procedures and processes for providing the team and the customer with an effective guarantee that the CMS provides the required level of performance. In other words, the configuration audit process confirms that the product complies in all respects with the specification, regardless of the changes that have been made to it.

7.6.3

Configuration Management Baselines Baselines are central to configuration management. A baseline is a window that shows the performance of the project at any moment in time. This could be the projected end performance for the project or the actual performance as of today. The main function of the baseline is to act as a standard against which actual performance can be measured as the project progresses through its life cycle. Most generic project plans use a baseline as a standard record document. Configuration Management is centred on five main baselines for the measurement of performance: •

•

•

•

•

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Project level 1 (project life cycle) baseline A good CMS establishes a different baseline for each phase of the development of the project. The project level 1 baseline is sometimes referred to as the functional objective baseline or the project outcome requirements baseline. The project level 1 baseline is the first baseline that is developed for the project. It is prepared in the early stages of the project life cycle and usually contains an order of magnitude estimate of the overall project cost. The project level 1 baseline typically contains a client brief and details about the basic contractual procedures and approaches that are to be used. Project level 2 (detailed design) baseline The project level 2 baseline is sometimes known as the allocated baseline or the design requirements baseline. The project level 2 baseline normally contains an indicative estimate of the project cost together with detailed design information showing full design details. Project level 3 (production information) baseline The project level 3 baseline contains a definitive estimate of the cost of the project and all other necessary design information that will allow the project to be implemented. Project level 4 (tender stage) baseline The project level 4 baseline is sometimes referred to as the definitive project product baseline or the product configuration baseline. It contains all of the information contained in the project level 3 baseline but updated to allow for agreed contractor, subcontractor and supplier tenders. It also includes (where appropriate) an agreed programme of works and method statement as supplied by the main or prime contractor. The project level 4 baseline forms the SPP baseline and acts as a contract document. Project level 5 (execution) baseline The project level 5 baseline is developed during the execution of the project. It is a dynamic baseline and is constantly adjusted for changes as the project continues. Edinburgh Business School

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The development and maintenance of accurate and representative baselines is crucial. Baselines form unalterable and permanent records of important stages in the development and implementation of the project. They are central to the various review and feedback exercises that are necessary in order to evaluate the success of the project at any moment in time. The relationship between these five baselines and the project life cycle is shown in Figure 7.19.

Life cycle

Baseline

Characteristics

Inception

Project level 1 baseline

Initial documentation, outlining the requirements of the product and defining what it is to do.

Scheme design

Project level 2 baseline

Formulated after outline proposals. Details what functions are to be performed by which part of the system.

Detailed design

Project level 3 baseline

Formulated after detailed design. Includes full working drawings showing exact arrangements of components.

Production cycle

Project level 4 baseline

Formulated after production. This documentation describes the finished article.

Operational cycle

Project level 5 baseline

Formulated after testing and commissioning. This document describes the product in operation.

Figure 7.19

7.6.4

Project configuration baselines

Summary Configuration management is the process by which information is communicated around the project system. On large and complex projects, information flow is a very important consideration. A computerised configuration management system (CMS) allows the project manager to track information as it travels around the various project team members.

7.7 7.7.1

Concurrent Engineering and Time-Based Competition Introduction Concurrent engineering is another specific quality management tool. It is one approach to time-based competition (TBC). Some researchers think that TBC could be the next big playing field for the multinational companies over the first

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ten years of the new millennium. Some authors have referred to this process as the ‘contest of the turbo marketers’. The underlying philosophy behind this approach is time-based competition. Over the past twenty years or so, all the big companies have downsized and outsourced to such an extent that they are running at near peak efficiency. It is not possible to trim off any more surplus because, in theory at least, it has all gone already. Given that all these companies are already optimised in terms of efficiency and performance, how can they still get an edge on the competition? The answer obviously varies from sector to sector and from company to company. However, in sectors that have a rapidly changing product base, one obvious way is to develop new products and get them on the shelves before the competition does. In some cases, the product that gets onto the market first can be more successful than a better product that arrives later. This is because customers will go for the first arrival and then build up a brand loyalty to that product, provided it is of reasonable price and quality. The most successful products that exploit time-based competition also include follow-on products such as own brand cartridges or other form of information transfer and storage. 7.7.2

The Concept of Concurrent Engineering US project managers are traditionally regarded as being the masters of concurrent engineering. They have used phased and fast-track approaches (see section 7.7.3) to reduce the time that it has taken to develop new products and get them on to the market ahead of the competition. Examples over the past few years have included John Deere in agricultural equipment and Boeing in aircraft. In both companies, fast-track techniques have been used to blur the borders between design and development and to get new models on the market earlier than would have previously been thought possible. In the case of John Deere, it allowed the company to remain competitive in the face of very powerful Japanese competition in the late 1970s and 1980s. Concurrent engineering is effectively concerned with the overlapping and blurring of traditional life cycle phases. Concurrent engineering basically takes the existing life cycle phases of a project and blurs the edges and overlaps life cycle phases where practicable. This allows the same amount of project work to be done with in a smaller overall time. In this respect, concurrent engineering is a ‘beyond trade-off’ consideration. It will be recalled from Module 5 that trade-off analysis allows the project manager to plot different combinations of time, cost and quality outcomes for different solution scenarios. If one variable is taken as a constant, it is generally possible to calculate a functional relationship between the other two. A typical time–cost trade off is shown in Figure 7.20. It will be recalled that the maximum trade-off point is the point where all critical activities have been crashed as far as possible, and no further reduction in overall time is possible. However, concurrent engineering provides one possible way of going beyond trade-off analysis. By speeding the project up using the simple overlapping of life cycle elements, it is possible to move further towards

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the time origin without incurring any greater costs. If an already crashed system is fast-tracked, the trade-off curve retains its typical shape but it moves further leftwards towards the time origin (see Figure 7.21). This process allows the project to be completed beyond the theoretical crash limit. It does not allow it to be completed any more cheaply, just more quickly. In some cases, this time saving can be significant.

Cost (£) Limit of analysis

Maximum trade-off point

Lowest cost trade-off

Project starting point

Beyond trade-off zone

Figure 7.20

Time (weeks) Trade-off zone

Fixed cost zone

Typical time–cost curve

Effective concurrent engineering, especially the fast-track technique, depends on an efficient management and control system. There is obviously more risk involved, and the scope for problems is clearly much greater than on a conventional programme. The basic requirements for an effective concurrent engineering system are: • • • 7/82

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Cost (£) Limit of analysis

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Figure 7.21

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Time (weeks) Trade-off zone

Fixed cost zone

Typical time–cost curve with concurrent engineering

immediate response to delay; efficient and very reliable communications systems; effective and proven use of a good CMS; clear stated aims and objectives for all levels of the OBS; detailed understanding of the complex linkages and dependencies within the WBS; immediate response to change; powerful change control; immediate authorisations where required; extensive sharing of information; absence of any ‘political’ influence and (especially) interference; multidisciplinary and cross functional working; ability to multi-task; fast and accurate reporting and report response; blurring of element and package boundaries; Edinburgh Business School

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effective and efficient use of the IMS; immediate co-operation from subcontractors suppliers and other external bodies; close and immediate client interfacing.

The process of concurrent engineering is sometimes also referred to as time compression. It enables a product to hit the market earlier than it might have done. This can have two payoffs. First, the product might well get there ahead of the competition and therefore the product is available before the competition and people are more likely to buy it. Second, the fact that it is there first may mean that the manufacturer can charge a premium, again because the competition is weak. This premium could be a cost premium, in that the customer will pay more if the product is available earlier or before programme. In some cases the customer might be prepared to accept a slightly lower-quality product if it is delivered well ahead of the competition. An example of this is the electronic games console industry. Nintendo and Sega dominated the electronic games console market throughout the 1980s, while the overall global popularity of these games continued to grow. By 1995, electronic games accounted for global entertainment sales that were second only to music CDs. Each side brought out new products on a regular basis and made money out of both the console and the games (which had to be bought separately by customers in order to use the consoles). In the mid-1990s, both sides were developing new consoles with 64-bit technology. The development and lead-in times were long and both sides had a choice between waiting to launch and thereby allowing more time for research and development, or launching early with less developed engineering. This was an example of timebased competition. Both sides could develop equally good systems and both were doing so at about the same rate. However, either side could cut the development and launch early if desired. They decided not to. In the meantime a new player, Sony came into the market. Sony had been working on a new system called the Playstation for a number of years. However, Sony had zero market share and was being totally outgunned by Nintendo and Sega. It now realised that there was going to be a small window of opportunity before Nintendo and Sega launched, for Nintendo was prepared to go on with research and development for another year or so in order to improve the quality of their console. Sony decided to take this opportunity and speed up the delivery of their new Playstation system. As it happened, it was a good decision. There was great demand for the Sony console and it became established as the market leader and sold millions of games. By the time the Nintendo N64 was launched, it was a better system but the Playstation had established itself in a position of relative power in the marketplace. The N64 never really recovered, and the Playstation has retained its new market lead for the rest of the decade. Sony’s market share of the second largest entertainment sector in the world jumped from nothing to 70 per cent overnight. In 2001, Sony was a $120 billion company, and one-third of its value is console games. Sega developed the moderately successful Dreamcast but was never able to recover its former market share. In 2001, Sega decided to move out of consoles and concentrate solely on software development. This 7/84

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happened because of effective concurrent engineering by Sony, allowing them to jump in and take advantage of an opportunity. The electronics games console example is by no means an isolated example. Socalled time-based competition is increasingly accepted as the norm in a number of high-technology industries. Mobile phones (see section 7.2.3) is another example. Efficient quality management systems educate the customer to expect continual technological improvements in parallel with constant or falling costs. The logical extension of this argument is that products, once developed and sold, will have a relatively short shelf life. The customer expects the very latest PC or mobile phone, but recognises that it will be outdated within six months and probably obsolete within two or three years. Time-based competition therefore implies not only constant development and innovation in order to bring new products on to the market ahead of the competition, but also rapid technological obsolescence and replacement. In this regard, the cycle becomes self-reinforcing. The tendency toward rapid obsolescence generates a demand for new products. The basic idea of concurrent engineering is to use project scheduling and resource management techniques in the entire life cycle of a project. These techniques have long been used in time and cost scheduling of the production phase, but concurrent engineering extends this application to the entire life cycle of a project. Concurrent engineering is based on designing, developing, testing and building the product as a sequence of concurrent activities. This contrasts with the typical sequential engineering approach to most forms of production in the UK. 7.7.3

Phased and Fast-Track Concurrent Engineering The two most common forms of concurrent engineering are the phased and fast-track approaches. A typical sequential project features a number of distinct life-cycle phases. Most of these run in sequential order. If a person decides to extend his or her house, he or she will commission an architect to do the design work. Once the design work is complete, the architect will issue drawings to a contractor. The contractor then does the extension work in accordance with the drawings. This is a sequential process with completely separate design and execution phases. It can be represented diagrammatically as a simple Gantt chart (see Module 5), as shown in Figure 7.22. With the sequential process, the work is designed as a single element. The design is then included within formal contract documents and the work is priced by a contractor. The work is then awarded and executed in a logical manner, one package or section at a time. As one element is completed, the contractor starts on the next element. This is obviously a simple and relatively straightforward way to conduct the design and construction phases for any project. However, it is also relatively time-consuming. Sequential engineering tends to take longer than phased or overlapped work because all the design activities are strictly ordered. In many cases, primary activities have to be repeated. This has time and cost implications. However, in the UK, a sequential approach is very much traditional for many industries and

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sectors. Any kind of phased or fast-track approach is seen as alien and risky, although approaches like fast track are receiving growing attention. Concurrent engineering allows the project development and execution phases to develop and run concurrently. The actual phases may not operate in parallel, but the contributions from the various members of the design team are made in parallel as opposed to in serial. This has obvious implications for projects where there is considerable reciprocal or pooled interdependency (see Module 2). Marketing, production and engineering all occur concurrently throughout the life cycle of the project.

Design work

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Figure 7.22

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Typical sequential process

The basic objective is to shorten the time needed to get the process from inception to the marketplace. The basis of the approach is good teamwork. The operation of the approach works best in multidisciplinary teams with members from each of the affected functional units within the organisation. The implementation of concurrent engineering is based upon shared databases, good management of design information and optimal use of computer-based design tools such as computer-assisted design (CAD). Phased concurrent engineering occurs where the project is separated into individual work packages and each package retains a separate design and execution phase. However, the sequential arrangement of the packages is blurred and some overlap takes place between the various packages – although, in each case, package design is complete before package execution commences. This concept is represented diagrammatically in Figure 7.23. The next stage is to split design and execution for the individual packages and run with design–execution overlaps. In other words, for each work package the execution phase starts before the design phase is complete. In addition, 7/86

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Concrete Walls Windows Drainage

Electrical Plumbing

Execution

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Figure 7.23

Typical phased concurrent engineering arrangement

each package overlaps. This arrangement is shown diagrammatically in Figure 7.24. With a fast-track arrangement, individual work packages are still being designed when the execution phase starts. In addition, the activities themselves are overlapped. Fast track gives the shortest possible time for completing any given amount of work. Concurrent engineering, whether phased or fast-track, is more applicable to some projects than to others. It clearly requires a higher level of control and management than traditional sequential engineering approaches. Generally, the project should be based on the development of known technology – for example, novel applications of known technology, or routine applications of known technology. Repetitive relatively simple projects are obviously more suited to concurrent engineering than more complex one-off projects. In addition, concurrent engineering does not work well where the end result of the project requires significant levels of innovation. Concurrent engineering is most applicable where the end result is known and a clear progression towards achieving it can be isolated and specified. The end result should be a goal (or family of goals) with clearly defined features and functions, where the exact completion or phasing of each stage in the process can be defined and quantified. Concurrent engineering also has project team implications. The team must know what concurrent engineering is, how it works and how to use it. Most conventional project teams would initially feel very uneasy about working to such a compressed project time scale. Concurrent engineering is a risky approach and can only be used with any hope of success if it tackled by people who have used it before and know the risks. It also requires a very detailed riskassessment and risk-management system. Risks have to be detected early and Project Management

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resolved quickly. In addition, the project team should be able to think in TQM terms, including the aspects of individual responsibility and accountability etc. This kind of approach is clearly not going to work with an unwilling project or production team, and there has to be total quality commitment right from the start. In addition, the team must be given the freedom to implement the outcomes of this TQM awareness in the process.

Concrete Walls Drainage Electrical

Plumbing Windows Execution Decoration Design

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Figure 7.24

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Typical fast-track concurrent engineering arrangement

Advantages and Disadvantages of Concurrent Engineering Concurrent engineering as a technique has a number of advantages and disadvantages. The more obvious advantages are listed below. •

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Achievement of earlier completion dates Concurrent engineering allows projects to be delivered more quickly using the same resources. Alternatively, concurrent engineering can allow projects to be delivered well ahead of schedule by using slightly increased resources. Early completion can be essential on some projects and concurrent engineering allows the completion date to be brought back to a point beyond that which can be achieved using conventional trade-off analysis. Early completion can be crucial in projects that are subject to a high degree of competition and requirement for innovation. Compliance with change In a good concurrent engineering project each phase of the design process is overlapped with the corresponding stage of the execution process. There is a very short lag time between a design Edinburgh Business School

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change and that change being implemented. This is important in projects where client demands change frequently and (sometimes) significantly in response to competitor behaviour. The overlap between design and execution means that design changes have to be assessed and included quickly and there is a shorter time between the design change occurring and the change being executed and included in the project. Change control flexibility Teams that work within a concurrent engineering environment have to be able to react quickly with the minimum of administrative bureaucracy and support. The nature of concurrent engineering projects often means that the standard procedure for the submission of formal change notice requests and subsequent authorisation can be dispensed with. As a result, concurrent engineering project teams and clients tend to work much more closely together and the process of change and design become blurred. A culture develops where change is accepted as standard and is included within the evolution of the design as rapidly as original design information. Earlier launch As discussed above it is sometimes all important to hit the market place ahead of the competition. If two products offer similar performance at similar prices under conditions of equal demand, the product that gets there first will often be the winner. This philosophy applies particularly in high change industries and sectors such as where high levels of technological change are important. Improved innovation Concurrent engineering demands a rapid response culture where people ‘think on their feet’. Some required changes may go beyond what has already been designed and included in the project and hence the changes can only be incorporated by developing new solutions. Traditional project planning and trade-offs are tools for making sure that the eventual project solution remains within the original constraints set by the client. Concurrent engineering introduced a new dimension in that changes may not always be contained within the original constraints because new innovations may have to be generated. This concept of ‘moving the goalposts’ is anathema to traditional (in the modern usage of the word!) project managers who base their approach on engineering a solution to meet established objectives. Improved break-even and revenue generation Launching a product early produces opportunities for early revenue generation and a faster break-even and subsequent profitability. These opportunities generate a consequent reduction in the duration of the financing period. This in turn can favourably affect the overall cost analysis and viability of the project at inception stage. Improved control of creeping scope It will be recalled that creeping scope is the tendency for clients to continue to require changes to a project once the initial design has been specified. Clients can and do make frequent changes in concurrent engineering projects, but the time window in which they can do so is considerably reduced. This shortened change opportunity window can have a considerable implication for the extent to which clients can impose changes.

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Improved design and execution integration In a concurrent engineering project, the designers and implementers have to work together. In traditional sequential projects there is a tendency to consider (at least to some extent) that the design and execution phases are separate entities. The design team designs the project and then ‘hands it over’ to the implementation team or external contractor for execution. In concurrent engineering projects the designers and implementers have to work closely together. The result can be a far greater allowance of implementation considerations during the design process. Elements of the project can be designed with implementation much more in mind. The end result can be a much more implementation-friendly design. This in turn can lead to shorter production periods and quicker launch, break-even and revenue generation. Improved performance The level of control that has to be present in a concurrent engineering project means that performance standards can be more rigidly controlled. The closer collaboration between designers, implementers and the client means that there is a more general awareness of what is involved and the consequences of particular decisions. If used correctly the approach offers a much greater degree of awareness and cross communication with corresponding opportunities for performance enhancement.

Concurrent engineering offers definite advantages and opportunities on some projects. It does however have some obvious disadvantages. Some of these are listed below. •

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Requirement for close internal control Everybody has to work together and be aware of what everybody else is doing. Some people may take exception to this requirement. Some designers like to be given a brief and be left alone to both develop their own interpretations of the contents and engineer the best solutions. Engineers are particularly prone to this mindset. For example, as a general rule engineers do not like to meet with cost controllers and develop a compromise solution that is cost effective. Some engineers see this as a dilution of their professional skills. There is a need for very careful communication, effective team building and conflict control in such circumstances. Requirement for multi-functional working Concurrent engineering requires all members of the project team to work across functional boundaries and become involved with different aspects of design and implementation that would normally fall outside their immediate sphere of responsibility. Some people adapt to this requirement quite readily, while others find the transition difficult. A long established functional manager for example might find it difficult to extend his or her horizons beyond the immediate functional boundary. The classical response when asked to contribute to a complex interdisciplinary and multi-functional problem is that ‘it is outside my department and therefore it is not my responsibility’. In such cases, good communication and team building become vitally important. Requirement to accept increased risk Concurrent engineering is basically a risky approach. A concurrent engineering schedule (if there is one) contains a multitude of interrelated critical paths. In extreme cases virtually Edinburgh Business School

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everything is critical. There are no float times or any spare money within the system. A concurrent engineering project is therefore far more susceptible to delay and cost overrun than a traditional sequential project. As a result the risk profile is significantly increased. The implications for the risk profile can be considerable and can have a number of implications. Some obvious implications are listed below: – there may be no design drawings or schedules covering the work that is being executed at any moment in time. This imposes a considerable communication and response time requirement; – the lack of detailed design information often leads to the client being affected by a lack of a clear understanding of what is happening; – there is very little time to explain everything to everybody. Trust becomes extremely important. If trust is missing there will be problems; – the risk management system can become inoperative. It is very difficult to control risk where everything is critical. Responses such as risk mitigation and transfer may no longer be appropriate. Requirement for close external control In order to succeed a concurrent engineering project must secure the same level of commitment and trust externally as it does internally. It can be extremely difficult to negotiate external contracts with subcontractors and suppliers where there is no contractual flexibility or margin of error. In such cases subcontractors and suppliers typically inflate their tender costs as a means of risk response.

♦ Time Out Think about it: concurrent engineering. Concurrent engineering is an approach to blurring the traditional phases that occur within a project. Most traditional sequential projects have clearly defined life cycle phases, such as design, prototyping, tooling-up and production. In some cases it may be possible to overlap some of these phases by starting on one phase before the preceding phase has been completed. It may also be possible to overlap both individual phases and individual sub-phases within each phase. This process would be appropriate where it is particularly important to save time. Increasingly, time-based competition is becoming a primary consideration for organisations that rely on the development and delivery of new or changed products. This will probably become more and more pronounced in future as competition increases and organisations reach maximum efficiency. Competitive advantage must then be sought through speed of delivery and guaranteed delivery dates. Questions:

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In what type of processes might time from inception to delivery be the most important project-success criterion?

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What are the obvious drawbacks associated with overlapping sequential project phases?

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Learning Summary Quality Management as a Concept •

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Quality implies providing products and services that are perceived to meet or exceed the expectations of the customer at a cost that represents outstanding value. Quality management is about the design and implementation of monitoring and control systems that enable the producer to manufacture goods to a guaranteed standard of quality for a given price. Quality cannot in most cases be considered in isolation from time and cost. There is virtually always a trade-off to be made in setting standards for one or more of these variables. Most quality–cost curves are curvilinear, with the cost per unit of quality increasing more and more rapidly as the process approaches zero defects. For this reason, most organisations assess their production systems, decide on a reasonable level of defects and cover the defect occurrences with warranties and guarantees. Acceptable defect rates will vary depending on the product and consequences of a defect occurring. The true cost of defects is much higher than the actual cost of replacing defective goods under warranties or guarantees. Customer loyalty and confidence can have a very high value. Perrier and Pan American Airways are examples of companies that have experienced the true cost of defects. The true value of payback can be far higher than current net income. The balance between preventive and responsive strategies is a choice that faces most quality managers at some point. Generally, preventive systems are very expensive if high-quality standards are required. Generally, preventive defect management is better than responsive defect management. Quality improvement management is a matter of improving the whole business process from one end to the other. It is far less effective if its application is anything less than universal. BS5750 was until recently an important British standard for quality management. It has now been superseded by ISO9000. This is the latest attempt at a generic international quality standard that is applicable throughout Western Europe. ISO9000 is basically a never-ending cycle including planning, controlling and documentation. However, as with the former BS5750, the fact that a company is ISO9000-accredited does not mean that the company produces only high-quality products. It merely shows that the necessary procedures are in place – or at least were at the time that the appropriate inspections were carried out.

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The Quality Gurus •

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Most contemporary quality management and TQM theory has evolved from the earlier workings of a number of quality gurus. Gurus are people who advance knowledge largely by inspiration and original thought, as opposed to classical researchers who base any advancement on existing literature. The main quality gurus have been Deming, Juran, Crosby and Imai. The gurus all agree that quality management and performance improvement have to be applied throughout the organisation. It is no use improving the performance of 90 per cent of the company if the remaining 10 per cent lets it down. The gurus all agree on the fact that most problems with quality relate to the process rather than the operatives. If the process is set up correctly, the chances are that the people who use the process will use it effectively. There is general agreement that any production process has to be broken down into its component elements so that individual aspects that are causing problems can be isolated Another area of general agreement is on the importance of the customer. The end result of the whole process is sales, and sales depend on the product being in line with customer expectations. The gurus all agree that the quality approach has to be applied at all levels throughout the organisation and that each section and individual has to want it to succeed. The Deming approach is very much worker-oriented and appeals to the democratic-type manager. It has a core of statistical analysis supporting a fourteen-point plan for managers. Juran’s approach suggested that senior management must establish toplevel strategic and annual plans for annual improvement in quality. It is a highly structured and co-ordinated approach based on complex planning and implementation control. It is far more controlled than the Deming approach. Juran’s approach tends to appeal more to boss-type managers who identify with a rigid control system. Crosby, like Deming, produced a fourteen-stage process for quality improvement. Its emphasis is on preventing defects at source by designing and constructing a production system that has inbuilt quality. The Imai approach assumes that, by continually improving processes and systems, the organisation will inevitably arrive at a better product or service. The Imai approach is highly structured and is aimed at structured production type managers. Imai’s theories became known as the ‘P’ approach (the process approach) because they concentrate on the process rather than the results. This was at odds with the approach of the classical motivational theorists, who tended to assume an ‘R’ approach (the results approach).

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The Quality Management Six Pack • •

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Quality management is the process of managing quality in order to ensure that certain established standards are achieved. The quality management six pack comprises quality policy, quality objectives, quality assurance, quality control, quality audit, and quality assurance plan and review. Quality policy is a statement of the policy of the organisation on quality, defining the organisation’s attitude and approaches to quality and setting out overall targets for performance. Increasingly, organisations are issuing quality policies in the form of charters. Hospitals operating as independent trusts might issue a patients’ charter that specifies performance levels in areas of greatest concern to patients. Obvious examples would include limits on waiting times to see a consultant or for operations, or for providing transport or special access. The primary components of a quality policy would be organisational quality objectives, minimum levels of acceptable quality, and individual organisation member’s responsibility for implementation. The quality policy should be (and should be seen to be) in the interests of senior management. Measurable performance criteria should be established so that actual performance levels can be determined. Quality objectives are effectively part of the quality policy. The objectives convert the main aspects of the policy into individual statements of what has to be done by individual sections in order to achieve the overall policy outcomes. Quality objectives should be achievable, be based around specific goals, be related to overall specific standards or deadlines, and be suitably resourced. ‘Quality assurance’ is a collective term applied to a wide range of activities and processes that are used as drivers to ensure that the system performs and produces results complying with what has been specified. Quality assurance also includes the collection and use of information from outside the manufacturing process, and even from outside the organisation. This information is used for comparative purposes and as feedback or input for improving the system. Generally, a good quality-assurance system will identify objectives in relation to workable standards. It will be multifunctional and will operate as part of a continual cycle for system improvement. Quality control is another collective term. It is usually applied to a range of processes and activities that are intended to create specific quality performance characteristics. Such processes include continuous sampling, with results being supplied by some form of statistical analysis. These results are then compared to the standards established as part of the quality assurance system in order to evaluate the performance of different levels of the OBS. A quality management system must have an audit process. The idea of this is that a high-level check is carried out by independent personnel in order to ensure that the project’s quality-performance standards are being met. Edinburgh Business School

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The quality management plan is analogous to the PMS and project cost plan. It breaks down the quality objectives of the organisation and expresses them in terms of individual targets for different sections of the organisation. The quality assurance plan itself can be formulated fairly easily by producing a quality assurance matrix using combined OBS and WBS elements, broken down into work packages and assigned using a TRM. The quality assurance matrix is generally developed by a project quality assurance team (if this exists as a separate entity) or, alternatively, by the project manager. It shows what is required, who is responsible for achieving it and how that person is to achieve his or her objectives. It is essentially a TRM applied to quality management. Data tables provide a simple method for collecting and arranging quality data. The main applications are in repetitive operations, where the same materials are being produced by the same suppliers and are being consumed by the same client or customer. They provide a consistent and reliable method for collecting and analysing quality data. A pareto diagram is a type of histogram. The objective is to produce a graphical representation that identifies problem areas. It also gives an approximation of the relative value or size of the problem area. It isolates areas of nonconformity in data presentations and, by doing so, it draws the attention towards the most frequently occurring element. Scatter diagrams analyse the correlation between two quality variables. They are based on the concept of having dependent and independent variables. Variations in one as a function of the other are shown on a simple two-axis graph. Control charts are an example of a preventive approach. They attempt to prevent defects, rather than detecting and isolating them after they have occurred. Most forms of control chart are based upon a standard normal distribution. Cause and effect analysis uses a six-stage process to isolate a problem and then traces back through the system to identify possible origins for the problem. The process is then reversed to provide a route to converting remedial measures to an improved system. Trend analysis is a method for determining the equation that best fits the data in a scatter plot. It quantifies the relationships of the data, determines the equation, and measures the fit of the equation to the data.

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TQM is increasingly becoming a standard component of all UK organisational endeavour. TQM is especially important in project management because quality has to be considered as an engineerable entity alongside project time and cost. TQM is a structured approach to the creation of organisation-wide participation in planning and implementing a continuous improvement process that exceeds the expectations of the customer. Edinburgh Business School

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Any TQM system has to be planned and researched before it can be implemented. TQM planning comprises eight primary phases. These are the commitment phase, mission phase, customer phase, process phase, vision phase, planning phase, risk management phase, and breakthrough and implementation phase. TQM implementation has three major components: breakthrough, daily management and cross-functional management. Breakthroughs are generally large-scale, fundamental quality improvements. They may involve significant investments by the organisation – perhaps in new plant and resources, training courses, procedure changes and so on. Daily management is the long-term implementation of the system. It is a process of continual assessment and monitoring in order to assess performance and then comparing this with the progress required in the plan to meet the overall goals and end vision. Cross-functional management is the integration of team activities across functional divisions and departments in order to meet organisational goals. It ensures that all groups within the organisation are working together towards a common purpose.

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Configuration management or configuration change control, is one aspect of any good quality management system. It is also one of the most important functions of the project manager, particularly on larger or more complex projects. Configuration management is about controlling change. In particular, it is about controlling the information that relates to change. Configuration management is a control technique for formal review and approval of change on a project. If properly executed, a good configuration management system (CMS) provides a comprehensive change-control and management system. It also acts as a focus for change proposal and consideration and as an interface for client and contractor responses and communications. The main components of a CMS are configuration format and layout, configuration identification specification, configuration change control system, configuration status accounting and reporting, and configuration auditing and feedback. Configuration selection is the way in which the CMS is assembled in relation to its environment and the characteristics of the project. The CMS will depend on the limitations that are applied to the project. Typical configuration item information that might be useful to the project manager, which the CMS can readily provide, might be date of drawing issue, drawing revision number, drawing author and authoriser, date when drawing received by project team members, and similar. Configuration identification specification comprises the allocation of codes to the identified items. The codes are designed to provide a range of specific information unique to each configuration item. Edinburgh Business School

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A configuration change control system typically includes facilities for preparation of a change request, evaluation of a change request and management of the implementation of approved changes. Configuration status accounting and reporting (CSAR) provides for the updated recording of current configuration identification (including all baselines and configuration items) and historical baselines and approved changes. It also acts as a register of pending change and reports on the status of implementation of approved changes. Configuration auditing and feedback includes a review of development test plans and test results as well as a summary of required tests not yet performed. It also provides details on deviation from plan, and waivers.

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Concurrent engineering is basically an approach to support time-based competition. Time-based competition is about developing new products and then getting them to the market before the competition does. Concurrent engineering allows the project development and construction phases to develop and run concurrently. The actual phases may not operate in parallel, but the contributions from the various members of the design team are made in parallel as opposed to serially. Phased concurrent engineering occurs where the project is separated into individual work packages and each package retains a separate design and execution phase. However, the sequential arrangement of the packages is blurred and some overlap takes place between the various packages; in each case, however, package design is complete before package execution commences. Fast-track concurrent engineering occurs where individual package design and execution overlap and also each individual work package overlaps.

Review Questions True/False Questions Quality Management as a Concept 7.1 The primary objective of a quality management system is to produce to the minimum standard acceptable to the customer at the lowest production cost. T or F? 7.2 A good quality management system should ensure that goods exceed customer expectations. T or F? 7.3 In most cases, quality is a separate project variable that can be planned and operated separately from other project variables. T or F?

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7.4 Most cost–quality curves are linear for most of their functionality. T or F? 7.5 There is no upper limit for defect proportionality, provided that all defects are covered by adequate warranties or guarantees. T or F? 7.6 The true cost of defective work is equal to the cost of honouring all the warranties or guarantees that apply in the system. T or F? 7.7 The true value of quality equals the cost of production plus the cost of implementing quality improvements. T or F? 7.8 The true value of payback can be far higher than net product sales income. T or F? 7.9 Most quality management systems are responsive rather than predictive or programmed, as responsive applications are easier to monitor and control. T or F? 7.10 BS5750 was a guarantee of quality assured production. T or F? 7.11 BS5750 has now been superseded by ISO9000. T or F? 7.12 ISO9000 is a legally enforceable European quality standard. T or F?

The Quality Gurus 7.13 In a well structured and efficiently managed organisation, quality management has to be applied throughout all sections. It can never work effectively if it is only applied to some parts of the organisation. T or F? 7.14 Most quality problems can be traced back to operative inefficiency and are rarely the fault of the process. T or F? 7.15 Most quality management systems have to be based on the objectives and preferences of the customer. T or F?

The Quality Management Six Pack 7.16 The quality management six pack comprises quality policy, quality objectives, quality assurance, quality control, quality audit, and quality assurance plan and review. T or F? 7.17 Quality policies are generally insurance-backed guarantees of the quality performance of the company. T or F? 7.18 Most types of organisation have to have a published quality policy by law. T or F? 7.19 Quality objectives are effectively part of the quality policy. The objectives convert the main aspects of the policy into individual statements of what has to be done by individual sections in order to achieve the overall policy outcomes. T or F?

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7.20 Generally, a good quality-assurance system will identify objectives in relation to workable standards. It will be unifunctional and will operate as part of a continual cycle for system improvement. T or F? 7.21 Quality assurance is based on the establishment of quality targets against which actual performance can be evaluated. T or F? 7.22 Quality control is based on performance evaluation and the identification of quality variances between actual and target standards. T or F?

Total Quality Management 7.23 Total Quality Management (TQM) is quality management applied throughout the organisation. T or F? 7.24 TQM implementation has three major components: breakthrough, daily application management, and interdepartmental cross-functional management. T or F? 7.25 Breakthroughs are generally large-scale, fundamental quality improvements. They may involve significant investments by the organisation. T or F? 7.26 Daily application management is the long-term implementation of the system. It is a process of continual assessment and monitoring in order to assess performance, comparing this with the progress required in the plan to meet the overall goals and end vision. T or F? 7.27 Interdepartmental cross-functional management is the measurement of the performance of individual components of the system so that a quality implementation report can be prepared for senior management. T or F?

Configuration Management 7.28 Configuration management is essentially the process of managing change on projects. T or F? 7.29 Configuration status accounting and reporting (CSAR) is a method of recording current configuration identification, historical baselines and approved changes. T or F? 7.30 Configuration audit and feedback provides a review method for the development of the configuration management systems used on projects. T or F?

Concurrent Engineering and Time-Based Competition 7.31 Concurrent engineering is basically an approach to support time-based competition. T or F? 7.32 Time-based competition is about developing new products and getting them to the market before the competition does. T or F? 7.33 Phased concurrent engineering is where the project is separated into individual work packages and each package retains a separate design and execution phase. However, some overlap takes place between the various packages. T or F?

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7.34 Fast-track concurrent engineering occurs where individual package design and execution overlap and also each individual work package overlaps. T or F?

Multiple Choice Questions Quality Management as a Concept 7.35 Quality management systems should generally seek to manufacture goods that exceed customer expectations at A

a higher price.

B

a lower price.

C

the same price.

7.36 Generally, most cost–quality relationships have a direct functionality that can be expressed as which of the following? A

Direct proportionality.

B

Linear.

C

Curvilinear.

D

Complex function.

7.37 The true cost of defects can be said to include: A

cost of honouring guarantees and warranties

B

ditto plus cost of loss of reputation.

C

ditto plus issue of replacement goods.

D

other.

7.38 Most clients set project objectives that are based on which of the following? A

Success criteria.

B

Failure criteria.

C

Both success and failure criteria.

D

Neither success or failure criteria.

7.39 True payback can be expressed in relation to value payback as being A

greater.

B

equal.

C

less.

D

greater or less.

7.40 An EU company that wants to show that it is accredited to the most appropriate European quality standard would seek accreditation through

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A

BS5750.

B

ISO9000.

C

ISO10006.

D

BS4690.

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The Quality Gurus 7.41 Which of the following areas of the organisation are generally agreed by quality management gurus as the most important in setting up an effective quality-management system? A

Senior management.

B

Production processes.

C

Quality control.

D

Administrative support.

E

All sections irrespective of function.

7.42 Quality problems can originate at many different points within the production system. In most cases the largest single area in which quality problems originate is: A

the management of the system.

B

the production process itself.

C

the people involved.

D

associated administration and support.

E

overall monitoring and checking.

7.43 In general terms, quality management procedures and systems should be designed primarily in relation to A

company objectives.

B

customer requirements.

C

market research outcomes.

D

overall strategy.

7.44 The Deming approach appeals more to the A

democratic manager.

B

authoritarian (control freak) manager.

C

human resource-type manager.

D

any of the three.

7.45 The Juran approach appeals more to the A

democratic manager.

B

authoritarian (control freak) manager.

C

human resource-type manager.

D

any of the three.

7.46 The Crosby approach appeals more to the

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A

democratic manager.

B

authoritarian (control freak) manager.

C

human resource-type manager.

D

any of the three.

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7.47 The Imai approach appeals more to the A

democratic manager.

B

authoritarian (control freak) manager.

C

human resource-type manager.

D

any of the three.

The Quality Management Six Pack 7.48 Quality policy is a statement of the organisation’s A

overall strategic approach to quality management.

B

firm commitment to quality improvement.

C

individual quality targets for reach section.

D

guaranteed levels of performance and service.

7.49 Which of the following are quality objectives? A

Individual section targets derived from the quality policy.

B

Strategic quality objectives of the organisation as a whole.

C

Individual improvement increments to comply with statutory requirements.

D

Operational constraints.

7.50 Quality assurance is based around A

providing guarantees of quality through the issue of warranties.

B

use of statistical techniques to evaluate quality variances by comparing target to actual performance values.

C

the establishment of objective-based quality performance targets for subsequent performance analysis.

D

relying on people to maintain collective standards.

7.51 Quality control is based around A

the use of statistical techniques to evaluate quality variances by comparing target to actual performance values.

B

guaranteeing compliance with the terms and conditions of the appropriate quality-control standard.

C

setting individual targets for performance.

D

complying with statutory requirements.

7.52 Quality audit is a procedure for ensuring that

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A

all quality management costs are accurately recorded and justified.

B

the quality management endeavours of the organisation can be written off against tax.

C

the quality management system is operating to the standards set within the strategic quality plan.

D

countering corruption.

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7.53 Quality plan and review is a process for A

establishing a formal planning process for the implementation and review of the quality management system.

B

establishing individual quality targets for each section of the organisation.

C

establishing a cost plan for the cost of the implementation of the quality management system.

D

cost control.

Total Quality Management 7.54 Total Quality Management (TQM) is basically A

the same as quality management.

B

a quality management applied to all sections of the system.

C

as in B but designed and applied in accordance with the changing demands of the customer.

D

as in B but applied in terms of breakthrough and day to day implementation and monitoring.

7.55 TQM systems are most readily applied in A

one-off innovative applications.

B

repetitive predictable applications.

C

research and development applications.

D

applications with high external input.

7.56 TQM differs from more traditional quality management systems in that it requires A

considerably more observation, sampling and testing.

B

slightly more observation, sampling and testing.

C

considerably less (or even no) observation, sampling and testing.

D

slightly less observation and sampling.

Configuration Management 7.57 Configuration management is about the control of A

time.

B

cost.

C

quality.

D

communication and change.

7.58 A change control panel is responsible for

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A

the approval of variation orders.

B

costing variation orders.

C

considering the implications of change and authorising where appropriate.

D

considering the impact of one change on a project in terms of the performance of the organisation as a whole.

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Concurrent Engineering and Time-Based Competition 7.59 Concurrent engineering is about A

overlapping design phases.

B

overlapping execution phases.

C

overlapping both design and execution phases.

D

overlapping milestone dates.

7.60 In phased concurrent engineering, the project is split up into packages and each package is expressed in terms of design and execution. Packages are then A

crashed.

B

subject to trade-off analysis.

C

overlapped.

D

blurred.

7.61 In fast-track concurrent engineering, the project is split up into packages and each package is expressed in terms of design and execution. Packages are then overlapped A

both in terms of design and execution.

B

in terms of design only.

C

in terms of execution only.

D

in terms of neither design or execution.

Mini-Case Study Background Sendo is a very UK-based small company based in a small retail park in Birmingham. For all its size, Sendo operates in a market dominated by giants. Sendo is the UK’s only mobile telephone manufacturer and it is the only serious mobile telephone manufacturer in the 1990s to have been founded and started up from nothing.

The basis for success Sendo decided to split up its manufacturing base in part to spread its risk across a range of plants in different countries. The distribution network was also immediately spread as wide as possible around the world. The telephones are manufactured in the UK, China and the Czech Republic and are distributed in nine different countries in Europe and Asia. The company already claims to be selling several hundred thousand handsets per month, perhaps 4-5 million handsets per year. Sendo has achieved this remarkable success against such opposition and in such favourable time for a number of performance based reasons. The company has based its designs and operational philosophy on technology. It realised that it would be impossible to compete in terms of scale with the established players. Instead it used advanced value management techniques to obtain 7/104

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greater value from the production process. Sendo makes four mobile telephones, all based around the same set of operational components. These components, built into a basic framework, are made in China. The driving software is added later. The programmed frameworks are then distributed and the various snap on plastic covers are added at the distributor location. The covers are pre-made in the UK and shipped out to the various distribution points as required. This simple manufacturing process allows the company to manufacture and assemble the handsets much more cheaply than in a conventional assembly plant where all parts of the manufacturing process are carried out under one roof. The savings Sendo makes on the assembly process more than offset the buying discounts which the larger telephone manufacturers can expect when placing large orders with their suppliers. In other words, Sendo has reduced its unforeseeable operating financial risk by obtaining more value from the production process. In doing so it has taken advantage of the markets offered by different countries and left the final simple stages of the assembly process (the snap on covers) to the distributors. Sendo also developed an interesting design philosophy which effectively reduced the unforeseeable strategic product/process risk. The mobile telephone buying public are notoriously fickle, frequently changing their preferences in terms of styling and technology. There is always a risk that a strategic decision to concentrate production on a particular style or specification could very quickly become obsolete. In order to reduce this risk Sendo decided to base its designs on what the big mobile telephone operators wanted. Sendo realised that a large part of mobile telephone customer demand is based on what the big operators present to the public. A similar phenomenon occurs to some extent in PC manufacture and (to a lesser extent) is automobile manufacture. Customers are educated by manufacturers to expect constant change and innovation and they eagerly await the launch of new models and types of product. Sendo decided to base its designs on what the big operators wanted. This ensured that its designs would be in line with what the customer base would be presented with as desirable by the large operators. Sendo tries to comply with large operator requirements in several primary ways. 1

Project Management

Maximise use time. The company was quick to realise that mobile telephones are about more than just making telephone calls. In 1998 text messaging was in its relative infancy but by 2001 more text messages were sent than telephone calls. In addition, customers were increasingly being educated to expect extra functions on their mobiles, especially games. Sendo developed a range of high-quality games including SMS multiplayer games. The company also developed a range of new user graphics animations and other off-line and on-line amusements and diversions. These innovations were all designed to entertain users and keep them on the mobile telephone for longer and therefore (at least for some of the additional time) pay further premium rate call charges. Independent research has shown that Sendo’s mobiles have been the most successful of any of the main players in raising net revenue per user. Edinburgh Business School

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2

3

4

Appearance. Sendo went for ‘fun’ designs delivering high quality communications. One of the main attractions of the Sendo covers (now being copied by some of the other manufacturers) was that users can e-mail a photograph to Sendo which will then prepare a set of custom snap on covers with the photograph featured within the colour of the cover. Logistics. Sendo also realised that the larger operators tend to be susceptible to overordering. They tended to buy very large numbers of handsets in order to take advantage of the discounts offered by the manufacturers for such large orders. However, the danger was that any supplies over-ordered would be left sitting in a warehouse somewhere. In addition, as fashions change quickly in the mobile telephone sector, any spare sets would have been depreciating rapidly and there was always a risk that a proportion of these handsets might have had to be written off completely. Sendo’s manufacturing arrangements allowed them to meet orders quickly even with just two or three days’ notice and let them avoid the problem of having to stockpile large numbers of potentially obsolete telephones. Brand. Sendo made the unusual decision to allow its telephones to be sold under other brand names. The company makes telephones for Virgin, sold as Virgin telephones with the Virgin brand. In some ways this flexibility may have directly helped sales as Virgin has a popular appeal in the UK.

The Z100 The combination of ingenuity and flexibility has allowed Sendo to survive and grow in this tremendously competitive area. However, not content with this unexpected growth, Sendo has recently developed and is about to launch a brand new concept in mobile telephone technology. The new product is the Z100. This is a hybrid telephone in that it combines telephone capability with computer technology. The end result is a handset which can make and receive calls and everything else that a telephone handset can do yet it also offers e-mail, personal organiser and diary functions, together with other interactive multimedia functions (such as being able to watch films and listen to internetbased music) and basic computer facilities. The Z100 is not just another WAP ‘phone’; it is far more complex and offers a much wider range of functions. The new software technology to drive the Z100 has already been developed by Microsoft. Interestingly, Microsoft owns 10 per cent of Sendo. The new Z100 will sell at between £250 and £700 depending on the package chosen. Sendo has used this technology to build a reputation for bespoke customer programming, matched fulfilment programmes and bespoke software design with dedicated services. The release of the Z100 might itself look a risky proposition but Sendo has hedged its bets in this respect as well. The Z100 is aimed very much at the business professional end of the market where the demand is and also the money if the product is right. In aiming at this market Sendo has effectively 7/106

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split the customer risk as their ‘bread and butter’ ‘phones are aimed very much at the ‘cheap and cheerful’ younger text messaging end of the market. Sendo is aware that the international appeal of the expensive mobile phone/PC is not yet proved. It is undeniable that there is an underlying logic to combining telecommunications, PC and multimedia in one ‘gadget’ but such design logic has not always driven what people actually want or what the large distributors actually produce. In addition, UK company MMO2 is about to launch a telephone/PC of its own. The Z100 will face immediate competition from the day it is launched. Sendo realises that it cannot bet everything on the Z100 and is happy that its flexible demand-driven development strategy will ensure that it does not become detached from consumer/ big operator demands and trends. The company is very aware of the external consumer demand unforeseeable risk and intends to make sure that it can stand up to any eventuality.

Other considerations Sendo obviously has a good appreciation of the dangers and risks out there in the mobile ‘phone market. The company faces risks from other quarters where, perhaps, it will have to develop similar levels of expertise. 1

2

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Finance. Sendo at present employs around 300 staff in the UK. Virtually all of its operations are funded by on-going cash flow together with strategic injections of cash from strategic shareholders such as Microsoft and CCT (a Hong Kong based telecommunications company). As Sendo continues to expand there will be a requirement for the company to move ‘up a gear’ in terms of financing. The company might have to consider a stock market listing (apparently a source of great excitement among the investment bankers who would wish to be involved in any such process). A stock market listing might affect Sendo in more that just immediate financial terms. Analysts would start watching the company carefully for any signs of relatively ‘irresponsible’ activity. Sendo has built up a considerable degree of success based on its flexible and freewheeling culture. The company has made successful use of innovation and change. This culture and style could well be restricted once the company is listed and the analysts are watching. Any moves away from what the market sees as a safe course could result in a reduction in the value of the company (unforeseeable finance/market strategic risk). Staying in front. Sendo has been successful by innovating and introducing ‘funky’ and ‘fun’ handsets. It has achieved this image quickly and ahead of the rest of the pack. However, the big established operators learn quickly and they are now investing heavily in developing ‘cool image’ and ‘funky user’ technology. Nokia spent almost £2 billion on research and development in 2001, much of it to make its ‘phones more fun and more multi-functional. It introduced 12 new products in the last quarter of 2001. In addition, Nokia is using its enormous distribution systems to expose these new products to as many potential customers as possible. The danger is that Nokia (and Vodafone) Edinburgh Business School

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3

have now ‘got the message’ and are channelling their massive resources into developing new products with popular appeal to match that of Sendo. There is no way that Sendo can compete with the investment levels Nokia has used to develop competing products. Uniqueness. Sendo is unique in that it is small (about 1 per cent of the global market) and is not backed up by a major company. This characteristic makes it particularly vulnerable. There are several other small telephone companies operating on about 1 per cent of the global market. These include companies such as Alcatel Mitsubishi Panasonic and Sony. However, these other small companies are backed by very large corporations making billions of pounds every year from other activities. In Sony’s case the biggest earner is computer games, followed by music CDs. The only other small independent competitor is the Finnish company Benefon. However, Benefon is a niche player and has, in fact, been in the market since the early 1920s.

As the global demand for mobile telephones falls, it may be that the big operators and manufacturers will have to start thinking about mergers and acquisitions in order to control capacity and buy market share. To some extent this has already started with the manufacturers in the case of Vodafone-Mannesmann. Sendo, as a small and highly successful independent operator, would make a very attractive target for any of the larger established companies.

The future Sendo intends to continue developing and offering innovative small and lightweight handsets with telecommunications multimedia games carrier branding and a range of fun customisation and interaction facilities. Sendo also intends to ensure that its manufacturing processes make use of value management and continue to offer excellent manufacturing costs in relation to sale price. It should be noted that while Sendo handsets are manufactured for considerably less than those of Nokia or Vodafone, they sell in the same price range and therefore generate a greater revenue and profit per handset. On 18 March 2002, Sendo announced a multi-year mobile telephone alliance with Cingular Wireless the second largest wireless carrier in the US. Cingular Wireless is a joint venture between SBC Communications and Bell South and currently serves nearly 22 million consumer and business customers in the US. This alliance will enable Sendo to launch the Z100 into Cingular Wireless’s lucrative US GSM 1900 markets. Questions: Sendo has done remarkably well in maintaining a competitive position in a market where it faces domination by a number of giant companies. On paper, Sendo should not be able to survive. 1 Explain how Sendo’s basic design philosophy stood it in good stead in this highly competitive market. 2 Discuss the extent to which Sendo is likely to continue to use performance as a way of staying ahead.

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Module 8

Case Study Contents

8.1

8.1

Aims and Objectives of the Case Study

8/1

8.2 8.2.1 8.2.2 8.2.3

Introduction (Module 1) Issue and Supplements The Oldcastle Station Development: Initial Project Information Assignment 1. Oldcastle Station Project: Preliminary Evaluation

8/2 8/2 8/3 8/9

8.3 8.3.1

Individual and Team Issues (Module 2) Assignment 2. Oldcastle Station Project: Primary Responsibilities of the Project Manager

8/10 8/10

8.4 8.4.1

Risk Management (Module 3) Assignment 3. Oldcastle Station Project: Contracts and Risk

8/17 8/17

8.5 8.5.1 8.5.2 8.5.3

Case Study First Supplement Introduction Change Information Supplement Appraisal

8/22 8/22 8/22 8/26

8.6 8.6.1

Organisational Structures (Module 4) Assignment 4. Oldcastle Station Project: OBS

8/27 8/27

8.7 8.7.1 8.7.2 8.7.3

Case Study Second Supplement Introduction Change Information Supplement Appraisal

8/30 8/30 8/30 8/33

8.8 8.8.1

Time Planning and Control (Module 5) Assignment 5. Oldcastle Station Project: Schedule

8/33 8/33

8.9 8.9.1

Cost Planning and Control (Module 6) Assignment 6. Oldcastle Station Project: Cost Planning and Control

8/41 8/41

8.10 8.10.1

Quality Management (Module 7) Assignment 7. Oldcastle Station Project: Quality Management and Control

8/52 8/52

Aims and Objectives of the Case Study Research reveals that knowledge and retention are increased significantly when people learn by doing. This case study is designed to do this by presenting the opportunity to supply what has been learned in the various modules of the course. It builds up in stages. The content of each part of the case study

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is relevant to the material that has been covered in a particular module; for instance, the case study presented at the end of Module 3 relates to project risk management. You can either complete all the modules and then work through the complete case study or you can complete each module and then work through the relevant section in the case study. Either way the case study will anchor the theory that you have learned by applying it to the case study information. Each part of the case study adds to the case study material that has been considered in the preceding part. As the cases studies progress, further case study information is introduced. Some of this information is new and some is revised from previous issues. The series of cross-sectional elements builds up into a single integrated study that considers the full range of areas covered in the preceding modules. The overall aim is to apply the knowledge acquired from the text to the theoretical case study, in order to develop an understanding (as opposed to knowledge) of the practical project issues involved. Successful completion of the case study will require a good understanding of project management in addition to a good knowledge of the subject. As a case study, all names of companies and individuals are intended to be fictituous.

8.2 8.2.1

Introduction (Module 1) Issue and Supplements The first information on the case study relates to Module 1 of this course material. It is general background information that sets the scene and provides a basic appreciation of the case study subject. Readers should study this material and then attempt the individual assignment task that is located at the end of section 8.2. Readers should then read through the next section of the case study and attempt the second assignment, and so on. The basic case study assumes a theoretical baseline date of Thursday 14 June. This date is important because it establishes the time perspective for the project. All subsequent issues of information and change notices are issued in relation to 14 June. It should be noted that 14 June is not the project start date; in the case study the main project is already in progress on this date. 14 June is ‘today’s date’ as far as the project manager is concerned. Some work has already taken place and some is about to take place. All plans and reviews should take place with 14 June as the base date. In real life, projects are dynamic and change constantly. New information arises and there is a constant requirement for change. The reader should review any supplementary information that appears in the case studies and try to appreciate how it has been assimilated into the developing solution. It is very important to ensure that information is tracked through the project. One of the most common problem areas in project management in practice is communication management – it is very easy to lose or misplace information

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8.2.2

8.2.2.1

The Oldcastle Station Development: Initial Project Information Project Background: Moving Offices Today’s date is 14 June. Jane is a newly appointed project manager working under the direct control of the station manager at Oldcastle railway station. Ultimately she is employed by the national railway infrastructure provider (Uptrack). However, she is directly employed by a wholly owned subsidiary of Uptrack, called Uptrack Major Stations (UMS). This subsidiary owns and operates the ten largest (or major) stations that are owned by Uptrack. The idea is that the major stations are operated as separate entities and they are significant revenue generators. All national major stations are currently being extensively modernised as part of Uptrack’s strategic programme of investment. This programme is being funded under Uptrack’s nationwide infrastructure-regeneration programme for major stations. Jane was employed by UMS specifically to improve the professionalism of the project delivery system. In common with most major stations, Uptrack owns and occupies most of the Oldcastle station buildings, although parts of it are owned by UMS. In line with standard Uptrack practice, UMS owns some of the offices and also has direct leasing responsibility for some other specific areas including the main concourse, the superloos and a number of catering facilities (coffee bar, sandwich bar, burger bar, etc.). As part of a planned modernisation process, the UMS section is moving from existing offices later this year into new offices elsewhere within Oldcastle station. The new offices will be leased from Uptrack; the old offices that are currently occupied by UMS are to be leased to Downline Trains. Downline is one of the big national train-operating companies (TOCs). Downline runs a lot of trains in and out of Oldcastle and its directors feel that they want the company to have a direct presence in the station. Leases have already been signed for Downline to occupy the old offices and for UMS to occupy the new offices. Downline has made it clear (and the lease specifies) that it must have possession of all the existing offices by 3 September (almost three months from 14 June) in order for their staff to move in on time and meet financial commitments. The Oldcastle station manager is very concerned to make sure that the office moves go smoothly. He has therefore asked Jane to act as project manager. She is responsible for planning and monitoring the whole process to make sure that the project of moving offices is successfully implemented.

8.2.2.2

Project Programme Information

UMS Generally UMS has 25 staff working at Oldcastle station, spread out over eleven offices within the old station buildings. New accommodation is currently being prepared by Uptrack, and UMS staff are due to move offices around the middle of August – indeed, Uptrack’s engineers have indicated informally that the new offices should be ready around 17 August. The new offices are considerably Project Management

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more extensive then the existing ones and will allow UMS to expand in line with strategic planning projections for the next few years. The UMS move should be relatively straightforward and will involve the usual office equipment and furniture. The only complex area is the existing computer network. The UMS IT systems are server-based, with a network of twenty PCs linked to the central server. The UMS system is also linked to the combined Uptrack and TOCs systems and it provides some essential services, such as accounting and costing information and Solari (train information) announcements facilities. UMS management have decided to take advantage of the office move to upgrade the office IT network. Some of the existing equipment will be retained, but a significant amount of new equipment is to be supplied and installed. The new equipment includes scanners, printers and modems supplied by Hardware World Ltd of Anytown. It also includes new PCs and monitors supplied by Teeny Computers Ltd of Anothertown. There will also be a requirement for a range of new software, for email, voice recognition and network management. This is to be installed by a firm of specialist software engineers called YK2 Ltd. Most of UMS’s office equipment and furniture can be moved by their normal removals contractor, Shifters Ltd. However, the computers and other specialist IT equipment has to be moved by Uptrack’s in-house IT division. This division is known as Railspark. Railspark is contractually required to move the equipment for insurance and security reasons but YK2 Ltd will be required in order to decommission the system and prepare it for removal. YK2 Ltd will also be required to recommission the system upon completion. There is only one other organisation (called Virus Ltd) that would be capable of carrying out this work. UMS has made it clear that the computing system must be shut down for the shortest possible time. This is because UMS has a contractual responsibility to provide administration services to a range of TOCs and, under current servicelevel agreements, if these levels of service are not provided for any reason, the TOCs can claim damages. At present, these damages vary in relation to the level of service that is not being provided. Examples include: Solari system (system section a) Accounting and cost control system (system section b) Booking reconciliation system (system section c)

£300 per hour £100 per hour £100 per hour

These damages start immediately the relevant part of the system is decommissioned (i.e. when it is less than 100 per cent fully operational), and they continue without limit until the relevant section of the system is fully operational again. These are contractual liabilities and are written into the service-level agreements. UMS can only provide these services while they are operational and on line. It is inevitable that some damages will be payable during the move; however, senior management has made it clear that these damages must be kept to a minimum. A total of seven days off-line with five days reimbursed (see next paragraph) has been allowed for and a provision made in the operational budget. Solari damages are limited to 06.00 am – 12.00 midnight daily. The other two are chargeable on a 24-hourly basis. 8/4

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As part of the moving process, UMS has to wind down operations prior to the move and then fire up again immediately afterwards. A number of days each side of the move have been provisionally agreed for this. UMS’s senior management expects that operational capability will decline by 50 per cent per day over two days during the wind-down and will increase by 33 per cent per day over three days during fire-up. The system itself can only be considered as ‘operational’ when its operational capability is 100 per cent. UMS and Uptrack Uptrack has indicated that the new offices should be ready for occupation by UMS on 17 August. This date allows UMS staff two weeks to move everything out of their old offices and into the existing offices on or before 3 September, which is the contractual entry date in the station premises lease. Under current leasing agreements, Uptrack is under no contractual obligation to provide entry to the new offices on 17 August; there is no contract in relation to the office move between Uptrack and UMS. Uptrack estimates indicate that the overall construction costs of the new offices work package will be around £500 000. This estimate includes all overheads and fees but not taxes. Uptrack has agreed to co-ordinate all aspects of commissioning the new offices (although it has no involvement with the IT systems, which are to be recommissioned by Railspark) for a one-off ‘management charge’ of £12 000. Uptrack’s refurbishment contractor (called Cowboy Ltd) is already working on the refurbishment work, and work is already in progress on the new offices. The office upgrading works were originally scheduled for 16 weeks from the end of April. The works have been under way since 30 April and have been progressing more or less to programme. At Uptrack’s last progress meeting, Cowboy Ltd assured the company that it was still on target for a completion date on or around 17 August. As part of Uptrack’s national upgrading system, a separate strategic development division within the company has agreed to reimburse UMS for any damages suffered by the inevitable breach of service-level provision during the move. This reimbursement is limited to the first five days only of any such penalties. This five-day period is intended to cover the period of operational capability that are expected to be lost through the wind-down (two days) and fire-up (three days). This reimbursement relates to wind-down and fire-up only. There is no reimbursement for downtime related to the actual move or for any extended or duplicate wind-down or fire-up periods. The separate strategic development division of Uptrack will make a contribution of 50 per cent toward the total cost of the new PCs. However, this contribution will take the form of a payment at the end of the current financial year. UMS and Downline Downline has made it clear that it must have possession of all the existing offices by 3 September. Downline has made contractual arrangements for decorating and refurbishment contractors to have access to the existing offices on that date Project Management

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and they are committed to leaving their own old offices in Late Street by 10 September. It is clear that Downline will suffer severe disruption if it is not given possession on 3 September, and the company has built damages into the lease agreement. These damages clauses commit UMS to paying liquidated and ascertained damages of £5000 per day for every day’s delay in handing over the existing offices after 03 September and before 10 September. After 10 September, additional damages come into effect in addition to the liquidated and ascertained damages. The additional damages are set at a further £5000 per day; hence from 10 September damages will be £10 000 per day in total. ♦ Time Out Think about it: What are the obvious risks that are present in the arrangement described above? Can the project manager do anything to reduce these risks? How could the transfer of accommodation have been better arranged from the UMS point of view?

♦

8.2.2.3

UMS and the Contractors

Railspark Railspark is Uptrack’s own internal IT division. It is the specialist IT equipment transporter for Uptrack’s national infrastructure. Its responsibility will be to disconnect, move and reconnect all the office IT equipment. Railspark has already agreed to move the UMS IT hardware. One of its engineers has visited the existing UMS premises and has assured UMS that Railspark can disconnect, package and move everything in one day, and then unpack and reconnect everything in one further day. Railspark will simply disconnect, move and reconnect the computer system; its staff have no additional works. Responsibility for decommissioning and recommissioning the system lies elsewhere. Railspark has made it clear that it will require ten days’ notice before being able to commence work. A figure of around £9600 plus VAT has been provisionally agreed for Railspark’s services. This sum will be payable in full within twenty-one days of everything being correctly moved and positioned in the new offices. The sum is an estimate based on a team of two IT specialists and four assistants working for two full days on the project. The IT technicians are charged at £150 per hour and the assistants at £75 per hour. These rates do not include VAT. Overtime rates are 40 per cent higher than the standard rates quoted above. For insurance reasons, Railspark cannot work in either set of offices at the weekend. Shifters Ltd Shifters Ltd is a private removals firm that is widely used for Uptrack removals. Its responsibility will be to move the general office equipment and furniture. A contract has already been signed with Shifters Ltd. That company has also surveyed the existing offices and agreed a two-day time limit for completion of 8/6

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the move. The contract states that shifters must have 21 days’ notice of when the move is required, and it must be given uninterrupted sole access to the existing and new premises over the two days. A figure of £6400 has been agreed for Shifters Ltd’s works. This sum is based on four gangs of movers each costing £100 per hour. Overtime rates are 50 per cent higher than the standard rates quoted above. Shifters could if required carry out overtime work either during the evenings or at weekends or both if necessary. YK2 Ltd YK2 Ltd is a firm of specialist software engineers. Its responsibilities will include the decommissioning and recommissioning of all existing systems, and also the installation and commissioning of all new hardware and software. YK2 has not yet entered into a contract. However, it has received a basic description of works from UMS and agreed that it can decommission the existing systems in one day and recommission the existing and new systems over two further days. YK2 must be given exclusive access at these times and must be given 28 days’ notice of the relevant dates. YK2 does not charge a flat rate but on an hourly basis. Time estimates are based on two engineers and one assistant working at any one time. The hourly rates are £250 per hour for the engineers and £85 per hour for the assistant. These rates do not include VAT or expenses (and typical expenses would add 5 per cent to these rates). YK2 staff do not work overtime.

8.2.2.4

UMS and the Suppliers Teeny Computers Ltd will be supplying all the new PCs and monitors that will contribute to the strategic IT upgrade. Teeny Ltd simply deliver the hardware in boxes. Railspark will be responsible for unpacking and installation. The estimated total cost of the equipment is £35 000 excluding VAT. It has not yet been formally ordered. Teeny Ltd has intimated that it needs 28 days after the signing of the supply contract before it can make delivery. Subsequent delivery is guaranteed on the stipulated date. Standard Teeny Ltd supply contracts say in the small print that the supply date is guaranteed ‘or your money back’. Hardware World Ltd will be supplying new accessories, including scanners, printers and modems. Again, Hardware World Ltd simply delivers the hardware in boxes. Railspark will be responsible for unpacking and installation. The estimated total cost of the accessories is £12 000 excluding VAT. Again, this equipment has not yet been formally ordered. Hardware World Ltd usually needs 21 days after the signing of the supply contract before it can make delivery; thereafter, delivery is guaranteed on the stipulated date. As with Teeny Ltd, Hardware World Ltd supply contracts say in the small print that the supply date is guaranteed ‘or your money back’.

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8.2.2.5

UMS and the Statutory Bodies

The Local Authority The local authority has to inspect the completed new offices and issue a completion certificate before formal occupation can take place. The local authority requires a minimum notice period of 14 days before an inspection can be made, followed by a further seven days before the certificate can be formally issued. The local authority fee for the inspection and the issuing of the certificate is 0.25 per cent of the overall cost of constructing the new offices. Uptrack will arrange for all services connections (water, electricity, etc.), and there will be no specific charge for this work other than the overall Uptrack management charge of £12 000. Uptrack has indicated that UMS will be responsible for the costs of all statutory inspections.

8.2.2.6

Project Summary Financial Information Uptrack is funding the new offices as part of its national regeneration programme. It has already agreed to provide the new office space free of charge. Uptrack will absorb all upgrading costs as originally designed and approved. As part of Uptrack’s national upgrading system, a separate strategic development division within the company has agreed to reimburse UMS for any damages suffered by the inevitable breach of service level provision during the move. However, this reimbursement is limited to the first five days only of any such penalties. In addition, the separate strategic development division of Uptrack will make a contribution of 50 per cent toward the total cost of the new PCs. However, this contribution will take the form of a payment at the end of the current financial year. UMS will be required to pay directly from its cost centre for the following: 1

2 3 4 5 6 7 8

service-level damages (unlimited) after the first five days, based on £300/hr for the Solari being off line, £100/hr for the accounting system off line and £100 for the booking system off line; late hand-over to Downline (unlimited penalties) based on £5000 per day for 3 September to 10 September and then £10 000 per day after 10 September; Railspark (IT equipment removers) fees, estimated at £9600; Shifters (office furniture movers) fees, estimated at £6400; YK2 (software engineer) fees, at £250/hr (engineer) and £85/hr (technician); Teeny Computers Ltd, for new PCs at £35 000 (with 50 per cent Uptrack rebate – see above); Hardware World Ltd, for new accessories at £12 000; the local authority inspection, at 0.25 per cent of total alteration works costs (excluding IT).

These costs have all been allowed for within the plan for the current UMS financial year, and existing budgets can contain all these costs (assuming five days off line under 1 above and zero damages under 2 above). However, any additional costs will have to be met from alternative sources. UMS has a general contingency reserve of £15 000 and a management reserve of £12 000. 8/8

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The case study builds on this initial project information. In addition, two further supplements will be issued. These introduce additional and changed information into the case study. All such information has to be incorporated into the developing solution. 8.2.3

Assignment 1. Oldcastle Station Project: Preliminary Evaluation Assignment 1 In the context of the Oldcastle case study, make a preliminary evaluation of the primary characteristics of the project.

Initially, the project looks reasonably well organised. It is always more difficult to join a project that is already running than it is to set up a new project. Projects that are already running have their own informal communication channels and information flows. It can be very difficult to access these once they are established, particularly in the case of informal communication channels. There will also have been a certain amount of information flow and, depending on the configuration management system that is in operation, it may be very difficult to build up an accurate appreciation of what information has been exchanged. It is immediately apparent from the text that there are some rigid deadlines that have to be met. Indeed, if these deadlines are not met, there are financial penalties (damages) to be paid. The immediate problem for the project manager (Jane) is to analyse these deadlines and penalties as risks and to make some kind of evaluation of impact and probability. There are two primary danger areas. These are downtime and late-move damages. Downtime costs are high and are sure to occur. There is nothing that the project manager can do about these other than to ensure that downtime is kept to a minimum and is not duplicated. The first five days of the downtime costs are directly reimbursable; this reimbursement is a one-off and is not applicable for a second interruption to service should this be required, so that any such second interruption becomes considerably more expensive than the first. Accurate project planning should enable the project manager to isolate the amount of downtime that is necessary and to ensure that adequate resources are available so that all works that contribute to downtime are completed on time. The late occupancy damages are high but are not certain to occur. Again, careful planning can go some way to ensuring that all necessary works are completed on time, but the final determinant of whether or not non-occupancy damages are payable is the main contractor Cowboy. The various supply contracts appear to be in order although Jane should make sure that all necessary orders have been placed and that any that have not been placed are flagged up with latest placement times (given the time lags that are required between order and delivery). Jane might also note that the supply contracts appear to be fairly weak, in that they state that delivery will be on time ‘or your money back’. Money back only provides the opportunity to start all over again with another supplier. In the meantime, the damages and downtime costs continue to accrue. Project Management

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It is clear that communications will play a particularly important part in this project. The lack of firm contractual linkages and clear lines of authority for UMS suggest that the project manager will have to make special use of ‘soft’ project-management skills in order to try and make the best use of and control people. This will be especially important in the link between Uptrack and UMS for the links between companies that are part of the same group can often be tenuous. In this case there are a number of important matters that affect the performance of the project, and over which UMS has little or no control and has to rely on control by Uptrack. Typical examples include: • • • • •

Cowboy contract; Shifters contract; YK2 contract; downtime cost reimbursement (five days); reimbursement of major contract costs.

It is very important that Jane establishes clear and efficient links with Uptrack in order to ensure that these areas are adequately controlled.

8.3

Individual and Team Issues (Module 2) Assignment 2 In the context of the Oldcastle case study, discuss the primary responsibilities of the project manager (Jane) at each stage of the likely project life cycle for the Uptrack programme of upgrading works.

8.3.1

Assignment 2. Oldcastle Station Project: Primary Responsibilities of the Project Manager Consider the likely roles and responsibilities of the project manager in the Oldcastle case study. These roles and responsibilities will vary in relation to the project life cycle of the various works that are in the upgrading programme. The reference date for the case study is 14 June. The works on the new offices are therefore already under way and Jane will not be able to play an active role in such aspects as briefing and selecting the various consultants and suppliers. However Jane does have the opportunity to review the planning and costing calculations that have been carried out and to establish new and more accurate time- and cost-control procedures that will ensure that the remainder of the ‘moving offices’ project runs smoothly and efficiently. These are set out next according to six project stages.

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8.3.1.1

Pre-design Stages The project manager: •

•

• • • •

provides advice on all aspects of the project during feasibility – possibly involving detailed investment appraisals and economic analyses, cost– benefit analyses and financial modelling; co-ordinates the development of the project brief, which is an essential part of most project development plans and which formalises the client requirements in a format that can be used as the basis for the subsequent design process; advises on the appointment of specialist feasibility-study consultants, as required; provides monitoring and co-ordination of all approvals and consents; establishes an overall conceptual programme for the project; establishes project control and reporting procedures.

The project manager (Jane) would consider all remaining aspects of the office move from operational and logistical viewpoints. The level of financial modelling would be low in this particular case, but the logistics of what is involved could be considerable. Jane would have to consider particularly the legal implications of some of the contracts that are in place with the train operating companies. These contracts may take the form of service-level agreements, and there could be penalty clauses that come into force where the station operator has to pay damages to the train operating companies for every day (or even every hour) that the agreed level of services is not being provided. One of Jane’s first formal requirements would be the review of the formal brief (if there is one). The brief should act as the focus for the plan and should set out the primary success criteria for the project. The preparation of this document will have involved a series of pre-planning meetings, where all members of the project team were allowed to make their contribution to the development of the brief. The end result should have been a document that outlines the requirements of the project and defines what achievements are necessary for the project to be considered a success. Jane would review this brief and then set up a formal sequence of progress and review meetings, together with some form of reporting system. As part of the tracking and control procedures, it is essential that there are regular meetings where progress and procedures are reviewed. Meetings could be weekly, monthly or some other frequency. There would normally be some process for the proceedings to be recorded and circulated to the various project team members. This process of review is sometimes known as focusing or definition. The process acts as an interface between the planning, or ‘intent’, phase of the project and the implementation, or ‘doing’, phase. The focusing process takes the aims and intentions of the project sponsor or other member of senior management or client body, and converts them into measurement variables within an implementation monitoring and control system (IMCS). The IMCS tracks the development of the implementation phase and evaluates performance in each of the key defined success-factor areas and expresses any Project Management

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divergence as a variance. The IMCS allows variances to develop so long as they remain within predetermined acceptability limits (the variance envelope). The variance envelope therefore restricts implementation variances to maximum and minimum levels that are established by the range of eventual outcomes that are necessary in order to realise the project success criteria. Focusing is also part of an ongoing process. Focusing establishes the monitoring and control systems and also calibrates them so that performance can be measured. The IMCS then works alongside the implementation process for the remainder of the project life cycle in order to ensure an acceptable outcome.

8.3.1.2

Formation of Project Team The project manager: • • • • • • • • • • • • • • • • •

advises the client on the selection and appointment of external consultants; establishes the project team and initiates the project team-building process; develops a project task responsibility matrix (TRM), which links individual responsibilities with time deadlines; develops proposed monitoring and control systems for planning, authorising, organising, controlling, and directing all aspects of the project team; evolves the team building process and sets standards and targets for project team performance; provides required levels and standards of leadership; provides life cycle leadership, which changes and evolves over time; interfaces with the client, the organisation and all other interested parties; negotiates (or co-ordinates negotiation) with suppliers and clients; effectively manages the projects resources; monitors and controls the project status; identifies issues and problem areas; identifies and implements the solutions to team problems; resolves team conflicts; provides project team conflict management; provides project team stress management; develops project team motivation and reward systems.

As project manager, Jane would give advice on the appointment of any remaining professional consultants such as YK2. Large organisations often have fixed lists of approved consultants. These practices are invited to tender on some kind of rota basis, with preference being given to those that have performed well in the past. Terms and conditions of engagement could be standard or could be negotiated. Jane would then review the project team in conjunction with senior management, making changes or additional appointments as necessary in order to ensure that the project team operates effectively and efficiently. Mary, as deputy station manager and project sponsor, might put forward Jane’s proposals on resources to senior management and then support this bid as far as possible. The final decision on staffing and resource levels, together with limits on external consultant fees, would be the station manager’s responsibility. 8/12

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Once the boundaries and membership of the current project team have been agreed, Jane has to set up an appropriate leadership style and control system for the team. This would be difficult in this particular case as most of the project team members have been appointed and the project itself has been running for some time. Initially, the current team will need a lot of direction and will be very task-oriented; as the team develops, a less directive approach will be required. Jane will have to keep alert for any personality clashes and other areas where there is obvious potential for conflict. If conflict appears, there has to be a procedure in place for dealing with it. Conflict detection and resolution will probably be through informal systems and will rely heavily upon the informal communication system within the project team. The project manager also has to establish some form of stress evaluation to ensure that individual team members are not becoming over-stressed. One of Jane’s most powerful tools here is a task responsibility matrix. She can develop this and then use it to record exactly what the obligations and responsibilities of each individual member of the design team are.

8.3.1.3

Design Stages In the design stages, the project manager: • • •

•

•

•

•

• •

Project Management

co-ordinates all aspects of the design to ensure that the evolving solution continues to meet client requirements; develops initial time, cost and quality objectives and agrees these as project success criteria with the client; develops a project statement of works (SOW), which details all aspects of the project as designed; typical components would include project drawings, schedules of rates, item descriptions, some form of measured works listing, and standard and specific forms and conditions of contract; develops a work breakdown structure (WBS) for the project, which isolates the individual work packages that act as the basis of all subsequent planning and control approaches; develops a cost accounting code (CAC) system based on the WBS elements and primes each work package with a budget total using a computerised database estimating system (CDES), which establishes a budget total for all work packages in the project from the outset; using the same CAC system, develops a precedence diagram for the project and, using the critical path method (CPM) or the programme evaluation and review technique (PERT), develops a draft master schedule (DMS) for the project; following client feedback on the proposed DMS, develops alternative scenarios for meeting adjusted time, cost or quality objectives by presenting trade-off options to the client together with recommendations on the most favourable type of trade-off for any given situation; applies the accepted trade-off solution in order to generate a project master schedule (PMS); ensures that the designs comply with all internal and external design requirements; Edinburgh Business School

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• • • • •

ensures that the designs comply with all relevant national and international statutory requirements; if appropriate, co-ordinates the design and implementation of a prototype and co-ordinates performance monitoring and recording; ensures that all aspects of the design are compatible with execution; prepares and co-ordinates an accurate cost plan and budget plan for the project; sets up a suitable earned value analysis (EVA) reporting system for subsequent cost control.

The project is already under way in this particular case, and so the designstage work is probably complete. In terms of ensuring that the team operates effectively, the project manager has to prepare a formal plan of the project (if this has not already been done) and set up appropriate monitoring and control systems. Jane would check again that the cost limits and time scales that have been entered in the brief are correct and then use these as the reference points for the planning process. For time control, Jane would look at the contract documentation and split the work up into obvious work packages. These packages could be defined by work type or by contractor/supplier type. It would probably be logical to consider IT removals as one package since it is to be carried out by a single contractor under a single contract. There would be no point in considering the removal in more detail (such as PC removal, scanner removal etc.) as the removal of the IT systems is being treated as a single entity. For cost control, Jane would take the work packages identified for time planning and ascertain their costs and values. This information could be obtained directly from the priced contract documents. This process would allow her to build up a cost plan that provides costs and values for each work package in the project.

8.3.1.4

Tender and Award Tender and award is the process involved in inviting prices for the work, based on a competitive pricing of the works as described and summarised in the SOW. In this process the project manager: •

•

• •

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co-ordinates the preparation of a complete pre-tender cost check, which will confirm that the project as documented and billed complies with the client’s cost criteria; co-ordinates the preparation of full SOW documentation and authorises the issue of this documentation to prospective tenderers; the project manager will generally also advise on the selection and procurement of prospective tenderers and the tendering procedure to be adopted for the project; advises on the tender to be accepted; co-ordinates any other activities required in order to conclude the contract, which could include checking on any necessary insurances and performance bonds and, where necessary, carrying out checks on individual tendering companies. Edinburgh Business School

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The project manager needs to check that all contracts have been put in place and formally concluded. Responsibility for the preparation of the contracts would probably be with a specialist legal services section within the organisation. Jane would have to identify any sums under UMS control that have to be retained or held as bonds or as performance retention sums. Most contracts require the client to retain a percentage in order to provide leverage over the contractor at the end of the works, where the client is trying to get any defects remedied or any outstanding works completed. In this case, most retention and bond sums will be held by Uptrack rather than by UMS. The project manager would usually initiate a full pre-tender cost check. In the case study, this will have been done for the Cowboy works at an earlier stage and by the internal or external consultant acting on behalf of Uptrack. Most pretender cost checks involve the cost consultant in pricing the contract documents in much the same way as the contractors, subcontractors and supplier would be expected to do. As with other aspects of project management control, pre-tender cost checks are increasingly being carried out by CDES-based software. A CDES pre-tender cost check has the advantage that it uses a blank version of the actual document that the contractor is going to price. There is virtually no chance of misunderstanding or misinterpretation of any part of the pricing process. Jane would also have to check carefully to ensure that all pricing in any UMS contracts is in place and that there are no ambiguities in the blank or priced documents. Most standard forms of contract list procedures that are to be adopted in the event of errors or omissions being detected. Some contracts require tenderers to stand by the submitted tender price or to withdraw. Other contracts allow the tender sum to be adjusted in line with any corrections that are required in order to describe the scope and extent of the works accurately. Jane would also have to monitor the award of contracts and ensure that all necessary liability provisions, such as performance bonds, are in place before the contract is awarded.

8.3.1.5

Project Execution The project manager: • • • • • • • •

Project Management

co-ordinates the efforts of all members of the design team and any contractors or suppliers; establishes a suitable performance monitoring and control system for the schedule; establishes a suitable cost monitoring and control system with sufficient sensitivity to operate at work package level; establishes a suitable quality management and control system with sufficient sensitivity to operate at the appropriate level; establishes and operates an EVA variance analysis system; isolates variances and records them as part of a comprehensive project variance analysis reporting (PVAR) system; uses these variance reports as the basis for executive recommendations and actions; monitors and controls the team development and team building process; Edinburgh Business School

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•

continues to provide tactical leadership at all levels;

•

monitors and controls all aspects of project team performance in relation to stated project-success criteria;

•

continues to monitor and control the project status;

•

continues to identify issues and problem areas;

•

continues to identify and implement the solutions to team problems;

•

continues to resolve team conflicts;

•

continues to provide project team conflict management;

•

continues to provide project team stress management;

•

continues to develop project team motivation and reward systems.

In executing the contract, the project team is converting the designs and plans into reality. Jane would have to put procedures in place for the monitoring and control of time, cost and quality together with any necessary checks on team development and performance. In most cases this would involve the establishment of detailed cost plan and time schedules using an EVA-based PVAR approach. Increasingly, these functions are being assisted by comprehensive project-management software packages. Jane would need to use all her control skills during this phase. The project is developing and the team itself is evolving and changing in operational characteristics. As the design evolves, there will be a need for a number of changes that will have to be allowed for and contained within the change management system. It will be important to ensure that change requests are monitored and controlled in order to ensure that they do not add significantly to the estimated final cost of the project. If the changes do indeed start to add significantly to the cost or time scale, the project manager will have to check to see whether the additional finance or time is available or will be made available. If not, it may be necessary to compensate for any such increase by finding savings elsewhere. Team and people management skills are required as the team continues to develop. As the project progresses, more and more aspects become fixed and there is less and less scope for change. In addition, the final completion times and costs become more and more accurately predicted; it may transpire that these are above and beyond the originally stipulated limits. These developments can all lead to an increase on the operational pressure on the project team, and this in turn can lead to increases in stress and conflict levels. Jane’s motivational skills may be in greatest demand at this stage. Jane will have to be most involved with the IMCS during this stage. The scope and adaptability of the IMCS is restricted in this case because some aspects of the project are the direct responsibility of Uptrack and come under the control of the appropriate Uptrack people. There may also be a difference between the project success criteria for Uptrack and for UMS. If there are any delays in the project, UMS will be liable for damages to Downline because of late hand-over of the existing offices. These damages are high and are of great significance to UMS. They are probably of much less significance to Uptrack as they only affect one small part of the Uptrack operational network. 8/16

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8.3.1.6

Project Commissioning and Use The project manager: • • • •

advises on the most effective method for commissioning the project; directs on the most effective methods of making use of the product; appoints external specialists, such as facilities managers to advise as necessary; develops suitable procedures for the collection and use of feedback.

Once the office move is complete, the final responsibilities of the project manager revolve around the commissioning, long-term use and eventual decommissioning of the system. Jane is responsible for making sure that the completed office is able to function at least at the minimum standards set by the specification and within the time scales and cost limits that were established in the project brief. If the completed system is defective in any way, Jane will be required to identify the precise nature of the defect and propose the necessary remedial actions. This may involve correspondence and negotiations with suppliers, contractors and consultants. As project manager, Jane may appoint specialist facilities managers or commissioning consultants in order to ensure that the new office is functioning as efficiently as possible. The various building services, such as heating, lighting and mechanical ventilation, will probably be the responsibility of Uptrack because the new offices are leased from Uptrack by UMS. These elements have a direct impact on the functional capacity of the office, and Jane should make sure that direct communication links are in place with Uptrack so that faults or deficiencies can be corrected by Uptrack as quickly as possible. Please note that the listing given above is not intended to be exhaustive. It demonstrates some project management responsibilities for an average project, as applied to the Oldcastle case study. Different projects could have different characteristics and therefore different requirements.

8.4

Risk Management (Module 3) Assignment 3 In the context of the Oldcastle case study, consider the likely forms of contract that would be used and evaluate the overall risk profile for the station.

8.4.1

Assignment 3. Oldcastle Station Project: Contracts and Risk The relatively high levels of work, plus use of a number of external contractors, suppliers and consultants, mean that there will be extensive use of contracts for the works. Contracts and payment systems within the Oldcastle station project will be set by standing orders. Uptrack, as a national company, will have established policies and procedures in relation to awarding contracts and paying for works.

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This section of the case study looks briefly at the various organisations and individuals that might be involved in direct contractual links with the station, and what the nature of these links might be.

8.4.1.1

Typical Oldcastle Station Contracts There are various categories of organisations and individuals that may be employed by a national organisation like Uptrack. The most common ones, employed directly by the Oldcastle Station section, would be as listed below.

Contractors Contractors contract to carry out works of numerous forms of contract. In the Oldcastle station project, contractors would typically be used for station improvement works. Each major station might have a rolling programme of station improvements that involve everything from the installation of new lighting and disabled access to redecoration of the main concourse. The station would generally use specialist contractors to do these works. In some cases, different contractors might be used for different elements; increasingly, multitrade contractors are being used where companies offer specialised abilities in a wide range of different fields. Contractors might also be used for more routine station functions, such as cleaning, security, lost property, toilets and so on. Most stations have outsourced these functions. Outsourcing is the process where a parent organisation employs external specialists as consultants or contractors rather than internal (directly employed) staff to carry out particular functions. Outsourcing offers much greater flexibility because it involves the use of external specialists only for as long and to the extent actually required. Outsourcing removes the fixed overheads that are linked with internal people, although an element of overheads will inevitably be included in the tender sums of external companies that are bidding for internal works. Most outsourced functions like toilet cleaning and left luggage will probably be awarded as service-level contracts or service-level agreements. This form is often the most appropriate where precise terms and conditions cannot be indicated within the contract but where the minimum level of performance for compliance can nevertheless be stated. Examples would be cleaning frequencies for public toilets, or turnaround time on requests from train operating companies for station announcements. Most of the contracts would be drawn up and signed by a central legal services section within Uptrack rather than by the individual stations themselves, unless they are set up to operate as individual trading units. The contractors in the Oldcastle study are key players in the success or otherwise of the project. It is essential that they turn up on time and do their works within the originally stipulated time scales. It is, however, very difficult for Jane to enforce this, as UMS is not a party to one or more of the works contracts. Jane would have to check the contractual arrangements already in place and evaluate the levels of protection offered by these contracts. Depending on the wording of the contracts, it might be prudent for Jane to try to put some additional safeguards in place. One possibility would be for 8/18

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a guaranteed undertaking or bond in order to ensure specific performance. It might even be possible to secure an insurance-backed guarantee or similar. The Cowboy works will be arranged through a standard from of contract, but this contract is between Uptrack and Cowboy. UMS is therefore not a party to this contract and cannot use it as a risk control mechanism. There may be some scope for exploring the contractual implications of UMS being a wholly owned subsidiary of Uptrack, although this is unlikely to give direct contractual implication under most European legal systems. There is very little that Jane can do about this situation as the contract has already been signed and the relationship between UMS and Uptrack is already established. Jane’s best move would probably be to bring the situation to the attention of the station manager and the appropriate person in Uptrack and seek approval to form some kind of communication link with Cowboy. The best approach would probably be to add this to an existing formal communication channel, such as an established sequence of progress meetings. Jane could attend these meetings and use them as a mechanism for early detection of any possible or likely delays in Cowboy’s programme. Suppliers Oldcastle station would certainly use suppliers. Contractors usually supply and execute works; suppliers simply supply things. Examples are office equipment and consumables. The station would probably have a standing agreement with a particular supplier to supply all office equipment to the station. This could be through an informal agreement or a more formal long-term contract. Term contracts are generally signed to cover a relatively long period. Typical terms would be three to five years. The relatively long time scale guarantees the supplier a volume of work, and this allows the supplier scope to offer economyof-scale savings to the station. Large operators such as Uptrack can usually take advantage of divisional or even national deals. Uptrack might offer longterm national franchises for work. The successful company then supplies all Uptrack’s stations for the agreed period. Some particularly important supply contracts might be handled differently. The computer equipment must be delivered on time (or maybe early) but it must not be delivered late. As mentioned earlier, it would be prudent for Jane to take precautions to ensure that there can be no slippage on the delivery of these items. This could possible be done by redrafting the supply contracts. A much easier way would simply be to place orders now and take delivery early. This has storage and insurance implications but provides a relatively cheap and effective solution to what could be a significant risk. Contracts with the Train Operating Companies Oldcastle station is actively involved with a number of train operating companies (TOCs). The TOCs provide the trains that operate on the Uptrack lines up to and within the UMS-controlled Oldcastle station. Several European countries use a franchise system where TOCs (or equivalent) compete for franchises in different areas, or even for the use of individual lines. A major station such as Project Management

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Oldcastle would certainly have at least two large TOCs plus possibly a regional TOC operating within the stations. Oldcastle would almost certainly also have its own service-level agreements with the TOCs in relation to the franchises. These contracts would be drawn up by legal experts acting on behalf of Uptrack. The contracts would be structured on a national basis with individual specific conditions inserted for individual stations. TOC service-level agreements (SLAs) often contain a great deal of information. TOC SLAs typically state levels of detail down to the times and windows of availability of individual platforms at different times of each day throughout the year. The TOCs effectively hire platform frontage from UMS or Uptrack for specific times so that their trains have right of access to pick up and offload passengers. Contracts with Tenants Stations are increasingly developing their retail potential. Stations tend to occupy central sites within cities and they generate guaranteed high numbers of people and therefore potential customers on a constant basis. These characteristics create an ideal retail environment for certain types of good. Obvious examples of outlets are fast food outlets, newsagents, pharmacies and stores for general provisions. Most large stations will now have several retailers who act as tenants. This usually involves some kind of lease contract signed between the retailer and the station owner. Like service-level agreements, these contracts expire after a given period. The landlord might include other contractual obligations, such as a requirement for the tenant to maintain the retail unit and carry out a specified level of repairs, both during the lease and at the end of the lease agreement. This liability could involve a dilapidation survey, where the required repair works are assessed and scheduled by an independent inspector. Oldcastle, as a major station, will almost certainly also have TOCs as tenants. The TOCs will occupy office and other types of space (such as information centres and ticket offices) within the station itself. The lease agreement will be similar to that signed with the retailers, although the period will almost certainly be specific for the time limit of the train operating franchise. The situation with the Downline offices contract is much more clear-cut. UMS has a direct contractual obligation to vacate the existing offices by the stipulated date. If it does not do so, it faces the penalty charges or damages that have been agreed in the contract. Jane’s only real course of action here is to make sure that these damages do not arise. There may be a possibility of challenging the contract on the grounds that the damages do not reasonably represent the losses that will be suffered by Uptrack as a consequence of its entry to the existing offices being delayed. There may be a possibility (depending on the precise terms and conditions used) of applying for a court to rescind the contract or rectify the offending terms. It is, however, unlikely that any such action would succeed, and the time scale involved would make it impractical as far as the project life cyle is concerned. Contracts with Consultants Oldcastle might employ external consultants for a whole range of reasons. Any station alteration work would require architects and engineers and, because it 8/20

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is a station, specialist health and safety advisors and consultants as well. Other consultants might be required for one-off consultations, such as air pollution or noise measurement, or for more detailed analyses such as traffic management and feasibility reports for major alterations.

8.4.1.2

Risk Grid Given the various contracts in place, it is possible to develop an outline risk grid for the Oldcastle station project (see Figure 8.1). Cowboy and Downline damages are clearly of high impact and high probability. They appear in the ‘red’ zone on the risk map.

High Downline damages

Double downtime

Cowboy Impact

Railspark YK2 Teeny Hardware world Shifters

Low High

Low Probability

Figure 8.1

Outline risk grid

On a large-scale project the Cowboy and Downline damages risks would be identified as major risks and would be controlled by an appropriate monitoring and control system under the direct control of a risk manager. Railspark and the various suppliers are theoretically more controllable than the Cowboy and Downline damages issues, although again their various contracts could be with Uptrack rather than with UMS. Railspark is part of the overall Uptrack group. Provided that the communications links are in place, there should be a relatively low probability of Railspark causing any problems. If Railspark causes problems of some kind, the impact of the problems is likely to be very high. The impact of the supplier default risks can be relatively easily reduced by placing orders well in advance or through contract formulation. In practice, Jane would develop a detailed risk map and then consider the various options that are available to her to manage and control the risk outcomes identified. Jane should highlight areas where there are high-impact highprobability risks over which she has no control. It is important that Jane brings these areas to the notice of senior management. She should try to avoid being seen as responsible for such risks where she has no direct means of influencing them.

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8.5

Case Study First Supplement ♦ Case study first supplement 21 June This is supplement 1. It contains important information that relates to changes in the project. All relevant information should be abstracted and used in subsequent case study development. Please note that ‘time now’ is now 21 June.

♦ 8.5.1

Introduction This report summarises new information that has arisen since the initial project information was issued (a week earlier) on 14 June. This change information should be carefully considered and due allowance made in developing the case study solutions.

8.5.2

8.5.2.1

Change Information Problem with the Hand-Over Date from Uptrack Uptrack has now informed UMS that there may now be a problem with the outline hand-over date of 17 August. Apparently some unforeseen alteration works are now required. These works include some structural works to be designed by an engineer and some new design works to be carried out by an architect. These works will also have to be incorporated into the current upgrading works contract that is already in progress. For technical and contractual reasons, the additional unforeseen works have to be included at the very end of the other upgrading works; the new works cannot be carried out concurrently with the existing works. However, the structural works required are above the main new offices area and there should be no problems with these works being carried out after the completion of the already agreed works. These additional structural works were not foreseen as part of the overall upgrading process and are not covered in Uptrack’s original deal with UMS. Uptrack is saying that these additional structural works are now necessary because of unforeseen problems with the main supporting structure of the station, which were not picked up in the original site surveys because they involve the load bearing walls of part of the main station buildings and these walls were hidden with dry linings and other decorations up until the current alteration works started. The original site surveys were carried out by civil and structural engineers from Third Engineering, an engineering organisation that is owned by Uptrack but operates as a separate trading unit.

Additional Costs Chargeable to UMS Uptrack is stating that as the foregoing are additional unforeseen structural works, and are not covered by the terms of the original agreement to provide UMS with the new offices free of charge. They are UMS’s responsibility. Uptrack is insisting that UMS appoint the design consultants and pay for them. Uptrack 8/22

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is also insisting that UMS pay for the additional structural-alteration works themselves, again because they were additional and unforeseen. Uptrack can suggest some good engineers and architects that they have used before. The estimated cost of the additional structural works is £100 000. UMS will be responsible for these additional costs as the works are outside the original remit in developing the new offices. The original estimate for the conversion and upgrading works was £500 000. The additional structural works therefore represent an increase of 20 per cent on the original estimate (plus fees). The engineers have indicated that they will provide consultancy services for a fee of 8 per cent of the additional works total for pre-contract works and one of 3 per cent for post-contract works. The architects have suggested fees of 10 per cent for pre-contract works and 4 per cent for post-contract works. These figures are based on the consultants providing services as follows: •

•

architect: – pre-contract: 40 person hours @ £250 per hour = £10 000 (10%) – post-contract: 20 person hours @ £200 per hour = £4000 (4%) engineer: – pre-contract: 40 person hours @ £200 per hour = £8000 (8%) – post-contract: 15 person hours @ £200 per hour = £3000 (3%)

The architects and engineers have indicated that these rates will apply for normal working hours. Overtime rates will be £350 per hour for the architects and £300 per hour for the engineers. Additional staff are available and can be requested as additional resources. Costs to cover any additional standard-rate or overtime fees will be payable as outlined above. Uptrack has indicated that all the additional design and alteration works will take no longer than two weeks. Much of the additional works cannot be designed until most of the original works are completed. All pre-contract design works therefore have to fit into the first additional week of the upgrading contract, and all additional alteration works have to be carried out during the second additional week. Delay to the Programme Uptrack is saying that the additional design and construction works will result in a two-week delay to the original hand-over for the new offices, indicating that the revised hand-over date is now 31 August. Uptrack has further indicated that one week of this delay is required for the additional design works and the other week is required for the execution of the additional structural works. Uptrack has already said that it would be happy for Cowboy Ltd to carry out the structural works. The original upgrading works were scheduled for 16 weeks’ duration. The revised duration is now 18 weeks from 30 April, giving a completion date on or around 31 August. Uptrack has also indicated that it might be possible to speed up the upgrading works generally. A preliminary discussion with Cowboy Ltd has revealed that Cowboy could speed up the rate at which they are progressing the overall upgrading works. Uptrack estimates that the increased costs necessary would Project Management

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amount to an overall increase in estimated total works costs of 10 per cent per week saved. This includes all current work plus the additional estimated two weeks for the unforeseen structural works. Possible Temporary Accommodation Uptrack has looked at the problem and has made an attempt to find sources of possible temporary alternative accommodation. The company’s property services section have come up with two main alternatives. The first alternative is to make temporary use of some existing disused offices in the old south wing of the station. The second alternative is to hire in some temporary ‘Portakabin’ type huts. In either case, the costs and times involved in moving the computer and office equipment remain as stated for the main move for each additional move into and out of any temporary accommodation. Existing Old Offices in the Old South Wing Uptrack has suggested that UMS could make temporary use of some old offices in the existing south wing of the station. These offices are cold and damp and are not really fit for occupation. However, it might be possible to make temporary use of them by installing space heaters and doing some temporary minimal decorations. One of the maintenance managers at UMS has inspected the old south-wing offices and has concluded that a significant amount of cleaning and temporary redecoration would be required. The cleaning works could be done by UMS’s own cleaning staff. The redecoration works could be done by one of UMS’s own approved contractors (Rollers Ltd). Both cleaners and decoration contractors would be immediately available. The estimated times and costs would be as set out in Table 8.1. Table 8.1

Estimates for making south-wing offices habitable

Cleaning

Time

Cost

5 days

£1000

UMS cleaners

Contractor

Preparation

1 day

£ 500

UMS cleaners

Decoration

7 days

£2500

Roller Ltd

Wiring

2 days

£2500

Cable Co

Some of these activities could be speeded up by negotiating increased costs. The normal and crash figures would be as given in Table 8.2. Table 8.2

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Estimates for normal and crash figures for south-wing refurbishments Normal time

Crash time

Normal cost

Crash cost

Cleaning

5 days

3 days

£1000

£2000

Preparation

1 day

1 day

£ 500

£ 500

Decoration

7 days

4 days

£2500

£5000

Wiring

2 days

1 day

£2500

£8000

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In all cases, health and safety policy dictates that these activities must be carried out in a sequential manner. A ten-day notice period applies in all cases. This can be waived by payment of a call-out supplement that adds 10 per cent to the work package normal cost for each notice day waived. Portakabins Uptrack has suggested that another possible alternative might be to use Portakabins. Uptrack has said that UMS could site suitable Portakabins in a part of the existing car park free of charge. The company would also allow UMS to use its existing services and mains connections free of charge. They have already looked at hire charges and have indicated that it would cost perhaps £1000 per day to hire the required number of Portakabins, plus a one-off delivery charge of £2500. The huts would be unfurnished and some of UMS’s existing office furniture would have to be used for temporary furnishing. The Portakabin hire company (called Shacks Ltd) has indicated that they would require a minimum 28 days’ notice of a delivery date. Shacks has said that it will deliver the huts and offload them, but not actually erect them. The erection process involves jacking the huts up on pre-assembled legs, levelling, and connection to all mains services. Uptrack has promised to supply three gangs of labourers to erect the huts as required. The gangs would be charged to UMS at a rate of £150 per gang per hour. Uptrack estimates that three gangs could erect all the huts in one day. Security services would be required for the Portakabins option. Uptrack employs a firm called Nabbem Ltd. The usual rate for three visits per night with inspections is £300 per day for this type of installation.

8.5.2.2

Problem with Railspark Railspark has indicated that it too now has a problem. Its entire regional staff only comprises six technicians and a number of assistants. Apparently there has been some kind of dispute within the organisation and three of the technicians have left suddenly to join a local private IT company. This has seriously affected Railspark’s ability to provide the agreed resource levels on a number of their forthcoming contracts. Railspark has informed Jane that its original time estimate no longer applies. It may still be able to meet the agreed removal dates, but all the time scales will now be doubled as they can only provide one technician and two assistants as a maximum until they are able to recruit more staff. Railspark has suggested that it will begin advertising the vacant posts at once, and the company is confident that it will be able to recruit more technicians and assistants within the next four to six weeks. Furthermore, Railspark is confident that it will be able to provide the agreed levels of staffing by the appropriate deadline date, which is still several weeks away. For internal contractual reasons, Railspark must carry out the IT systems removals. However, it may be possible to get around this by seeking UMS steering committee approval. The committee only meets once each month and the next meeting is on 20 July. The committee would consider awarding IT systems removals to an outside contractor or agency under the circumstances.

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UMS has identified a suitable agency, which has already given outline agreement to provide similar levels of resourcing to Railspark if required. ♦ Time Out Think about it: Is Uptrack acting reasonably in expecting UMS to pay for the additional works? Is the two-week delay purely a UMS liability? What is the most obvious change in the risk profile resulting from this first amendment? What new risks are associated with the new options of Portakabins or temporary offices?

♦ 8.5.3

Supplement Appraisal This supplement has introduced some important new information. There has now been a delay by Cowboy Ltd and this has eroded the spare time that had been built into the system between Cowboy completing the new offices and UMS having to leave the existing ones. The fact that delays like this can occur with no warning or justification from Cowboy suggests that further such delays could occur in future. In addition, the Cowboy works have given rise to a need for additional structural design and construction works. The newly discovered works are outside the scope of the original contract and therefore have to be treated as additional (and therefore unpriced) items. Jane should check with Uptrack and find out whether there are any provisions within the original contract for unforeseen works, such as contingencies and provisional sums. If there are no such provisions, UMS will have no alternative other than to pay for the additional works using non-allocated funds. Jane also needs to consider what to do next in order to control risk. She has now identified that Cowboy Ltd delays constitute a significant risk. Further such delays have to be considered as both of high impact and of high probability, and there is a real need for effective management and control. However, Jane has virtually no direct control over Cowboy. Jane’s management control is therefore largely restricted to making provision so that, if further Cowboy delays occur, they will have the least possible effect on the project. In this context, two possible alternative courses of action have been identified. Both involve a move into some form of temporary accommodation while the Cowboy works are finished. This negates the risk of further Cowboy delays but the trade off is that a double move is needed and therefore double downtime penalties are incurred. Jane needs to make an initial evaluation of the risk of further Cowboy delays against the cost of the double downtime. This is obviously a subjective evaluation. The evaluation will also presumably be timerelated. The double downtime costs are absolute and fixed, provided that the move can be accommodated within the time scales that have been allowed in the project plan. However, the late access damages are not absolute; they increase as a function of time. It may turn out that it is initially cheaper to remain in the existing offices and pay the damages for late hand-over. However, as damages

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increase with time, there will presumably be a cross-over point where the double downtime option becomes cheaper. This trade-off will be considered in more detail below. It is also apparent now that Railspark’s work times have increased. This has the overall effect of increasing the move time by two days. The result is that the original hand-over date of 3 September cannot now be achieved unless Shifters are prepared to work overtime over the weekend of 1–2 September (assuming this is a weekend). This gives Jane an instant trade-off decision between offering Railspark overtime working and embarking on paying damages to Downline.

8.6

Organisational Structures (Module 4) Assignment 4 In the context of the Oldcastle case study, consider the likely organisational structure for the moving offices project.

8.6.1

Assignment 4. Oldcastle Station Project: OBS The OBS for the Oldcastle development is rather complex. However, as with most project layouts, it is well worth the time required to develop an OBS as it shows the strengths and deficiencies within the structure. The basic contractual interconnection is shown in Figure 8.2.

Shifters

Railspark Cowboy builders

Uptrack YK2

Downline

Uptrack Major Stations (UMS)

Teeny Hardware

Standard form Implied

Local authority

Supply Lease agreement

Figure 8.2

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The most immediate aspect of the OBS is the apparent separation of the contractual arrangements into two halves. Uptrack and UMS effectively form two separate contract centres. The standard forms of contract with the main works contractors and specialist contractors are between those parties and the Uptrack centre. UMS is restricted to the supply contracts for the delivery of the new hardware and the implied contract with the local authority for the inspection. There will be some kind of control link between Uptrack and UMS, but this will almost certainly not be a contractual link. This arrangement suggests that UMS is dependent on the arrangements made by Uptrack but have no contractual protection. In addition UMS is contractually liable to Downline by the terms and conditions of the lease agreement. This situation is clearly unfortunate. Having already identified major risk areas where she has insufficient or no control, Jane would probably look at ways of improving this situation for the next project in the programme. She could look at ways of working more closely with the Uptrack centre to allow greater co-operation and recognition of dependencies. It might be possible to set up a reimbursement system where delays and corresponding charges caused by the centre are reimbursed directly to the various major stations. The case study already contains an example of this, where some of the downtime damages costs are reimbursed from the centre as the disruption is being caused by improvement programmes that are ordered and controlled by the centre. The new contracts required for the external consultants in charge of the additional works will be professional services contracts. It is very difficult to say whether or not UMS would have grounds for contesting the cost of these additional works being charged directly to them. As an operating unit, UMS will probably have a separate cost centre for maintenance and minor upgrading works. If additional works become required as part of a major upgrading project, it might be possible to cover these costs using an existing budget that has been set aside for works of a similar nature. In this case, the formal communication links will follow a similar – but not identical – layout to the contractual links. UMS has no contractual link with Cowboy and therefore no formal communication link (see Figure 8.3). Given the relatively weak position of UMS in the contract linkages, one of Jane’s best courses of action would be to set up some informal communication channels. These are not needed in the case of the supply contracts, provided that the latter are adequately prepared and that delivery is arranged for a suitably early date. They are also probably not appropriate for the Downline connection because there is a rigid lease contract here with very significant damages clauses, and informal communication would probably make no difference. Informal communication would make a considerable difference, however, to the various standard forms of contract relationships. Jane could talk to the relevant people in Railspark, YK2 and Shifters to make sure that there are no problems and that their input can be guaranteed for the correct dates. An informal communications channel is Jane’s only real hope in trying to offset any further delays from Cowboy. Even if any further delays cannot be offset, Jane might at least be able to gain an early warning of forthcoming delays. If further delays are likely and 8/28

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Jane is made aware of them, at least she can weigh them up in the trade-off considerations. The awareness that further delays are on the way could have a decisive impact on borderline considerations of whether or not to commit to one of the double-move options.

Shifters

Railspark Cowboy builders

Uptrack YK2

Downline

Uptrack Major Stations (UMS)

Teeny Hardware

Local authority Communication Organisational boundary

Figure 8.3

Communication links

The local authority could be one of the most difficult sections of the OBS. Their works will be covered by a statutory contract developed by central and local government and usually written to be very much in favour of the local authority. UMS would normally be required to give adequate notification of the date required for the inspection. The local authority may or may not be required to confirm this date, depending on the statutory contract being considered. The authority would normally give some kind of undertaking to carry out the inspection or works on the date or dates stipulated, but there are often rider clauses that allow them to evade liability for any loss or expense caused by their inability to carry out the agreed works. Informal communications would probably be of no benefit here as the local authority has more or less complete autonomy.

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8.7

Case Study Second Supplement ♦ Case study second supplement 28 June This is supplement 2. It contains more important information that relates to changes in the project. All relevant information should be abstracted and used in subsequent case study development. Please note that ‘time now’ is now 28 June.

♦ 8.7.1

Introduction This report summarises new information that has arisen since the initial project information was issued on 14 June and the first supplement was issued on 21 June. This change information should be carefully considered and due allowance made in developing the case study solutions.

8.7.2

8.7.2.1

Change Information Problem with the Hand-Over Date from Uptrack Uptrack has now informed UMS that there may be a further problem with the revised outline hand-over date of 31 August. Apparently, the additional and unforeseen structural alteration works that were estimated as taking an additional two weeks in supplement 1 will in fact take an additional four weeks. Uptrack has confirmed that these additional works, for technical reasons, have to be included at the very end of the other upgrading works. They cannot be carried out concurrently. As stated in the first supplement, these works were not foreseen as part of the overall upgrading process and are not covered in Uptrack’s original deal with UMS.

Additional Costs Chargeable to UMS Uptrack is still saying that as these are additional unforeseen works, they are not covered by the terms of the original agreement to provide UMS with the new offices free of charge. Uptrack is still insisting that UMS appoint the required design consultants and pay for them, and that UMS also pay for the cost of the additional works themselves. The latest estimated cost of the additional works is now £150 000. UMS will be responsible for these additional costs as the works are outside the original remit in developing the new offices. The architect and engineers have now provided revised fee estimates: •

•

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architect: – pre-contract: 80 person hours @ £300 per hour = £24 500 – post-contract: 40 person hours @ £250 per hour = £10 000 engineer: – pre-contract: 80 person hours @ £200 per hour = £16 000 – post-contract: 30 person hours @ £200 per hour = £6 000 Edinburgh Business School

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The architects and engineers have indicated that these rates will apply for normal working hours. Overtime rates will now be £450 per hour for the architects and £350 per hour for the engineers. Additional staff are available and can be requested as additional resources; however, additional standard-rate or overtime fees will be payable as outlined above. Uptrack has now indicated that all of the additional design and alteration works will take no longer than four weeks. As previously indicated, all precontract design works therefore have to fit into the first two additional weeks of the upgrading contract, and all post-contract structural works and inspection works have to be carried out during the third and fourth additional weeks. Delay to the Programme Uptrack is now saying that the additional design and construction works will result in a four-week delay to the original hand-over for the new offices. Uptrack has indicated that the revised hand-over date is now 14 September. The original upgrading works were scheduled for sixteen weeks. The revised upgrading works duration is now twenty weeks (including the additional structural alteration works). Uptrack has again indicated that it might be possible to speed up the upgrading works generally. A preliminary discussion with Cowboy Ltd has revealed that Cowboy could speed up the rate at which it is progressing the overall upgrading works. Uptrack now estimates that the increased costs necessary would amount to an overall increase in estimated total works costs of 12 per cent per week saved. Cowboy also estimates that it could save up to one week on the structural alteration works at a cost increase of 15 per cent of the works total (i.e. 15 per cent of £150 000). Cowboy has confirmed that the additional works could not be speeded up by any more than this. Possible Temporary Accommodation in Existing Old Offices in the Old South Wing Uptrack has again suggested that UMS could make temporary use of some old offices in the existing south wing of the station. Occupation of the old south wing offices is still a possibility. The estimated work requirements are as set out in Table 8.3 (unchanged from Table 8.1 but repeated for convenience). Table 8.3

Estimates for making south-wing offices habitable

Cleaning

Time

Cost

5 days

£1000

UMS cleaners

Contractor

Preparation

1 day

£ 500

UMS cleaners

Decoration

7 days

£2500

Roller Ltd

Wiring

2 days

£2500

Cable Co

Some of these activities could be speeded up by negotiating increased costs. The normal and revised crash figures are as set out in Table 8.4. In all cases, health and safety policy dictates that these activities must be carried out in a sequential manner. A ten-day notice period applies in all cases. This can be waived by payment of a call-out supplement that adds 10 per cent to the work package normal cost for each notice day waived. Project Management

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Table 8.4

Estimates (revised) for normal and crash figures for south-wing refurbishments Normal time

Crash time

Normal cost

Crash cost

Cleaning

5 days

4 days

£1000

£8000

Preparation

1 day

1 day

£ 500

£ 500

Decoration

7 days

6 days

£2500

£9000

Wiring

2 days

1 day

£2500

£8000

Portakabins The situation with regard to the Portakabins option remains unchanged.

8.7.2.2

Problem with Railspark The situation with regard to Railspark remains unchanged.

8.7.2.3

Revised Operational Information

New Service Level Agreements The UMS station manager at Oldcastle has been watching developments with some alarm. He has again made it clear that the UMS computing system must be shut down for the shortest possible time. This is now even more important as new service level agreements have recently come into force with the TOCs. In the new agreements, the obligations of UMS are more or less unchanged but the damages that are payable to the TOCs for system downtimes have now increased. The new service level damages are: Solari system not operational (system section a) Accounting and cost control system not operational (system section b) Booking reconciliation system not operational (system section c)

£500 per hour £300 per hour £300 per hour

As previously, these damages start immediately the relevant part of the system is decommissioned, and they continue without limit until the relevant section of the system is fully operational again. These are contractual liabilities and are written into the new service-level agreements. As previously, UMS can only provide these services while they are operational and on line. It is inevitable that some damages will be payable during the move. However, senior management have again made it clear that damages must be kept to a minimum. Revised Wind-Down and Fire-Up Estimates Further discussions with Railspark have suggested that the wind-down and fire up periods can definitely be reduced. Some Railspark IT specialists have now inspected the system and have confirmed that the wind-down and fire-up procedures can now be compressed into two days each. As a result, it is now estimated that, at the start of day one, operational performance will be 100 per cent; at the end of day 1, operational performance 8/32

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will have dropped to 50 per cent; at the end of day 2, operational performance will have dropped to zero. Railspark has now confirmed that the operational systems (a) (b) and (c) will all terminate immediately operational performance drops below 100 per cent. Fire-up is now also estimated to take two days. At the start of day one, operational performance will be zero; at the end of day 1, operational performance will be 50 per cent; at the end of day 2, operational performance will be 100 per cent. This revised figure will be confirmed by Railspark in due course. As previously, a total of seven days off line, with up to five days reimbursed (see original project information) has been allowed for, and provision has been made in the operational budget. Reimbursement can only be claimed for winddown and fire-up periods. Under the revised service-level agreements, Solari damages are payable for 18 hours each day while the system is down. The other two sets of damages are chargeable on a 24-hour basis, seven days per week. ♦ Time Out Think about it: Is there anything that UMS can do about these further delays? Should UMS stay put or should they move out into temporary accommodation? What is the relationship between this decision and further delays?

♦ 8.7.3

Supplement Appraisal This additional two-week delay starts to have significant implications for the project. Jane is now faced with the prospect of having to pay considerable late-hand-over damages while having no method of recovering these costs from elsewhere. However, the downtime damages have now also increased in cost, and so a completely new evaluation of the trade-off is required.

8.8

Time Planning and Control (Module 5) Assignment 5 In the context of the Oldcastle case study, develop a schedule for each of the three options, showing start and finish dates and all intermediate major milestone dates.

8.8.1

Assignment 5. Oldcastle Station Project: Schedule Time planning and control will be crucial in this case study. As an Uptrack major station, the projects that are executed here will carry a relatively high-risk element in terms of late completion. Uptrack will be constrained by service-level agreements that require Uptrack to reimburse the TOCs for any loss of revenue

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caused by failure of the station to provide contractually agreed levels of service. Such payments could be very large and must be avoided if possible. The move itself has to be very carefully planned in advance in order to ensure that all the major milestones are achieved. The basic Gantt chart for option 1 (stay put) is shown below at Figure 8.4.. This relates the basic sequence of moving activities to the work that is being carried out by Cowboy. The removal works are obviously dependent on Cowboy works because the removal process cannot begin until Cowboy’s works have reached a certain level of completion. The ‘core’ of the office move is centred on the processes involved in moving the furniture and PCs and in decommissioning and recommissioning the software. This central core of activities can be summarised as listed in Table 8.5. Table 8.5

Central core of activities

Activity

Duration

Wind down

2 days

YK2 decommission

1 day

Railspark move PCs out

2 days (from 1 day originally)

Shifters

2 day

Railspark move PCs back

2 days (from 1 day originally)

YK2 recommission

2 days

Fire up

3 days (assume original figure)

Total

14 days

This central core of activities establishes the key dependencies for all other activities in the sequence. The primary link for the core activities is to the Cowboy works. Shifters cannot move the furniture until the new offices are ready – that is, when the Cowboy works are successfully completed.

8.8.1.1

Situation on 14 June The basic layout of the core and Cowboy interdependency is shown in Figure 8.4. It can be seen that the core elements are linked to the end of Cowboy’s works through the start of Shifter’s works. The core activities last fourteen days in total and straddle two weekends. This method of fixing the core interdependencies and then linking them to the main predecessor allows the core activities to move backwards and forwards as a block or collection of packages as the main precedent activity expands and contracts. The ability to do this is important where there is a fixed sequence of works that are dependent on one or more preceding activities. The overall completion date for the project, using the pre-established Cowboy duration, is 31 August (Cowboy completion is 17 August). In this case, the project manager has chosen to identify dates for placing orders or giving notice as ‘events’ (zero-duration activities). These have been linked to the activities to which they relate by a vertical dependency line and the appropriate lag times. Hence, a 28-day delivery period is indicated by the activity itself preceded by an event that is lagged at twenty-eight days before the following activity.

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ID

i

1 2 3 4

Task name Basic solution Project start date Cowboy works

5 6 7 8

06 Aug ‘01 13 Aug ‘01 20 Aug ‘01 03 1 27 Aug ‘01 30 Jul ‘01 Duration W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M 0 days 0 days 80 days

Wind down YK2 Railspark notice Railspark (1) Tiny notice Tiny delivery

9 10 11 12 13 14 15 16 17

Hardware notice Hardware delivery Shifters Railspark (2) YK2 Fire up

2 days 1 day 0 days 2 days 0 days 0 days 0 days 0 days

03/08

21/08

21/08

2 days 2 days 2 days 3 days

17/08

Local authority notice 0 days Local authority inspection 1 day Project completion 0 days

18 19 20

Figure 8.4

31/08

Position on 14 June

The basic sequence described above is only part of the overall picture. Looking at the wider picture gives the dependencies shown in Figure 8.5. The basic sequence is still apparent. Now it is possible to see some of the notification flags that have been inserted. These represent dates where orders have to be placed or where final notification of dates has to be given to subcontractors or suppliers. These are set by establishing in the work logic that the notification flags are predecessors of the main work activities to which they relate. The period of notice required is entered as a lag time in this precedence relationship – for example a 28-day lag in the case of Railspark. In most cases, the activities themselves are programmed to start as early as possible. However, there is no point in placing orders before necessary, and so the flags are scheduled to finish as late as possible.

ID

i

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Figure 8.5

Project Management

Task name Basic solution Project start date Cowboy works Wind down YK2 Railspark notice Railspark (1) Tiny notice Tiny delivery Hardware notice Hardware delivery Shifters Railspark (2) YK2 Fire up

June

Sept.

August

July

Duration 20 23 26 29 01 04 07 10 13 16 19 22 25 28 01 04 07 10 13 16 19 22 25 28 31 03 06 09 12 15 18 21 24 27 30 02 05

0 days 0 days 80 days 2 days 1 day 0 days 2 days 0 days 0 days 0 days 0 days 2 days 2 days 2 days 3 days

Local authority notice 0 days Local authority inspection 1 day Project completion 0 days

03/08 23/07 21/08 23/07 21/08

17/08

31/08

Basic core interdependency (expanded)

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ID

i

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Figure 8.6

Task name Basic solution Project start date Cowboy works Wind down YK2 Railspark notice Railspark (1) Tiny notice Tiny delivery Hardware notice Hardware delivery Shifters Railspark (2) YK2 Fire up

Dec. July May November April August June September October Duration 02 09 16 23 30 07 14 21 28 04 11 18 25 02 09 16 23 30 06 13 20 27 03 10 17 24 01 08 15 22 29 05 12 19 26 03 10 30/04 0 days

0 days 80 days

30/04

2 days 1 day 0 days 2 days 0 days 0 days 0 days 0 days

03/08 23/07

23/07

21/08 21/08

2 days 2 days 2 days 3 days

Local authority notice 0 days Local authority inspection 1 day Project completion 0 days

17/08

31/08

Entire project schedule

The whole programme is shown in Figure 8.6, condensed slightly in order to make it fit within the space available. The basic logic in this case dictates that Shifters cannot carry out its removals until the new offices are ready. The start of Shifters works is therefore linked to the end of Cowboy’s works. Shifter’s work cannot start before the end of Cowboy’s work. In addition, it is not desirable to start after the end of Cowboy’s work as there is no time to spare on this project. It is clear from this schedule that, under the initial conditions as known for 14 June, Shifters can have the existing offices cleared by 21 August. This leaves two clear weeks before the deadline date of 3 September set by the leasing agreement with Downline. The last dates for placing orders and confirming other details are as shown. The overall completion date for the project (not the date when the offices are handed over) is 31 August.

8.8.1.2

Position on 21 June By 21 June, the position has worsened considerably and the whole schedule starts to look more worrying. Cowboys works have now extended by two weeks. Because the core move activities are dependent on the completion of the new offices, this delay has had a direct corresponding effect on the core move activities. Shifters cannot now complete until 3 September, which is the deadline date from Downline. All the slack time that was available within the programme has been eroded, and UMS is up to the time limit that is acceptable without being liable for damages. This position now gives rise to consideration of the use of the alternatives. As soon as double moves are considered, the time scale involved begins to increase significantly. As the time scale increases, so does downtime, and downtime is a very expensive element. The project manager might decide to sit tight and leave the section where it is, and take the risk of further delays occurring. If any more delays do in fact occur, the result will be an extension in the overall duration of the project and lease damages becoming due. In addition, UMS has no contract with Cowboy, and the former therefore cannot recover the direct

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loss and expense incurred as a result of any delay on the part of Cowboy. ID

i

1 2 3 4

Task name Basic solution Project start date Cowboy works

5 6 7 8

Wind down YK2 Railspark notice Railspark (1) Tiny notice Tiny delivery

9 10 11 12 13 14 15 16 17

Hardware notice Hardware delivery Shifters Railspark (2) YK2 Fire up

Duration

13 Aug ‘01 20 Aug ‘01 17 Sep 10 Sep ‘01 27 Aug ‘01 03 Sep ‘01 F S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W

0 days 0 days 90 days 2 days 1 day 0 days 2 days 0 days 0 days 0 days 0 days

17/08

04/09 04/09

2 days 2 days 2 days 3 days

31/08

Local authority notice 0 days Local authority inspection 1 day Project completion 0 days

18 19 20

Figure 8.7

14/09

Position on 21 June

From Figure 8.7, it is clear that the new project completion date is 14 September (Cowboy hand-over is 31 August). The core move sequence is unchanged and still forms part of the larger overall picture. Most of the key dates, including the last dates for placing orders have been realigned as shown in Figure 8.8. ID 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

i

Task name Basic solution Project start date Cowboy works Wind down YK2 Railspark notice Railspark (1) Tiny notice Tiny delivery Hardware notice Hardware delivery Shifters Railspark (2) YK2 Fire up

20 Aug ‘01 13 Aug ‘01 27 Aug ‘01 03 Sep ’01 06 Aug ‘01 30 Jul ‘01 S S M T W T F S S M T W T F S SM T W T F S S M T W T F S SM T W T F S S M TW T

0 days 0 days 90 days 2 days 1 day 0 days 2 days 0 days 0 days 0 days 0 days

17/08

06/08 04/09 06/08 04/09

2 days 2 days 2 days 3 days

Local authority notice 0 days Local authority inspection 1 day Project completion 0 days

Figure 8.8

8.8.1.3

Duration

31/08

Notification flags

Position on 28 June The second supplement, dated 28 June, introduces more delay (see Figure 8.9. A further two weeks are now required in order to complete the additional structural and alterations works that have been identified. Shifters now cannot start work until 18 September, the completion date for the project is back to 28 September (Cowboy hand-over is on 14 September). Contingency plans should now be considered, as set out next.

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ID

i

1 2 3 4

Task name Basic solution

10 Sept ‘01 27 Aug ‘01 17 Sep ‘01 24 Sep ‘01 03 Sep ‘01 01 Oct '01 Duration S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F 0 days

Project start date Cowboy works

5 6 7 8

0 days 100 days

Wind down YK2 Railspark notice Railspark (1) Tiny notice Tiny delivery

9 10 11 12 13 14 15 16 17 18 19 20

2 days 1 day 0 days 2 days 0 days 0 days 0 days 0 days

Hardware notice Hardware delivery Shifters Railspark (2) YK2 Fire up

2 days 2 days 2 days 3 days

Local authority notice Local authority inspection Project completion

0 days 1 day 0 days

Figure 8.9

31/08

18/09

18/09

14/09

28/09

Position on 28 June

Stay Put or Move Twice The high levels of damages that are now payable justify consideration of a double-move alternative. The cost comparison between single- and double-move options are disregarded for the present. The project manager has a choice of making use of temporary accommodation – either the old offices once they have been suitably refurbished, or Portakabins.

ID 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

i

Task name Project start Cowboy works Wind down YK2 notice YK2 work (1) Railspark notice Railspark work (1) Shifters notice Shifters work Railspark work (2) YK2 work (2) Fire up

0 days 105 days 0 days 2 days 0 days 1 day 0 days 1 day 0 days 2 days

2 days 0 days

YK2 work (1) Railspark notice Railspark work (1) Shifters notice

1 day 0 days

Shifters work Railspark work (2) YK2 work (2)

1 day 0 days 2 days 1 day 2 days

Fire up

3 days

Double move complete 0 days Portakabins Portacabins notice

20/07 16/08

02/08

1 day 2 days 3 days

Wind down YK2 notice

Figure 8.10

8/38

August September October July June November December January Febr Duration 28 04 11 18 25 02 09 16 23 30 06 13 20 27 03 10 17 24 01 08 15 22 29 05 12 19 26 03 10 17 24 31 07 14 21 28 04

13/08

07/09

24/08

03/10

1 day 0 days

The double-move option (position at 28 June)

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The obvious advantage of the double-move options is that the work by Shifters is no longer dependent on the completion of the Cowboy works. All of the key move activities can therefore start earlier if required. The double move obviously takes longer overall, and therefore involves greater downtime, but most of this additional time occurs after Shifter’s works and is therefore not liable for damages because of delayed entry for Downline. The basic sequence of works involved in the double-move option is shown in Figure 8.10. The primary link between Cowboy and the core move sequence has now been radically changed. In the single-move options, the link runs from the end of Cowboy’s works to the start of Shifters works. This was because Shifters could not move anything until the new offices were ready for occupation by UMS. In the double-move option, the link is now between the end of Cowboy’s works and the second Shifters move. The second move is not physically linked to the first move; there can be an indeterminate period of time between two of them. The links are shown in more detail in Figures 8.11 and 8.12.

ID 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

i

Task name Basic solution Project start date Cowboy works Wind down YK2 Railspark notice Railspark (1) Tiny notice Tiny delivery

10 Sept ‘01 17 Sep ‘01 08 03 Sep ‘01 24 Sep ‘01 ‘01 01 Oct '01 Duration W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M 0 days 0 days 100 days 2 days 1 day 0 days 2 days 0 days 0 days 0 days 0 days

Hardware notice Hardware delivery Shifters Railspark (2) YK2 Fire up

2 days 2 days 2 days 3 days

Local authority notice Local authority inspection Project completion

0 days 1 day 0 days

Figure 8.11

31/08

18/09

18/09

14/09

28/09

Single-move option (position at 28 June)

This difference between the single-move and double-move options is crucial because it gives the project manager time flexibility. It is well worth acquiring it if this is practical. The earliest that a double move option can be completed is 3 October. This assumes that Cowboy completes all its works as agreed by 14 September. However, all double-move option activities (with the exception of those occurring after Shifter’s second move) can be brought forward if required. Figure 8.13 shows the basic sequence with the Portakabin activity added. This activity itself is obviously a predecessor for Shifter’s works in the first (not second) move. Its only other dependency is the notification period that is required for the hire company.

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ID

i

1 2 3 4

Task name Project start Cowboy works

2 days 0 days 1 day 0 days 1 day 0 days 2 days

Wind down YK2 notice

5 6 7 8

YK2 work (1) Railspark notice Railspark work (1) Shifters notice Shifters work Railspark work (2) YK2 work (2) Fire up

9 10 11 12 13 14 15 16 17

Wind down YK2 notice YK2 work (1) Railspark notice Railspark work (1) Shifters notice

18 19 20 21 22 23 24 25 26 27

1 day 2 days 3 days 2 days 0 days 1 day 0 days

Shifters work Railspark work (2) YK2 work (2)

1 day 0 days 2 days 1 day 2 days

Fire up

3 days

07/09

Double move complete 0 days 03/10 Portakabins

28 29 30

Portakabins notice

Figure 8.12

ID 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

i

1 day 0 days

Double-move option (position at 28 June) expanded

April

Task name Wind down YK2 notice YK2 work (1) Railspark notice Railspark work (1) Shifters notice Shifters work Railspark work (2) YK2 work (2) Fire up

May

June

August

July

September

2 days 0 days 1 day 0 days 1 day 0 days 2 days

YK2 work (1) Railspark notice Railspark work (1) Shifters notice

1 day 0 days

Shifters work Railspark work (2) YK2 work (2)

1 day 0 days 2 days 1 day 2 days

Fire up

3 days

20/07 16/08

02/08

13/08

07/09

24/08

Double move complete 0 days

Portakabins notice

Figure 8.13

Erect

November

1 day 2 days 3 days 2 days 0 days

Portakabins

October

Duration 12 19 26 02 09 16 23 30 07 14 21 28 04 11 18 25 02 09 16 23 30 06 13 20 27 03 10 17 24 01 08 15 22 29 05 12 19

Wind down YK2 notice

31

8/40

10 Sept ‘01 27 Aug ‘01 17 Sep ‘01 24 Sep ‘01 03 Sep ‘01 01 Oct '01 Duration S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F 0 days 105 days 0 days

03/10

1 day 0 days 1 day

Full double move with Portakabin option (position at 28 June)

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♦ Time Out Think about it: What are the obvious trade-offs between the single-move and double-move options? How many days of downtime are chargeable under each option? Why does the double move have less than double the chargeable downtime?

♦

8.9

Cost Planning and Control (Module 6) Assignment 6 In the context of the Oldcastle case study, develop a cost plan for each of the three options. Show measured and non-measured works and make reasonable allowance for provisional items where appropriate. Also, develop a claims total that can be used in the event of any Cowboy works becoming claimable and examine the justification for a claim.

8.9.1

Assignment 6. Oldcastle Station Project: Cost Planning and Control Jane has some obvious trade-off considerations to make on this project. The basic choice is between deciding to stay put and risk further delay or to act now and commit to a double move.

8.9.1.1

Stay Put or Move into Temporary Accommodation? The basic cost information that needs to be considered is set out below. Using the revised costs and times given, the Solari, accounting and booking downtime charges amount to £23 400 per day. This allows for the Solari system at £500 (second supplement) per hour and 18 hours per day, and accounts and booking at £300 each per hour on a 24-hour basis. It should be noted that these damages are considerably higher than those given in the original information. It is very important to ensure that the information used for the calculation is up to date. The total downtime involved in one move is thirteen days. Originally, the total time required for one move was twelve days. However, Railspark works have increased to two days each and the fire-up time has decreased to two days. UMS can claim reimbursement for four of the days that the system is down (not five as was originally the case, as reimbursement relates to downtime only). A single move therefore equates to thirteen days at £23 400 per day. However, with reimbursement four of those days, the cost is nine days at £23 400, giving £210 600. Two moves equates to twenty-two days at £23 400, giving £514 800. The reimbursement of the wind-down and fire-up days only applies once; they cannot be charged in relation to a second move. There is a considerable difference between these two sums. One-off subsidies or claims like this can seriously impact on the cost comparisons between two alternatives.

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Over and above the downtime consideration, a double move implies double use of YK2, Railspark and Shifters. Railspark’s fees are £9600, Shifters fees are £6400 and YK2’s fees are £14 040. In terms of fees only, the single move therefore costs £30 040 while the double move costs £60 080. The comparison is as shown in Table 8.6. Table 8.6

Total downtime/contractor cost comparison

Costs

1 move

2 moves

Downtime costs

210 600

514 800

Contractor costs

30 040

60 080

240 640

574 880

Total

In addition, in the case for both options for two moves there are some modest preparation costs. For the temporary offices option, the redecoration and preparation costs are £6500. This covers cleaning, preparation, decoration and wiring. In the case of the Portakabins, there are one-off delivery and erection charges totalling £6100. The stay-put figure represents downtime and fees only. The final fixed-cost assessment is therefore, as show in Table 8.7. Table 8.7

Final fixed-cost assessment

Option

Cost (£)

Stay-put

240 640

Temporary offices

581 380

(574 880

Portakabins

580 980

(574 880

+ 6 500) + 6 100)

The project manager would then consider the variable (time-based) additional costs that apply to each option. In the case of the stay-put option, these are zero until 3 September after which penalties are payable at a rate of £5000 per day. After 10 September, costs rise to £10 000 per day. It is relatively straightforward to add these time-based costs to the fixed costs and show a cumulative total for the stay-put option. In the case of the temporary offices option, there are no time-based costs. The fixed cost of the temporary offices cost is much higher than that for the stay-put option. However, this difference is eroded as a function of time by £5000 per day for the first week and by £10 000 per week thereafter. The Portakabins offer has time-based costs of £1300 per day. Jane has to be able to make an assessment to see how much cheaper the stay-put option is, and for how long it remains the cheapest option. The initial fixed cost of the stay-put option is £240 640. This is easily the cheapest option of the three and remains easily the cheapest for several weeks. By the end of September, the comparison has changed (from that shown in Table 8.7) to the figures set out in Table 8.8. 8/42

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Table 8.8

Final cost assessment (end-September)

Option

Cost (£) at 30 September

Stay put

485 640

Temporary offices

581 380

Portakabins

617 380

Table 8.9

Final cost assessment (end-October)

Option

Cost (£) at 30 October

Stay put

585 640

Temporary offices

581 380

Portakabins

630 380

The cross-over between the stay-put option and the temporary offices option occurs on 10 October. The figures for this date are as shown in Table 8.9. It should be noted that 10 October is day 39 of the Downline damages liability. The stay-put option is finally relegated to third place on 16 October (see Table 8.10. This is day 45 of damage liability to Downline. Table 8.10

Final cost statement (16 October)

Option

Cost (£) at 16 October

Stay put

645 640

Temporary offices

581 380

Portakabins

638 180

Jane can therefore safely assume that the stay-put option is the most costeffective: staying in the existing offices and paying damages is the most costeffective solution under both the current situation and in the case of further delays up to a maximum of 39 days. Jane would have to evaluate the probability of further delays occurring and the extent of any such delays are likely to take before deciding whether to opt for the double move. The situation is shown diagrammatically in Figure 8.14. It should be noted that this relatively long turn-around point of 39 days was brought about largely by the increase in service-level-agreement downtime charges in Supplement 2. These charges were seen to increase significantly and this caused the balance of costs to shift considerably. A full analysis is shown in Table 8.11. Using the original figures, the downtime cost per day was £10 200 rather than £23 400. In addition, a single move involved seven days costs after reimbursement (rather than nine) and a double move involved nineteen days costs after reimbursement (rather than twenty-two). This analysis is shown in Table 8.12. Using the original downtime costs and durations, the temporary offices option becomes the most cost-effective option much earlier. It is very important to ensure that change information is relayed to the project manager and to the other people involved in making decisions within the organProject Management

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Cost (£100 000) Day 45

6.0 Portakabins 4.0

Temporary offices Day 39

2.0 Stay put

4.0

Figure 8.14

5.0

6.0

Weeks delay

Relative costs of the three options

isation. The outcome of the single move/double move trade-off depends very much on whether or not the calculation uses original or updated information. The attractiveness and risk control of staying put is very much increased using the later (second supplement) figures.

8.9.1.2

Is It Worth Crashing Anything? There are several possible areas for crashing within the case study. The redecoration and refurbishment works for the old offices option are given as crashable, but the redecoration works are not on the critical path. Like the delivery and erection of the Portakabins, the redecoration works can be carried out at any time up to the point where occupation is required. The redecoration works can start at any time, provided that adequate notice periods are available. The design and construction works for the additional works can be crashed and, as activities, they are both on the critical path. However, the cost of crashing these activities is relatively very high and as such has to be disregarded.

8.9.1.3

EVA Control System In terms of cost control, Jane might want to use an EVA-based monitoring and recording system. This would use basic project information on the prices and rates that have already been agreed, in comparison with actual costs that have been incurred in reaching a particular level of development. An EVA system would not be entirely appropriate in this particular application as it is relatively short-term in nature and most of the costs are involved with professional consultants and external suppliers. Organisations of this type usually involve one-off payments rather than a series of interim payments. The external consultants might possibly be paid their professional fees in tranches or instalments but this is unlikely in this case as the overall time scale for their involvement is so short. In practice there would be no real opportunity for any detailed variance

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Table 8.11

Cost comparisons after 3 September (Supplement 2 downtime costs) Stay put

Day

Project Management

Date

Temporary offices

Portakabins

Daily

Total

Daily

Total

Daily

£

£

£

£

£

240 640

0

581 380

Total £

1

02-Sept

2

03-Sept

5 000

245 640

0

581 380

1300

582 280

3

04-Sept

5 000

250 640

0

581 380

1300

583 580

4

05-Sept

5 000

255 640

0

581 380

1300

584 880

5

06-Sept

5 000

260 640

0

581 380

1300

586 180

6

07-Sept

5 000

265 640

0

581 380

1300

587 480

7

08-Sept

5 000

270 640

0

581 380

1300

588 780

8

09-Sept

5 000

275 640

0

581 380

1300

590 080

9

10-Sept

10 000

285 640

0

581 380

1300

591 380

10

11-Sept

10 000

295 640

0

581 380

1300

592 680

11

12-Sept

10 000

305 640

0

581 380

1300

593 980

12

13-Sept

10 000

315 640

0

581 380

1300

595 280

13

14-Sept

10 000

325 640

0

581 380

1300

596 580

14

15-Sept

10 000

335 640

0

581 380

1300

597 880

15

16-Sept

10 000

345 640

0

581 380

1300

599 180

16

17-Sept

10 000

355 640

0

581 380

1300

600 480

17

18-Sept

10 000

365 640

0

581 380

1300

601 780

18

19-Sept

10 000

375 640

0

581 380

1300

603 080

19

20-Sept

10 000

385 640

0

581 380

1300

604 380

20

21-Sept

10 000

395 640

0

581 380

1300

605 680

21

22-Sept

10 000

405 640

0

581 380

1300

606 980

22

23-Sept

10 000

415 640

0

581 380

1300

608 280

23

24-Sept

10 000

425 640

0

581 380

1300

609 580

24

25-Sept

10 000

435 640

0

581 380

1300

610 880

25

26-Sept

10 000

445 640

0

581 380

1300

612 180

26

27-Sept

10 000

455 640

0

581 380

1300

613 480

27

28-Sept

10 000

465 640

0

581 380

1300

614 780

28

29-Sept

10 000

475 640

0

581 380

1300

616 080

29

30-Sept

10 000

485 640

0

581 380

1300

617 380

30

01-Oct

10 000

495 640

0

581 380

1300

618 680

31

02-Oct

10 000

505 640

0

581 380

1300

619 980

32

03-Oct

10 000

515 640

0

581 380

1300

621 280

33

04-Oct

10 000

525 640

0

581 380

1300

622 580

34

05-Oct

10 000

535 640

0

581 380

1300

623 880

35

06-Oct

10 000

545 640

0

581 380

1300

625 180

36

07-Oct

10 000

555 640

0

581 380

1300

626 480

37

08-Oct

10 000

565 640

0

581 380

1300

627 780

38

09-Oct

10 000

575 640

0

581 380

1300

629 080

39

10-Oct

10 000

585 640

0

581 380

1300

630 380

40

11-Oct

10 000

595 640

0

581 380

1300

631 680

41

12-Oct

10 000

605 640

0

581 380

1300

632 980

42

13-Oct

10 000

615 640

0

581 380

1300

634 280

43

14-Oct

10 000

625 640

0

581 380

1300

635 580

44

15-Oct

10 000

635 640

0

581 380

1300

636 880

45

16-Oct

10 000

645 640

0

581 380

1300

638 180

Edinburgh Business School

580 980

8/45

Module 8 / Case Study

Table 8.12

Cost comparisons after 3 September (original downtime costs) Stay put

Day

Date

Temporary offices

Portakabins

Daily

Total

Daily

Total

Daily

£

£

£

£

£

71 400

0

200 300

Total £

1

02-Sept

199 990

2

03-Sept

5 000

76 400

0

200 300

1300

201 290

3

04-Sept

5 000

81 400

0

200 300

1300

202 590

4

05-Sept

5 000

86 400

0

200 300

1300

203 890

5

06-Sept

5 000

91 400

0

200 300

1300

205 190

6

07-Sept

5 000

96 400

0

200 300

1300

206 490

7

08-Sept

5 000

101 400

0

200 300

1300

207 790

8

09-Sept

5 000

106 400

0

200 300

1300

209 090

9

10-Sept

10 000

116 400

0

200 300

1300

210 390

10

11-Sept

10 000

126 400

0

200 300

1300

211 690

11

12-Sept

10 000

136 400

0

200 300

1300

212 990

12

13-Sept

10 000

146 400

0

200 300

1300

214 290

13

14-Sept

10 000

156 400

0

200 300

1300

215 590

14

15-Sept

10 000

166 400

0

200 300

1300

216 890

15

16-Sept

10 000

176 400

0

200 300

1300

218 190

16

17-Sept

10 000

186 400

0

200 300

1300

219 490

17

18-Sept

10 000

196 400

0

200 300

1300

220 790

18

19-Sept

10 000

206 400

0

200 300

1300

222 090

19

20-Sept

10 000

216 400

0

200 300

1300

223 390

20

21-Sept

10 000

226 400

0

200 300

1300

224 690

21

22-Sept

10 000

236 400

0

200 300

1300

225 990

analysis, and all the professional and supplier fees would probably be agreed at project commencement. An EVA system might be appropriate for Uptrack’s monitoring of Cowboy’s works. Cowboy will have agreed an overall tender sum based on some kind of priced schedule or bill of quantities. This document will be a priced WBS, which breaks the works down into measurable items with a price or cost against each item. Uptrack’s cost consultants will certainly have prepared one of these when inviting tenders for the initial upgrading works. It will contain: • • • • • •

preliminaries; prime cost sums; provisional sums; direct payments. measured works (section by section); a summary.

Cowboy will have priced each of these sections when submitting its tender. Depending on the form of contract, Cowboy might also have included additional items for attendance (allowing access and providing plant) and profit (if the items relate to items that Cowboy have not had the opportunity to price within its contract). 8/46

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Module 8 / Case Study

The overall cost plan for the works might therefore look something like the distribution shown in Table 8.13. Table 8.13

Possible measured works 18 000

Preliminaries

18 000

Prime cost sums Specialist plant ABC Ltd.

10 000

Attendance

1%

1 000

Profit

3%

3 000 14 000

Provisional sums Structural

3 000

Unforeseen alterations

4 000

Asbestos

3 000 10 000

Measured works Demolitions

12 000

Structural

13 000

Alterations

25 000

Redecoration

8 000 58 000

Summary Preliminaries

18 000

Prime cost sums

14 000

Provisional sums

10 000

Measured works

58 000

Sub-total Contingences

100 000 10%

10 000

12%

13 200

12%

14 784

Sub-total Fees total

110 000

Sub-total Tax Overall total

123 200 137 984

The total contract value is around £100 000 with various percentages allowed for additional works. Attendance and profit percentages are allowed on prime cost works although the main contractor (Cowboy) does not have to include these percentages. If they are included, they become included in the tender sum and inflate the tender price. This increase in tender price may make a difference in highly competitive situations. In terms of setting up the mechanics of the EVA system, the agreed programme of works (simplified) might show that Cowboy’s rate of progress should be as shown in Table 8.14. Demolition works should be complete by week 4. Structural works should be 50% complete by week 4,75% by week 8, and 100% by week 12. The costs of the various work packages are known. The actual costs in terms of payments made are needed in order to allow the analysis to begin. If the analysis is assumed to be taking place in week 8, the actual costs incurred might be as set out in Table 8.15. Project Management

Edinburgh Business School

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Module 8 / Case Study

Table 8.14

Possible rates of progress Week 0

Week 4

Demolition

0

100%

Structural

0

Alterations Redecoration

Table 8.15

Week 8

Week 12

50%

75%

100%

0

25%

50%

100%

0

0

25%

50%

Week 16

Cost (£) 12 000 13 000 25 000

100%

8 000

Actual costs at week 8 Actual costs at week 8 (£)

Demolition

12 000

Structural

10 000

Alterations

14 000

Redecoration

2 000

These figures represent the actual money that has been paid to Cowboy for doing the works that have been completed to date. The only remaining input required is an estimate of the amount of work in each package that has actually been completed by week 8. These values have to be estimated and verified anyway, as they form the basis of the cyclical measurement that is necessary in producing valuations and interim payments. The assessment might produce the rates of progress shown in Table 8.16. Table 8.16

Rates of progress and costs at week 8 Progress (%)

Demolition

Costs (£)

Planned

Actual

Planned

Actual

100

100

12 000

12 000

Structural

75

60

9 750

10 000

Alterations

50

50

12 500

14 000

Redecoration

25

20

2 000

2 000

Values for budgeted cost of the works performed (BCWP), budgeted cost of the works scheduled (BCWS) and actual cost of the works performed (ACWP) are now as given in Table 8.17. Table 8.17 Demolition

Schedule of costs at week 8 Planned

Actual

Budget

BCWP

BCWS

ACWP

100%

100%

12 000

12 000

12 000

12 000

Structural

75%

60%

13 000

7 800

9 750

10 000

Alterations

50%

50%

25 000

12 500

12 500

14 000

Redecoration

25%

20%

8 000

1 600

2 000

2 000

The cost variance (CV), schedule variance (SV), cost variance index (CVI), and schedule variance index (SVI) values can now be calculated on the basis of the following formulae:

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Module 8 / Case Study

CV = BCWP − ACWP SV = BCWP − BCWS CVI = BCWP/ACWP SVI = BCWP/BCWS

The results of our example are given in Table 8.18. Table 8.18

Schedule of costs and parameters at week 8 Budget

BCWP

BCWS

ACWP

Demolition

12 000

12 000

12 000

12 000

0

0

1

1

Structural

13 000

7 800

9 750

10 000

2 200

−1 950

0.78

0.8

Alterations

25 000

12 500

12 500

14 000

0.893

1

1 600

2 000

2 000

−1 500 −400

0

8 000

−400

0.8

0.8

Redecoration

CS

SV

CVI

SVI

Positive variance values are good as they represent works that are ahead of programme and/or under cost; similarly, index values greater than 1.0 are good. Negative variances or indices less than 1.0 are unfavourable. A glance at the last four columns of the table above shows that the variance values are all zero or negative, giving corresponding indices of less than 1.0. This process would be repeated for whatever reporting cycle is required. The process would typically be carried out on a weekly basis, with the analysis being used as the basis for the cost- and progress-reporting system. Longer-term tracking might reveal the figures shown in Table 8.19. Table 8.19

CV and SV values for the project as a whole Week

Demolition Structural Alterations Redecoration

1

2

3

4

5

6

7

8

CV

0

0

100

−100

0

0

0

0

SV

0

0

0

0

0

0

0

0

CV

0

−250

−350 −150

−500 −350

−900 −800 0

−1300 −1200 −250

−1700 −1400 −1000

−2200 −1950 −1500

SV

0

0

CV

0

0

0

0

SV

0

0

100

−250

0

0

0

0

CV

0

300

0

250

−400

0

0

SV

0

0

0

0

0

0

0

−400 −400

50

−250 −50

−350 −600

−1300 −800

−1550 −1200

−2700 −1400

−4100 −2350

CV total SV total

The eight-week figures indicate that there are some worrying trends, and the overall performance of the system is deteriorating. The project CV and SV values are negative and are increasing as the project progresses. In addition, in week 8 the negative CV is considerably greater than the negative SV. This suggests that the works are both over budget and behind on programme and that it has taken considerably more money than expected to reach a diminished level of progress. It is therefore likely that the project as a whole is heading for a considerable overspend and a late finish. Project Management

Edinburgh Business School

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The main source of the problems seems to be the structural element. This element has shown a negative CV and SV value more or less throughout the course of the project. Demolition and redecoration works have been performing more or less on target throughout, although there has been a sudden deterioration in redecoration works in week 8 only. This sudden change could be a one-off ‘blip’ or it could be the start of a more serious and worrying trend. The project manager should watch this package carefully in weeks 9 and 10 and see what happens. Alterations works have generally gone more or less according to plan, although there has been a recent deterioration in CV for this package. The overall rate of progress on the package has been acceptable, indicating increased costs for some reason. This trend could be price increases for labour and materials (if the standard form allows fluctuations). Alternatively, the trend could be the result of variation orders, where more decoration works have been ordered and the cost has therefore increased in line with the increase in the quantity required. If this is the case, Cowboy has done well to contain the increased amount of work within the existing programme as there has been no deterioration in SV performance over the same period. The project manager will have to identify the specific liability for each source of cost increase and delay and allow for this in the EVA calculations. Generally, there is a steady deterioration in overall project performance. The project manager should look carefully at those sections of the works where control is possible and take measures to try to correct the negative variance values. Some costs and delays are nevertheless attributable to Cowboy, such as those caused by inefficient working practices. Others may be recoverable through a claim (see below), depending on the cause of the problem. Still others will be the responsibility of UMS, such as those caused by variation orders and change notices. The project manager might even decide to produce four EVA tables every week. These would represent: • • • •

overall CV and SV performance; performance excluding contractor liability cost and schedule variances; performance excluding UMS liability cost and schedule variances; performance excluding claim-item cost and schedule variances.

Each format gives a different view. Cowboy would probably perform a similar EVA exercise for cost and schedule control. Cowboy’s project manager would probably just prepare a single collective EVA report each month. This would simply show planned and actual performance and costs using bill rates and schedule dates. This is all that really matters to Cowboy because the company is paid on the basis of bill rates only, unless variations are involved.

8.9.1.4

Possible Claim Jane should also prepare an outline claim at this point. Depending on the standard form of contract used, it may be possible to claim some of the additional costs back from Cowboy, and/or perhaps reimbursement from Uptrack for additional works that could be chargeable to other budgets such as central maintenance. Different forms of contract have different notification requirements,

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Module 8 / Case Study

but generally there will probably be a requirement for immediate notification of relevant parties and the assembly of information relevant to the claim. Some forms of contract require a ‘heads of claim’ form (or proposal report), to be prepared and sent to the other party within a stipulated time. The possibility of recovering costs from Cowboy through Uptrack will depend largely on what event or sequence of events has caused a delay. Essentially, if the delay has been caused by Cowboy or by events that are Cowboy’s liability or risk under the terms and conditions of the contract, Uptrack might have grounds for a claim. Typical relevant events where Cowboy may be liable will include: • • • •

failure to proceed regularly and diligently with the works; mistakes or errors in planning or execution; shortages or non-availability of labour or materials; adverse weather or working conditions.

Typical relevant events where Cowboy will probably not be liable will include: • • • •

late instructions from Uptrack; exceptionally adverse weather or working conditions; changes in the scope and type of work; problems with nominated contractors or suppliers.

Jane should contact the programme controller or other relevant person in Uptrack and ascertain whether or not Uptrack is considering making a claim against Cowboy. She should also attempt to ascertain the exact reasons for the initial delay and for any subsequent delay and attempt to match these to the terms and conditions that relate to delay within the conditions of contract. If the claim is made and subsequently disputed by Cowboy, and if the case then goes to arbitration or other form of dispute resolution, there will generally be a requirement for Uptrack and/or UMS to be able to demonstrate that it has made every reasonable effort to mitigate the costs incurred as a result of the disruption. There is usually a general duty of mitigation on the claimant in cases like this. Jane should consider this duty and the costs associated with it as part of her trade-off reasoning in deciding whether to stay in the existing offices and incur damages from Downline, or to move into some form of temporary accommodation and become liable for double downtime damages to the TOCs. In addition to any claim against Cowboy by Uptrack, there may be a case for a non-contractual reimbursement claim from UMS against Uptrack. There may be a case for recovery of the costs of the additional works from Uptrack because these were unforeseen and therefore cannot reasonably be charged to UMS. The overall programme of works is controlled and directed by Uptrack; and if additional works become necessary as a result of this programme of works it may be reasonable for UMS to seek reimbursement from Uptrack. There are therefore two separate possible claims in relation to the overall four-week delay: first, a possible claim by Uptrack against Cowboy on behalf of UMS; and, second, a possible non-contractual reimbursement claim by UMS against Uptrack. The first claim is relevant to the initial two-week delay and Project Management

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Module 8 / Case Study

may or may not be appropriate depending on the cause of the delay. The claim itself would be a contractual claim by Uptrack against Cowboy; UMS would depend upon reimbursement of any claims settlement from Uptrack. The initial two-week delay did not cause any damages to become payable. The second claim is relevant to the second two-week delay. It would be non-contractual and would seek to recover the costs of the additional unforeseen works from Uptrack. The cost of the additional structural and alterations works is currently estimated as £150 000. In addition to this sum, there are associated design fee figures of £34 000 for the architect and £22 000 for the engineer. This gives an overall package total of £206 000 excluding taxes and contingencies for the additional works. This figure includes normal working time and would increase if crashing is required. The additional works that caused the second two-week delay resulted in damages becoming payable by UMS, and these damages would form the basis of the claim. In the case of staying in the existing offices, the claimed damages would be seven days at £5000 plus seven days at £10 000, totalling £105 000. This pushes the overall reimbursement claim to over £300 000 (excluding taxes). Presumably this total would increase if any further delays occur as a result of the additional unforeseen works. It should be noted that damages could not be claimed for the initial two-week delay, even if this delay did result from claimable events, because these first two-weeks were contained within the overall slack time that had been built into the project. The reimbursement claim in the case of the double move would be more complex. Jane would have to be able to show that the delay had precipitated the double move, or that the double move was the cheapest option under the circumstances.

8.10 Quality Management (Module 7) Assignment 7 In the context of the Oldcastle case, discuss the possible format and operation of a quality management plan.

8.10.1

Assignment 7. Oldcastle Station Project: Quality Management and Control In the Oldcastle case study, the plan would probably depend most on how successfully UMS could avoid the damages that have been put in place by Downline and the other TOCs. There would be a clear correlation between risk and the corresponding quality management system. The quality management system itself would have to be a form of risk evaluation and control system. The relevant control systems would probably all be time-based. The quality management system would be based on a set of performance objectives. It would be particularly important in this case, given the high levels of risk that are already present in the system.

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Edinburgh Business School

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Module 8 / Case Study

8.10.1.1 Configuration Management System The Oldcastle case study project would clearly benefit from the introduction of a configuration management system (CMS). This could be installed on the central server of the computer network at Oldcastle station and could be used as an aid to communication, as a quality-management tool and as an information controller. This would involve the establishment of a project central server (PCS). This unit would act as the foundation of the CMS. The PCS would have direct links to the various other servers that would be active within the system, including: •

contractors’ database (Cowboy and YK2);

•

suppliers’ database (Teeny and Hardware World);

•

UMS database (UMS gateway and Shifters).

YK2

Hardware World

Cowboy

Teeny

Contractors database

Uptrack manager

Uptrack central database

Suppliers database

Central server

Central database of Uptrack project information

UMS Project database

UMS Project Manager

UMS Station Manager

Shifters

Figure 8.15

Project Management

Access to system databases

Edinburgh Business School

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Module 8 / Case Study

Access to the UMS database would be restricted. The project manager would have access to those areas that are relevant to the projects that she is immediately responsible for. The project manager may or may not have access to cost and planning data. Some areas may be available while others may remain restricted. The Uptrack manager (the manager who is appropriate to offer control at this level) may act as gateway and authoriser for UMS project manager access to the Uptrack projects database. these linkages are set out in diagrammatic form in Figure 8.15. Using this approach, the confidential contract and project information remains secure within the Uptrack database. The UMS station manager can see as much information as is required to allow a full understanding of the situation. It would clearly be very useful if the UMS project manager could see copies of variation orders (unpriced), with corresponding estimates of time delays and subsequent issues of revised programmes and completion dates. This type of CMS can be developed new each time or built into existing systems. Most large organisations already have server-driven systems for ordering and executing repetitive works such as maintenance or safety checks. It is a relatively straightforward job to adapt and expand an existing system into a full CMS.

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Project Management

Appendix 1

Answers to Review Questions Contents Module 1

A1/1

Module 2

A1/1

Module 3

A1/4

Module 4

A1/7

Module 5

A1/8

Module 6

A1/10

Module 7

A1/12

Module 1 Answers to True/False and Multiple Choice Questions 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9

True. False. False. False. False. True. True. True. False.

1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18

True. True. True. False. False. False. False. False. True.

1.19 False. 1.20 False. 1.21 True. 1.22 True. 1.23 False. 1.24 True. 1.25 False. 1.26 False. 1.27 True.

1.28 1.29 1.30 1.31 1.32 1.33 1.34 1.35 1.36

True. D. B. C. A. B. C. D. B.

1.37 1.38 1.39 1.40 1.41 1.42

B. C. C. A. B. D.

2.37 2.38 2.39 2.40 2.41

True. B. B. C. C.

2.49 2.50 2.51 2.52 2.53

B. A. D. A. C.

Module 2 Answers to True/False and Multiple Choice Questions 2.1 2.2 2.3 2.4 2.5 Project Management

True. True. True. True. False.

2.13 2.14 2.15 2.16 2.17

Edinburgh Business School

True. True. False. True. True.

2.25 2.26 2.27 2.28 2.29

True. False. True. True. True.

A1/1

Appendix 1 / Answers to Review Questions

2.6 2.7 2.8 2.9 2.10 2.11 2.12

False. True. False. False. True. True. False.

2.18 2.19 2.20 2.21 2.22 2.23 2.24

False. False. True. True. True. False. True.

2.30 2.31 2.32 2.33 2.34 2.35 2.36

True. False. True. False. True. False. False.

2.42 2.43 2.44 2.45 2.46 2.47 2.48

A. D. B. C. C. D. B.

2.54 2.55 2.56 2.57 2.58 2.59

C. A. E. D. A. B.

Answers to Mini-Case Study 1 The project team could assume a number of different arrangements depending on the precise nature of the two companies. John will probably want to staff the project team with appropriate specialists and with a membership which reflects the main issues and challenges likely to be faced by the acquisition. Depending on the relative size of DEF in relation to ABC, it may be more effective for the project team to act more as a steering group for the various functional integration processes which will have to take place in order to achieve successful implementation. 2 If the acquisition is relatively large scale, there is likely to be a hierarchical arrangement of teams involved. At the highest level, company ABC would probably establish an overall strategic objectives implementation team (SOIT). This team would be staffed by senior managers and directors and would ensure that the strategic objectives of the acquisition are achieved. Where the acquisition is treated as a separate project, there is always a danger that the objectives of the project may become misaligned with the strategic objectives of the organisation as a whole. The acquisition project team (APT) would probably operate at a level directly underneath the SOIT. John would probably establish an organisational structure where the SOAT and APT liaise on a regular basis, probably through a formalised programme of meetings. The basic organisational breakdown structure (OBS) could therefore look something like that shown in the figure. The board establishes the overall strategic objectives of the acquisition which are protected and aligned by the SOIT. The APT is steered by the SOIT and reports directly to the SOIT on a regular basis. The APT itself includes specialists from the major functional silos within each organisation. In the case study, the main silos in DEF are likely to match those that exist in ABC PLC, since both companies are based in food retail. The design of the acquisition project OBS would therefore be driven by the existing layout of the acquiring and target (acquired) company. John would probably ensure that the functional head of each function (or his or her deputy) is given membership of the APT.

A1/2

Edinburgh Business School

Project Management

Appendix 1 / Answers to Review Questions

Board/CEO

Strategic Objectives Implementation Team Acquisition Project Team

Specific Integration Team

Specific Integration Team

Specific Integration Team

Function

Function

Function

Strategic/operational interface or clutch

Possible organisational structure

3 In this case there is clearly a significant difference between the organisational cultures of the two companies. One company (the acquirer) is relatively laid back while the other (the target) is more formal. This combination can be particularly problematic as there is a good chance that the less formal structure will be imposed on the more formal structure, resulting in potential conflict from employees within the more formal structure. The imposition of new cultures and particularly the imposition of new aims and objectives are classical origins for conflict. John would have to be very careful to make sure that effective communications are established and put in place as early as possible. These communication systems should ensure that each employee at every level receives as much information as possible about the change process. In some cases, effective formal communication channels like this can reduce the effectiveness of informal (and often negative) communication channels. The project team in the case study is in an unusual position in that it is not positioned within the simplest form of matrix structure. The APT is directly accountable to the SOIT. This is essential in this case because the acquisition is presumably being made on strategic grounds and the need for objective -strategic alignment is especially important. This alignment role could be provided by a project sponsor, although in the case of larger acquisitions a specialist interface team may be required. This combination Project Management

Edinburgh Business School

A1/3

Appendix 1 / Answers to Review Questions

of SOIT and APT working together through the lifecycle of the project is sometimes referred to as a ‘clutch’ interface.

Module 3 Answers to True/False and Multiple Choice Questions True. True. True. False. True. False. True. True. True. True. True. True.

3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12

3.13 3.14 3.15 3.16 3.17 3.18 3.19 3.20 3.21 3.22 3.23 3.24

True. True. False. False. False. True. True. True. True. False. False. False.

3.25 3.26 3.27 3.28 3.29 3.30 3.31 3.32 3.33 3.34 3.35

True. True. False. False. True. True. False. True. True. True. True.

3.36 3.37 3.38 3.39 3.40 3.41 3.42 3.43 3.44 3.45 3.46

False. A. E. D. C. B. A. A. D. D. A.

3.47 3.48 3.49 3.50 3.51 3.52 3.53 3.54 3.55 3.56 3.57

B. A. B. B. A. C. B. B. B. C. B.

Answers to Mini-Case Study 1 The typical risks will vary considerably from country to country and also in relation to those attending the conference, where it is, and for how long it will run. However, from a US and EU standpoint the primary risks are likely to be as shown below. External •

Terrorist attack.

•

Demonstrations (environmentalists, anti-capitalists etc).

•

Building fire.

•

Power failure.

•

Transport failure.

Internal •

Lack of available officers.

•

Inadequate planning.

•

Poor implementation and associated tactical response.

Unforeseeable • A1/4

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In terms of potential impact, terrorist attack poses the greatest threat. However, presumably the support intelligence services are working closely with the major event co-ordinators, and so the terrorist threat should be known. A large scale demonstration could also have a high impact, particularly if it is allowed to get out of hand. This is most likely to happen if large numbers of demonstrators arrive unexpectedly and where the demonstrators present make use of formal communications systems in order to co-ordinate their actions. 2 The risks identified above all have different likelihood of occurrence and different potential impacts. One possible representation is shown below. There is of course no one single representation for this risk map. Presumably the terrorist threat, a major fire and a major power failure are low-likelihood but high-impact risks. A major demonstration could be just as disruptive as any of these but, based on examples over the past few years, a major demonstration is much more likely to happen. The threat posed by a major demonstration is therefore both high impact and high likelihood and would appear to represent a risk which requires immediate attention by the police commander.

Major demonstration

Terrorist attack Fire Power failure Lack of available officers

Impact

Transport failure Poor implementation

Inadequate planning

Major event elsewhere

Likelihood

Possible risk map

The internal failures listed are all possibilities even though they are technically within the control of the police force. These risks have been represented as larger areas on the map because of the extent to which these risks are likely to occur and the impact if they do occur. Poor implementation is always a danger, especially in police operations where much of the operational work is executed in the form of tactical operations made in response to imposed and uncontrollable events on the ground. Project Management

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The main ‘joker’ in this risk map is the area covered by the risk of a major event occurring elsewhere. This is one of the most difficult considerations for senior police commanders when planning and resourcing major events. Even the most carefully-developed plans may go completely wrong if an unforeseeable emergency happens nearby, or at least close enough to affect the resources available for, or being used on, the planned major event. 3 The risk map may change considerably over time. Indeed it would be most unusual if it did not do so. An obvious example is the risk classification offered by the anti-capitalism protestors (ACPs). Experiences over the past ten years have shown that ACPs can be extremely violent and disruptive and, unlike some other specialist protestors, they are often extremely well organised and can summon thousands of demonstrators onto the streets at relatively short notice. Where ACPs have been organised and active in the US and EU over the past few years, the only effective police response has been to provide a large riot police presence with a comprehensive back-up. This approach has worked well, although there was a fatality at a recent anti-capitalism demonstration in Italy. The drawback is that the heavyweight police presence is expensive and ties up officers in relation to their other duties. The commander therefore has to perform a trade-off between providing the police presence needed to meet the best and worse case scenarios and the costs of providing those levels of cover. The trade-off itself depends on the likelihood of the demonstration. In practice, the police commander would use intelligence to determine the likelihood of a major demonstration and the impact that it would make should it transpire. Typical indicators of a growing likelihood and impact would include increasing: •

numbers of demonstrators travelling to the conference city;

•

demonstrator communications, particularly mobile ‘phones and internet;

•

risk rating by strategic command;

•

media interest and speculation.

An increase in any of these variables would probably result in an increase in the estimated risk likelihood of a major demonstration. The impact of a demonstration would depend primarily on the number of demonstrators who attend. Irrespective of the level of commitment and determination shown by the demonstrators, the damage and disruption they can cause tends to be a direct function of the number of them going ‘on the rampage’.

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Module 4 Answers to True/False and Multiple Choice Questions 4.1 True. 4.2 True. 4.3 False. 4.4 False. 4.5 True. 4.6 True. 4.7 True. 4.8 False. 4.9 True.

4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17

False. True. True. True. False. True. True. False.

4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25

False. False. False. False. False. D. C. A.

4.26 4.27 4.28 4.29 4.30 4.31 4.32 4.33

B. B. C. C. A. C. B. A.

4.34 4.35 4.36 4.37 4.38 4.39 4.40 4.41

A. B. D. D. A. A. A. B.

Answers to Mini-Case Study 1 Choosing between in-house staff and consultants is always difficult. Inhouse staff are generally more motivated and committed, easier to manage and are cheaper than consultants. Staff from other departments within the same university will have a better understanding of how the university works and of the various administrative and support features which are necessary and ancillary to all courses. In most cases in-house staff can be appointed for service on the new course without any specific forms of contract. Staff from other departments do sometimes have a less than fully committed attitude as there may be a degree of professional jealousy between departments, particularly where disciplines are similar and where similar courses are offered. There is also the problem that other heads of service departments may try to allocate their less able and talented staff to the new course. In this way the service head of department gets the fulltime equivalent student places at the lowest loss to his or her own teaching capabilities. Consultants from other universities, however, may be more skilled or more directly qualified or experienced in the desired areas than in-house staff. If Jane can resource all or part of the course using external staff, she will certainly have a much wider choice of combinations of qualifications and experience. This flexibility may allow her to achieve higher performance standards on the new course. Staff from other universities will generally have to be appointed using some form of consultant contract, possibly a professional services contract. This will contain the implied terms typical of this type of contract, and the degree of protection offered to the parent university, and indeed to department X, may be limited. In addition, most universities use some form of central department or section for making and controlling external appointments. Both the parent university and the university by which the external staff are employed may insist on standard consultancy agreements with significant mark ups or premiums so Project Management

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that the consultancy fees which are charged make a contribution to the administrative and support centre. 2 The primary internal/external interface which Jane would have to consider would be: (a) the organisational boundary of department X. (b) the organisational boundary of the parent university. As project manager, Jane would (presumably) have authority over other members of staff from her own department. She would have theoretical control over members of other departments of the same university, although these contributors are aware that they are employed by their own departments and their first allegiance clearly lies there. As is typical in any organisation, once a project manager starts trying to interface with people from other departments, there is always a barrier in terms of functional specialisation. The project manager is always aware that a specific person is ‘loaned’ from the main functional department for a short period of time to work on the project. The sense of transience and non-permanence can have a profound effect. The other primary interface is that of the parent university organisational boundary. Consultant service providers have no allegiance to the university whatsoever and are hired consultants. In terms of the interfaces, communications become very important. As a result of the varying degrees of control and risks involved, it is usually prudent to ensure that all communications with external consultants are either made or confirmed in writing so that a permanent record can be made. Such records will be necessary should any action ever be taken under the professional services contract.

Module 5 Answers to True/False and Multiple Choice Questions 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 A1/8

False. False. True. True. True. True. True. True. True. False. True. True. True.

5.16 5.17 5.18 5.19 5.20 5.21 5.22 5.23 5.24 5.25 5.26 5.27 5.28

False. False. True. True. False. True. True. False. False. False. True. True. True.

5.31 5.32 5.33 5.34 5.35 5.36 5.37 5.38 5.39 5.40 5.41 5.42 5.43

True. True. False. True. A. E. E. D. C. A. A. B. A.

5.46 5.47 5.48 5.49 5.50 5.51 5.52 5.53 5.54 5.55 5.56 5.57 5.58

D. B. C. D. B. C. B. A. C. C. A. A. D.

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5.61 5.62 5.63 5.64 5.65 5.66 5.67 5.68 5.69 5.70 5.71 5.72 5.73

A. A. B. C. A. C. B. E. D. C. B. A. B.

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Appendix 1 / Answers to Review Questions

5.14 5.15

True. True.

5.29 5.30

True. False.

5.44 5.45

D. C.

5.59 5.60

C. C.

Answers to Mini-Case Study 1 Collaboration between European nations has always enjoyed only limited success. There have been some notable collaborations, including the AngloFrench Concorde programme in the 1960s, but generally the performance of joint national projects tends to be restricted because of political, cultural and economic differences between the collaborating nations. For example, in the case of the Eurofighter, each government has the capability to cause hold-ups at any one time. Problems such as changes in political leadership and consequent enthusiasm for the project are therefore multiplied four-fold as compared to executing the design and construction of the aircraft in a single country. 2 One of the most important aspects to consider in terms of the Eurofighter development timescale is technology. The aircraft was first visualised in 1983. That was before the fall of the Soviet Union when the world scene was very different. As the design of the aircraft evolved, important design changes were made as new technology evolved, but there was always an element of retained technology. As the design evolved further the opportunity for changing any aspect of the design diminished, simply because the complexity and consequent cost of doing so became prohibitively high. Some aspects of the design, including the basic shape and flight arrangements (for example the use of a delta wing), originate from 1983. The US competitor, the Joint Strike Fighter, is currently still at outline proposal stage. The contract was only awarded to the successful bidder in 2002. As a result, although it will be longer before the Joint Strike Fighter comes into service, when it does come into service, it will be using technology which is almost thirty years ahead of the Eurofighter. There are also defence implications. The UK and German governments are both relying on the Eurofighter to take over from the Tornado F3 as the backbone of their air attack and defence capability. The longer the old Tornados have to stay in service, the more expensive they will be to maintain and the less effective they will be. 3 The time performance of the project could possibly have been improved by having a more effective and reliable communication system between the various collaborating governments. This would have assisted in the early notification of delays, although it would not have been of any assistance in the inevitable delays which resulted from changes in government. Time performance could almost certainly have been improved by making use of fewer collaborators. The risk of a delay caused by any one single collaborator increases in relation to the number of collaborators involved. In most cases the more individuals or companies or countries involved, the Project Management

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more there is to go wrong. In the Eurofighter case, four collaborators were needed in order to achieve an acceptable cost distribution. There is little doubt that the delay to the project would have been lower if there had been three rather than four collaborators. The Eurofighter also makes use of an interesting range of old and new technology. The long development duration has resulted in the use of some aspects which are clearly obsolete or at best outdated. The aircraft does, however, make use of some of the latest technological advances, particularly in the radar navigation and weapons systems. Significant delays were encountered in modifying the new technology to fit in with and be compatible with the old technology. For example, the original 1983 designs contained similar radar systems but the control computers were entirely different. The original 1980s designs called for much more stowage space in the original fuselage than was needed in the 2002 fuselage.

Module 6 Answers to True/False and Multiple Choice Questions 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11

False. False. True. False. True. True. False. True. True. True. True.

6.12 6.13 6.14 6.15 6.16 6.17 6.18 6.19 6.20 6.21 6.22

True. True. True. True. True. True. True. True. True. False. True.

6.23 6.24 6.25 6.26 6.27 6.28 6.29 6.30 6.31 6.32 6.33

True. True. False. True. True. True. True. B. A. C. A.

6.34 6.35 6.36 6.37 6.38 6.39 6.40 6.41 6.42 6.43 6.44

B. C. D. A. D. C. A. B. D. A. B.

6.45 6.46 6.47 6.48 6.49 6.50 6.51 6.52 6.53 6.54

C. D. A. D. A. D. A. B. A. D.

Answers to Mini-Case Study 1 The Scottish Parliament building is in many ways a classical example of creeping scope. When the project was first agreed after the 1997 referendum, nobody really knew what kind of design would be most appropriate. A brief was produced, although this was deliberately vague. The architect had a considerable degree of freedom in interpreting this brief and was given a more or less free hand in how the design evolved. The initial outline proposals were very interesting, but it soon became clear that the cost of the proposed design would be considerably higher than what had been allowed when the project had been approved. There then followed a series of design alterations and cost reduction exercises, all of which resulted in change. Some of these changes were wholly unforeseeable at the start of A1/10

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the project. Security was a good example. The building had always had a requirement for strict security systems, but the events of September 11, 2001 forced a series of major design alterations on the architects. The two major implications were the re-design of walls that are near public areas to make them effectively bomb proof and the re-design of the glass roof of the Parliament to make it effectively shatter-proof. These changes in specification both involved very significant time and cost increases. Another very significant element was the innovation involved in the design. Some of the design details were architecturally challenging. An example is the roof assembly over the main debating area. The supporting structure is based on laminated hardwood members which intersect at variable angles. Where these members meet, they are held in place by purpose made stainless steel ‘nodes’. The design of the roof structure was so complex that it proved to be impossible to pre-assemble the nodes within the tolerances required. It therefore became necessary for the roof timbers to be put in place and then make individual nodes ‘to measure’ for each intersection. To add to the problem these nodes are very large and are extremely heavy. The end result was that the roof assembly (a) took considerably longer than expected to complete and (b) went considerably over budget. The same basic pattern of lack of design information and change was reflected throughout the project. 2 Delays cost money because the client has to cover the additional operational costs of the various contractors and suppliers involved, assuming that the delay is caused by the actions of the client. Under most standard forms of contract, contractors and sub-contractors can assemble a claim to recover the total costs they incur as a result of a delay that has been caused by the client. These claims can soon become very large and complex as the contractor can effectively claim the wages of every operative and the cost of every piece of plant, per day, for the duration of the delay. The client also has extended fixed overhead costs which can be considerable on a project of this size. These delay or extension costs are also very difficult to control because, especially in this case, it is very difficult to say what the overall extent of the final delay is likely to be. Acceleration costs usually take the form of time-cost trade-offs. The client may pay contractors and sub-contractors financial incentives to speed up critical work packages. Acceleration is not always possible, and even where it is possible, the degree of acceleration may be restricted and the cost of achieving the acceleration may be extremely high.

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Module 7 Answers to True/False and Multiple Choice Questions 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13

False. True. False. False. False. False. False. True. False. False. True False. True.

7.14 7.15 7.16 7.17 7.18 7.19 7.20 7.21 7.22 7.23 7.24 7.25

False. True. True. False. False. True. True. True. True. True. True. True.

7.26 7.27 7.28 7.29 7.30 7.31 7.32 7.33 7.34 7.35 7.36 7.37

True. True. True. True. True. True. True. True. True. B. C. C.

7.38 7.39 7.40 7.41 7.42 7.43 7.44 7.45 7.46 7.47 7.48 7.49

A. A. B. E. B. B. A. B. C. D. A. A.

7.50 7.51 7.52 7.53 7.54 7.55 7.56 7.57 7.58 7.59 7.60 7.61

C. A. C. A. D. B. C. D. C. C. C. A.

Answers to Mini-Case Study 1 Sendo took the unusual step of manufacturing a number of alternative ‘phones which are all based on the same basic set of operational components manufactured and assembled in China. This process allows Sendo to produce a very low cost basic ‘chassis’ in that it makes use of extremely competitive labour costs and uses a standardised constant approach. The handset covers are manufactured in the UK and are sent out to the various distribution points around the world as required. This simple but very effective production system allowed Sendo to produce a high quality handset at a unit price which was competitive with even the largest of their immediate competitors. Sendo also allowed individual operators to put their logos and brands on Sendo handsets. 2 Sendo has clearly been very good at developing high performance handsets at reasonable prices which match customer demand and expectations. Innovations like the Z100 are clearly the way to move forward and stay ahead. The mobile ‘phone market is changing rapidly and, as with personal computers, customers demand constant change and innovation. Even then, ‘average’ innovation is not enough. Anybody can develop a WAP phone. The customers want ‘WAP phones plus’. The Z100 is clearly a development in the right direction as it integrates the latest mobile ‘phone technology with high growth and high demand innovative areas such as text messaging and information transfer media. Working with Microsoft in developing the software for the Z100 is a powerful move as Microsoft is likely to dictate the format of any PC software widely used for downloading or communicating with hand-held ‘phone-computers. A1/12

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The proposed strategic alliance with Cingular also appears to be a good move as this will provide Sendo with a more or less guaranteed market for the Z100.

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Appendix 2

Practice Final Examinations Contents Final Practice Examination 1

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Final Practice Examination 2

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Final Practice Examination 1 Please note that the type of specimen answer given is often called the 150% answer. The examiners are aware of the time constraints involved in an actual examination and take this into account when awarding marks. The key to passing the examination is to cover the key issues. Additional marks are awarded for the scope and depth of answers. Please also note that this sample paper includes 6 questions in order to cover a wide range of subject areas. The examination paper itself will comprise 4 and not 6 questions. In the examination, candidates have to answer all 4 questions. The project management examination is designed to test both knowledge and understanding of the subject. It tests knowledge by measuring the extent to which the theory from the text has been retained. It tests understanding by measuring how well the candidate can apply the theory to the content of the mini case study that appears at the start of the examination paper. The short mini case study comprises around one page of text, perhaps with some tables or related figures. It gives some basic background information about a hypothetical project and will typically include some basic details on the main people involved, together with some cost and time information. The candidate should read the case study carefully and then answer the examination questions in the context of the case study. Candidates should remember the following points. 1

Project Management

Read the question carefully Answer only what is being asked. Candidates should avoid the temptation to answer the question that they wish had been asked. Some candidates include irrelevant material in the hope that extra marks will be gained. Sections of the answer that are irrelevant consume valuable time but do not earn any marks.

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2

Check the marks distribution The Project Management examination comprises four questions, each of which in turn has several sections. Each section carries a certain mark. It is important that candidates allocate time to each section in relation to the marks that are available for that section. In the project management examination, it is beneficial to use diagrams as these can communicate knowledge and understanding more efficiently than words when time is strictly limited.

3

Answer all the questions Candidates should attempt each part of each question. The overall average for the paper is very quickly affected when the answer omits whole sections.

4

Knowledge and understanding Project management is very much a practical subject. It is about planning things and then doing them on time, on cost and to the required standards. It is very important that candidates demonstrate that they understand the subject as well as having developed a knowledge of the theory. Therefore candidates should try to show that they can apply their knowledge of the subject wherever possible. This could involve making direct use of the case study information in developing answers, and should include example applications where appropriate.

5

Answer plan It is sometimes useful to prepare an answer plan. This gives an outline of the main areas that a candidate intends to include in his or her answer. It can act as a useful indicator to the marker where (for example) the candidate has run out of time and has not been able to complete the answer as he or she intended.

Mini Case Study You are a newly appointed project manager with a project management consultancy. Your first assignment is to project manage the programmed replacement of a production line in a local factory. The production line assembles electronic components. In order to minimise disruption to production, the upgrading works are to take place in several phases over the next year and a half. Each phase of the work involves closing down the production line, stripping out parts of the line and replacing that section with new equipment. The main people involved in the project management process are:

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•

the project manager;

•

the production manager (responsible for production output);

•

external electrical and mechanical engineers, as design consultants;

•

external specialist contractors, as installers and commissioners;

•

external specialist domestic and nominated engineering subcontractors;

•

external specialist suppliers (of all equipment);

•

the Health and Safety Executive (HSE);

•

local authority inspectors (LAIs). Edinburgh Business School

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A total of 50 employees work on the production line. These people will be temporarily laid off on full pay while the line is closed down for upgrading. The contractor and design engineers have indicated that it should be possible to complete the works in nine phases, each requiring a one-week shut down. For each phase, the main work elements will be the following: •

Shut down production line (production manager).

•

Remove old section (main contractor).

•

Upgrade and test electrical supplies (engineering subcontractors).

•

Install new production line section (main contractor).

•

Commission and test (main contractor).

•

Approvals and acceptance (HSE, LAI, production manager).

The factory owners clearly wish to keep downtime to a minimum. It is therefore very important that good quality-management systems are put in place in order to avoid any errors or problems that may lead to delays or interruptions that could have been avoided. Note: Candidates can make any assumptions that they wish, provided that the assumptions are reasonable and do not conflict with the information provided as part of the case study. Candidates must write any such assumptions down.

Questions 1 As project manager, you are required to design a suitable organisational breakdown structure (OBS) for the project. This will feature internal and external components and be held together by organisational links. (a) Compare and contrast the main characteristics of internal (non-executive) and external (executive) project management organisational systems. (10 marks) (b) For the above case, design an organisational breakdown structure (OBS) showing all contractual, communication and authority links, and briefly summarise the primary characteristics of any two different contractual links. (10 marks) (c) Summarise the primary formal and informal communications channels that would apply in the case study and discuss their use. (5 marks) 2 Another early requirement is the development of a schedule in order to allow time estimates to be made for each work package and for the project as a whole. Schedules can typically be based on either the critical path method (CPM) or the programme evaluation and review technique (PERT). Table A2.1 shows PERT values for the various work packages that are involved in the project. Project Management

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Table A2.1 Work package

Estimated activity durations for work packages Optimistic estimate (months)

Most likely estimate (months)

Pessimistic estimate (months)

A–B

1

2

3

B–C

1

3

5

B–D

2

3

4

B–E

2

4

6

C–F

1

5

8

D–F

2

4

6

E–F

2

4

6

F–G

1

3

5

G–H

2

3

4

(a) Develop a PERT schedule for the project and identify the critical path. (5 marks) (b) The company board has indicated that the production line upgrade must be completed and fully operational within 18 months. The probability of completion within that time must be no lower than 75 per cent for the project to receive approval. Using the data provided in Table A2.1, indicate whether or not the project should continue based on the approvals criteria stated. (20 marks) 3 The project requires a cost planning and control system in order to make sure that costs stay within some kind of variance envelope. (a) Discuss the concept of the variance envelope and explain how upper and lower limits can be defined in relation to the project life cycle. (5 marks) (b) Describe the process of developing a work breakdown structure (WBS) for the main project work packages, and explain how this forms the basis for the project budget plan. (10 marks) (c) Explain how actual project costs can be related to schedule performance using an earned value approach (EVA). (10 marks) 4 The project requires some form of quality management system. This comprises a number of phases that generally apply to all quality management systems. (a) Differentiate between quality policy and quality objectives, supporting your answer with examples from the case study. (10 marks) (b) Discuss how a quality policy might be converted into a set of quality objectives for operational quality-control purposes. (10 marks) (c) Discuss the concept of an interface management system (IMS) and explain how this would be useful as a quality control for the case study. (5 marks) A2/4

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5 ‘Project management is often used as a tool for managing change.’ Discuss this comment in the context of strategy development and implementation. (25 marks) 6 Risk management is one of the project management sets of techniques used in designing monitoring-and-control systems for making strategies work. (a) Differentiate between conditions of certainty, risk and uncertainty, giving examples from the case study. (10 marks) (b) Discuss the primary components of a risk management system. (10 marks) (c) Discuss the main processes involved in the Delphi technique and nominal group technique for risk identification. (5 marks)

Outline Answers 1 (a) The answer should clearly differentiate between internal and external systems; organisational boundaries and contractual linkages are the most significant differences (see Figure A2.1). Internal systems use individual functional units from within the existing structure. The main connectors are formal contracts of employment and the existing authority system within the organisation. In an external system, the project manager is hired as a consultant and acts in an agency capacity on behalf of the client. The responsibility here is more precise and is defined in terms of the appropriate professional agreement. Other externals are hired in order to complete the project team. The answer should indicate the control channels and characteristics of the agency concept.

Client

CEO

FM

FM

FM

Contractor

Consultant PM

PM

Supplier

Statutory bodies

Consultant Consultant

Internal system

External system

Figure A2.1 Internal and external project structures

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There is generally a greater and wider distribution of risk in the external system and therefore a greater requirement for formal contractual linkages. External systems tend to be affected by a higher degree of sentience and interdependency and make greater demands on the project manager’s leadership and team-building abilities. External systems frequently include a higher number or degree of organisational boundaries and interfaces. This necessitates more detailed control systems, often using detailed configuration management systems on larger and more complex projects. Internal systems usually have more immediate systems for accountability and control, as all members of the system work for the same parent organisation. Internal systems are often less flexible and responsive as they have more rigid functional and project boundary definitions. In large and bureaucratic organisations, the large functional sections can generate a large fixed overhead and possible requirement for centralised and support functions. External systems tend to be more flexible and responsive to change. Internal systems are more suited to large-scale repetitive work with a bureaucratic overhead and no immediate requirement for quick response or change. (b) The nature of the OBS will vary depending on the choice of sample. Generally, all organisational boundaries should be shown for all key players. The main organisational boundary is that which encloses the production organisation. The external contractors, subcontractors and consultants will operate as satellite external bodies outside the main organisational boundary (see Figure A2.2). The contractual linkages will be as standard. A standard form will link the external contractor and nominated subcontractors. These standard forms have precise terms and conditions that aim to establish absolutely the requirements for completion of the contract. Clauses are carefully worded to cover all aspects of the contract and to lay out established procedures for virtually all eventualities. The external professional consultants will probably be engaged under some kind of professional services contract. These contracts comprise largely implied terms that are interpreted according to the codes and standards of the appropriate professional body. Remedies for breach of both types of contract are damages. In the case of the standard form, the damages would be for breach of one or more contractual terms or conditions. In the case of the professional services contract, the damages would be for negligence or other act where the professional has failed to act according to the standards that are set by the appropriate professional body. Standard forms of contract may set out specific levels of damages for non-compliance with various contractual events. A typical example will require damages for late completion. These may be defined as liquidated and ascertained damages and may be entered as being payable at a defined level in the event of a default by the contracting party. A2/6

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Levels of damages in professional services contracts are not usually set out beforehand and are based on the actual losses incurred.

Senior management

Production manager

Control

Production process

Project manager

External contractors

Nominated subcontractors

External consultants

Domestic subcontractors

Figure A2.2 Internal and external linkages

Authority links would generally be centred on the project manager. Authority links define who tells whom what to do in the organisation. The project manager usually tries to retain as much authority as possible within the system. The control mechanism (possibly a project sponsor) might have executive authority over the project manager. The functional managers will normally be on an equal level with the project manager. The various members of the production system will generally be under the control of the functional manager but may be answerable to the project manager on project related issues. In larger systems, the organisation might develop a change control or organisational interface section. This involves the establishment of a specialist department or section that is responsible for acting as interface between the external and internal organisations. This arrangement can be useful as a centralised authority function. It can sometimes be more effective to channel all information flows through a single section that has responsibility for distributing that information and monitoring responses. Communication links will be formal and informal but primarily formal. The project manager will act as the centre of the communication system. Project Management

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Where a specialist change-control/interface section exists, it will adopt this role. (c) The case study OBS would certainly feature formal and informal communication channels. The formal channels would more or less follow the communication links as detailed in (b). There may be some additional formal lines following external and cross-interface contractual links. Informal channels would tend to flow horizontally through the system and would work within peer groups rather than across status boundaries. Generally, formal and informal channels will not follow the same internal routes, except where there are direct reporting requirements. Formal communication channels would be used for the issue of change notices and contractual project information. The forms of contract between the project manager and the main contractor or subcontractors will probably stipulate that all orders and instructions shall be in writing. Most contracts also include opt-out clauses, stating that non-written instructions shall be of no immediate effect and unless confirmed in writing within a given time may be disregarded. There may be a formal link between the project manager and the functional manager, depending on the operational procedures that are used within the organisation. There will also be a formal link between the organisation and the HSE and local authority. These bodies will probably have statutory (implied) contracts with the organisation and there can be considerable implications if these are breached. Informal communication channels tend to be more immediately verbal. Typical media are direct speech and telephone conversations. In most organisations there would be an important informal channel between the project manager and the production manager. The production manager will rightly see this project as a major determinant of production output during this period. He or she will want to keep in close contact with the project manager in order to monitor progress and agree on any milestone revisions. The project manager will probably want an informal link with the external contractors and consultants. This is particularly important in the management of change. Formal systems for agreeing and valuing variations can take days, whereas informal agreements can be made in hours or even minutes. Short-timescale change agreements can generally be made where the parties have a certain level of trust. It is standard practice to back up any such agreements using the formal system. Informal communications with the statutory bodies would be limited. Statutory contracts and the duties and obligations imposed by them tend to be very inflexible. It is generally advisable to follow formal procedures and record everything when dealing with these bodies. 2 (a) The initial calculation for the average and standard deviations is as set out in Table A2.2 (based on the figures given in the question in Table A2.1). A2/8

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Table A2.2

Estimated activity durations for work packages, with their averages and standard deviations

Activity

Optimum

Likely

Pessimistic

Average

SD

A–B

1

2

3

2

B–C

1

3

5

3

0.67

B–D

2

3

4

3

0.33

0.33

B–E

2

4

6

4

0.67

C–F

1

5

8

4.8

1.17

D–F

2

4

6

4

0.67

E–F

2

4

6

4

0.67

F–G

1

3

5

3

0.67

G–H

2

3

4

3

0.33

The PERT precedence diagram therefore should look like that shown in Figure A2.3.

2

A

3

B

C

4.8

3

4

D

4

F

3

G

3

H

4 E

Figure A2.3 PERT precedence diagram

The PERT schedule is therefore as shown in Figure A2.4, with the critical path indicated by the thicker lines.

2 2

A 0

2

5 5.2 3

B

C

4.8

3

0

4

D

F

3

G

4 5

10 10

6

13 13

3

H 16 16

4 E 6

6

Figure A2.4 PERT schedule and critical path

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(b) The calculations for the project mean and standard deviation are as set out in Table A2.3. Table A2.3 Activity

Calculations of project mean and standard deviation Optimum

Likely

Pessimistic

Average

SD

A–B

1

2

3

2

0.33

B–C

1

3

5

3

0.67

SD

2

0.11

B–D

2

3

4

3

0.33

B–E

2

4

6

4

0.67

C–F

1

5

8

4.8

1.17

D–F

2

4

6

4

0.67

E–F

2

4

6

4

0.67

0.45

F–G

1

3

5

3

0.67

0.45

G–H

2

3

4

3

0.33

0.11

Sum average Sum SD

2

0.45

16 1.57

Project SD

1.25

The project mean duration is seen to be 16 months, with a project standard deviation of 1.25. With a target completion time of 18 months, we have Mean difference = Target completion time−Project mean = 18−16 = 2.0 months Standardised mean difference = 2.0/1.25 = 1.6 standard deviations

The target completion time therefore is 1.6 standard deviations above the project mean completion time. From statistical tables, we know that events within 1 standard deviation above the normal mean occur 68 per cent of the time. Events within 2 standard deviations occur 95 per cent of the time. A standard deviation of 1.6 above the mean equates to about 84 per cent probability (using linear interpolation). There is therefore something around 84 per cent probability that the project will be completed within 18 months. Given that the approval criteria is a minimum of 75 per cent, the project should go ahead. 3 (a) A variance envelope represents the acceptable limits of variance about the projected or target performance, or the cost curve. The variance envelope typically diverges towards the later life cycle phases of the contract. The variance envelope is typically built into the EVA system so that it acts as a trigger for some kind of alarm system that is attached to each work package. Individual or multiple divergences from the envelope cause feedback to a central monitoring and control section. Variance upper and lower tolerance limits would typically be set at 10–15 per cent at the start of the project, depending on the amount of A2/10

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design and product information that is available. Some tolerance would always be retained – perhaps 3–5 per cent by the later stages of the project.

Actual cost

Cost

Maximum cost

Minimum cost

Time

Figure A2.5 Variance envelope

Generally, the variance envelope converges towards a point (see Figure A2.5). This is usual because the level of detail that is fixed (and therefore not able to be changed) is lower in the early stages of the project. Thus, the opportunity for change diminishes as a function of time. Similarly the cost of change increases as a function of time. As more detail becomes fixed, it becomes more expensive to make any changes and therefore fewer changes occur. (b) The WBS is a breakdown of the principal work packages that are identified. These could relate to design and/or implementation. The WBS elements typically reflect natural boundaries in the design of the project control system. The overall work total is typically first broken down into elemental levels. These are then subdivided according to specialisation, or sometimes (depending on how the project is organised and on the methods of procurement employed) they are broken down according to individual suppliers and contractors. Where packages are to be allocated on a contractor or supplier basis, the analysis stops at that level and control and responsibility are transferred to the contractor or supplier. Where the package is retained in house, further subdivisions may be appropriate down to whatever level of control is appropriate. Each element is typically subject to overall time, cost and quality limits. These are retained as each element is broken down into components. The idea is that the packages can be separately controlled in relation to time, cost and quality objectives, both as individual objectives and also as collective objectives for use in trade-off analysis. The level of definition used will depend on the nature of the works involved in Project Management

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each area of the case study. Most operational processes apply at level 3 or 4 of the WBS; it is unusual for operational considerations to go much beyond level 4. Occasionally, such as in the case of the valuation of variation orders or in detailed claims, it may be appropriate to go down to level 5 or even level 6. Once the WBS has been established, individual cost and schedule performance targets would be established for each element. This is most readily performed using a computerised database estimating system (CDES). Each package receives a budgeted cost (BC) target. This is related to the schedule performance in terms of works scheduled (WS) and works performed (WP). Each WBS element becomes an activity on the schedule with a start and finish time and an estimated duration. Each element also has an estimate total placed against it in the cost accounting code (CAC) system. The bridge between the schedule and the CAC cost plan is the EVA PVAR system, which allows individual work packages and elements to be tracked and monitored in terms of time and cost performance. Obvious work package elements for the case study include: •

shut down production line (production manager);

•

remove old section (main contractor);

•

upgrade and test electrical supplies (engineering subcontractors);

•

install new production line section (main contractor);

•

commission and test (main contractor);

•

approvals and acceptance (HSE, LAI, production manager).

Removing the old section would almost certainly be awarded as one contract and would involve complete dismantling and disposal of the old system. This would effectively be one work package and control could be established at the sub-project level. The project manager would not seek any level of control lower than the overall monitoring of the main contractor. The engineering subcontractors would probably be appointed on the same basis. The level of control required by the project manager would probably be limited to the monitoring and control of the entire subcontract packages. Approvals and acceptances are one-off activities and would be treated as WBS events or milestones rather than standard activities. (c) The EVA approach simply extends the approach outlined in (b). Earned value analysis allows the project manager to establish the value of work done in relation to the cost that has been absorbed in order to achieve that level of completion. Cost variance is evaluated in terms of budgeted cost of works performed (BCWP) and budgeted cost of works scheduled (BCWS). ‘Budgeted costs’ refers to estimated costs in the cost plan, as generated by the project CDES during cycle 1 of the project cost control A2/12

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system (PCCS). ‘Works scheduled’ refers to the degree of completion of each activity at a particular stage in the project. This information is developed and stored on the project master schedule (PMS). ‘Works performed’ refers to the degree of completion that has actually been achieved (not necessarily as scheduled) on each work package. The actual costs incurred by the project are measured using actual costs of the works performed (ACWP). Cost and schedule variance values are produced for each WBS package, individual cost variance (CV) and schedule variances (SV) being generated in order to relate cost performance to schedule performance according to the following: CV = BCWP − ACWP SV = BCWP − BCWS

This comparison allows the project manager to isolate cost variances and see whether they have been caused directly by corresponding variances in the schedule. The project manager can produce a simple matrix showing cost variances and listing those that are acceptable (package ahead of programme), or risky (package on or behind programme). EVA also allows the project manager to see where underspends are accompanied by delays (indicating eventual break even but late completion) or where underspends are accompanied by advancements on programme (indicating eventual completion under the cost limit and ahead of programme). EVA allows other scenarios to be identified and analysed. In this context EVA is a prediction tool as well as being a monitoring and control tool. It detects variances and uses these to project potential outcomes if the situation remains unchanged. It offers alternative scenarios and shows possible end states if various corrective actions are taken. 4 (a) Quality policy is an overall statement of the quality vision of the company, often backed up by statements to customers or collaborators about minimum levels of performance in specific and general areas. Quality objectives are usually taken as being individual components of the policy that are extracted and converted into operational and/or production targets. In the case study, the project manager or project sponsor might set out an overall policy for the project that fits in with the quality policy of the organisation as a whole. He or she might then break this down into a quality assurance plan and review (QAP/QAR) that isolates individual components of the process and identifies the required contribution area. Project managers sometimes use a quality breakdown structure (QBS) in order to identify those areas of the quality system that should be targeted as quality objectives. In general, the objectives must be clear and achievable, and must mirror reality and practical possibility. More specifically, the objectives should be: • Project Management

achievable;

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•

based around specific goals;

•

related to specific standards or deadlines etc.;

•

suitably resourced.

In the case study, the production manager might take samples of produced items and plot the average distribution. From this, the quality manager might then analyse the system to identify all the contributory elements and sample each one in turn for defects. For example 10 per cent of products might be defective over a given period, but only 20 per cent of these defects might have been caused by production quality failure – maybe 80 per cent were caused by bad handling or packing. These results would give an obvious indication of where investment is required and where standards for improved performance need to be established. Research within the company might indicate that a 25 per cent increase in inspections will result in a 50 per cent reduction in bad packing. This information, coupled with the cost of inspections and defects, can then be used as the basis of trade-off calculations in order to determine the optimum level of inspection. (b) Conversion of a policy into a set of objectives requires an analysis of the system and an evaluation of exactly what contribution each section is required to make. This contribution is usually derived at a level where individual and measurable targets can be set. The policy should be carefully broken down using a quality breakdown structure (QBS) (see above). The project manager should then carefully consider each QBS component and identify those over which he or she has direct control. If the project manager does not have direct control over a particular package, then some kind of indirect control system has to be put in place. This could be done (for example) through a contractual link that specifies the minimum levels of performance that are acceptable, backed up by some kind of insurance guarantee and/or warranty. Damages and penalty clauses may also be built in as an added safeguard. If the project manager does indeed have direct control over an element, then it can be considered in terms of being an objective. The upper and lower performance limits of each objective should be established and the minimum level acceptable (in order to service the delivery of the policy adequately) should be determined. In some cases there may be a need to assign weights to individual objectives where some are more important than others or where some contribute more to the overall policy than others. This can be avoided using an established methodology such as relative weighting analysis. The various initial performance levels for each part of the policy system are then established, and individual target levels of performance for each of the objective sections can be set. Ownership and management structures are established and the improvement in performance of each of the objective components is monitored. So long as each objective element contributes to the overall performance of the policy system, an improvement in any objective A2/14

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component will generate a corresponding improvement in the system as a whole. (c) An interface management system (IMS) is a tool for controlling formal and informal communication flows within the organisation and also across organisational boundaries. The IMS maps each individual project team member and stakeholder, and establishes clear lines and channels of communication across the various interfaces within the system. The method and type of communication varies among the different areas that are defined by the project interfaces. Generally, where there are formal contractual links across the organisational boundary, there will be a requirement for formal written communications. The IMS might allow verbal communications, for example in relation to change, but these would probably be subject to written confirmation within a limited time or would be of no immediate effect. Marks can be given for reasonable extension and assumptions. In the case study, the IMS would be particularly useful in managing the communications that are occurring between the client organisation and the various external bodies. Engineering design processes can be highly complex and are also very often subject to change. The external designers might be designing a particular component or layout and suddenly discover that some part of the original specification is incompatible with the rest. They then ask for instructions and a change notice is issued. It is very important that everybody knows about this change notice, and it is also important that it is issued correctly and within the terms and conditions of the contract. The IMS would monitor the issue of the change notice and ensure that all contractual procedures and limitations are complied with. 5 A project is usually required and justified as part of an overall organisational strategy. The project itself could be a change mechanism, where the organisation develops a need for change and the project is the vehicle by which the change occurs. An example is a paint and wallpaper manufacturer who is experiencing increased demand for its paint products and is therefore planning for growth. The organisation as a whole is likely to develop a strategy for programmed expansion over a three-year period. Each aspect of the production process that is to be changed (to increase capacity) is treated as a project, and the collective group of projects is considered as a programme. Each level requires its own degree of strategy development and implementation. The project and programme strategies can be developed as strategic project/programme plans to BS6079 and can be designed, planned and executed using project management. At the programme level, project management develops an overall programme plan and ensures that the objectives of each individual project match those of the programme. During programme implementation, project management tools such as EVA track the performance of each individual project and develop a collective outcome that can be evaluated in terms of the overall strategic objectives of the organisation. Variations in programme Project Management

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development can be investigated by considering the performance of each project and by issuing the necessary corrective instructions to the various project managers. In the wallpaper and paint example, the programme level would be the programme manager in charge of each of the individual projects that are required in order to allow the paint production section to expand. At the project level, the project manager develops the project strategy and then guides the implementation. This involves all the usual project management skills of team building, objective establishment, establishing procedures, and putting in place the standard time, cost and quality controls. In the wallpaper and paint example, a project could be the works involved in upgrading one particular paint production line. At the organisational strategic level it might be decided that the company should switch from batch to mass (continuous) production. At programme level, this would be considered in terms of updating all of the various paint production lines. At project level, the consideration would be upgrading one particular production line. It can therefore be seen that project management is applied at the organisational, programme and project levels in the form of organisational strategic, programme and project management. The essential tools and techniques are the same at each level. The difference is in the level of detail that is available and required, and in the scope and range of objectives that are considered. Project management also works at all three levels in relation to unforeseen changes. Switching from batch to mass production is a change that is planned and implemented by the company as part of its overall strategy for success. In the process of implementing this strategy, unforeseen additional changes may be required. An example is a breakthrough in paint technology and a corresponding need for change in the design of the new production systems. Project management acts as a planning and control process for this level of change as well. Project planning and control allows new time objectives to be put in place, while EVA allows new estimates to be established and new estimated final account totals to be developed. It also allows new tracking lines and variance envelopes to be established. Project management also works at higher levels within the system. There might be a switch in the strategic objectives of the organisation when the programme itself is only partially complete. In this case, project management allows new programme objective-and-monitoring and control systems to be put in place. The programme is realigned to become compatible with the revised strategic objectives of the organisation. Project management is then used to realign the various project objectives and monitoring-andcontrol systems with those of the realigned programme. Project management can be used at all these levels because it is the only set of tools that operates with sufficient power and flexibility. A2/16

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6 (a) Conditions of certainty apply where the outcome is known. If a person throws a stone in the air it can be forecast with certainty that it will always fall back to Earth. One could argue that there are other possible outcomes. Theoretically, if one could throw the stone hard enough it would go into orbit, but this would be outside the limits of what is feasible. It would therefore be reasonable to say that if a person threw a stone out over a large glass roof, the stone will hit the glass at some point and damage will occur. This is a ‘known’ event. It is foreseeable from the information that is available to the decision maker and its occurrence can be forecast with certainty. An example from the case study is that the project will cost something. Even if it does not go ahead, the fact that it is being considered and planned means that money is being spent on it. Conditions of risk apply where there is a reasonable probability that an event will occur and where some kind of assessment can be made. These are the ‘known unknown’ events. An example would be a cricket captain considering the weather. In England, it will definitely rain at some point – probably soon. ‘Soon’ means different things to different people; it also means different things in different seasons and in different parts of the country. The captain therefore knows that it will rain (known) but he or she does not know when it will rain (unknown). This is therefore a risky event, and is a ‘known unknown’. It can be forecast with reasonable accuracy but it is not a certainty. In the case study, an example is that the project will start. It is not known exactly when it will start, but economic necessity means that it must start at some point. Conditions of uncertainty apply where it is not possible to identify any known events. Decision making under conditions of uncertainty is therefore concerned with wholly ‘unknown’ events. Considering the weather, this would apply to the likely occurrence and impact of a wholly unforeseeable and unparalleled storm, such as the great storm of 1987 in southern England. Under conditions of uncertainty it is not possible to predict outcomes with any accuracy. In general terms, most actuaries would say that risks are insurable while uncertainties are not. In order to calculate an insurance premium, an actuary has to be able to evaluate a set of risks in some way. If the actuary cannot make an evaluation, the insurance may be refused. The main difference between the two is knowledge about the situation: the more knowledge one has, the more chance there is of being able to determine a risk as opposed to an uncertainty. It is generally not possible to transfer risk under conditions of uncertainty through insurance, because the events concerned are not reasonably foreseeable and therefore cannot be forecast with any degree of accuracy. Some insurance policies will cover minor storm damage, but most do not cover major storm damage simply because it is generally too difficult to predict with any accuracy and therefore to calculate a level of risk for the insurer. An example of uncertainty in the case Project Management

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study is delay. The project will start at some point and the project manager can make as much provision as possible against delay but delays can still occur that are beyond the capacity of the project manager to predict. There could be a major plant failure half-way through the project, which delays completion by six weeks. The plant failure could be wholly unforeseeable and could occur over and above the standard maintenance cycles that are in place. (b) A typical risk-management system comprises a number of well established stages. These include: •

risk identification;

•

risk analysis and classification;

•

risk attitude;

•

risk response.

Risk identification is the process of identifying and defining those risks within the system that are relevant. Risk identification uses approaches such as the Delphi technique, the nominal group technique and SWOT analysis in order to determine the nature of a risk profile. The identification process may have to look inside and outside the organisation. Risk analysis and classification involves evaluating the risks and measuring them in some way. In the case study, the risk profile is relatively straightforward because there are relatively few risks and those that there are can be clearly defined. Most risks can be classified in terms of impact and probability. This is most often represented as a risk grid or risk map. Risks are located on this map and can move around as internal and external variables change. ‘Red’ sector risks are the ones that cannot be ignored and should be allocated ownership and also a defined management approach. Numerous quantitative tools and techniques are available for risk analysis. These range from detailed statistical approaches such as Monte Carlo simulation to EMV and pay-off matrices. Risk attitude is a measure of the attitude of whoever is responsible for making the decision. Some decision makers are risk-averse while others are risk-seeking; others may be neutral. A funds manager may take some options that are more risky than others because they offer the potential for higher returns. This is generally necessary in order to establish a balanced portfolio. In some cases, such as aircraft design, it is not acceptable to take a risk-seeking attitude as the consequences of failure can be catastrophic. In other cases, such as gambling, it may be inappropriate to take an entirely risk-averse approach. Risk response is the end result of the process. The decision maker can decide to

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•

avoid the risk;

•

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•

mitigate the risk;

•

transfer the risk.

Risks may be avoided by removing them from the system, such as taking out a contractual term from a contract. Avoidance could also occur where a decision maker decides not to accept a particular risk at all, such as an insurer refusing to accept an insurance proposal for a high-risk subject such as a cargo plane flying weapons into a war zone. Risks may be accepted as they are and allowed for by including some kind of premium, reserve or contingency to cover the eventuality of the risk occurring. Building contractors often inflate tender prices to allow for unforeseeable elements such as bad floorboards or rot. Risks can be mitigated by transferring part of the risk and retaining the other. An example is an insurance policy excess. Insurers often seek to discourage policy holders from making minor claims by asking for a policy excess. Under this arrangement, the policy holder agrees to pay the first part of any claim. Risks can also be mitigated by careful planning and by putting in place appropriate monitoring and control systems. Risks can be transferred by contractual terms and by other provisions such as insurance policies, outsourcing and subcontracting. (c) The Delphi technique and the nominal group technique are both forms of brainstorming that usually involve the development of separate creative and evaluation phases. In the Delphi method, a panel of experts is selected from both inside and outside the organisation. They are all given an identical statement of the problem, with full associated data and support information. The experts do not interact and do not know of each other’s existence. They therefore act purely as individuals. Each expert is asked to make an anonymous identification and prediction of a particular risk. Once the identification and prediction are complete, each expert submits it to the steering group. The steering group assesses the evaluation and provides comprehensive feedback to each expert on the collective answer. Each expert is then asked to make a new identification and prediction based on that collective answer. The Delphi method therefore uses individual and group decision-making theory. It is based on the principle that groups approximate to the most accurate answer, provided that group interaction is limited. In the nominal group technique, a panel is convened. The panel is then asked to brainstorm the problem and to list proposed answers in writing. The listing usually goes onto a flipchart so that the whole group helps develop the list and observes it as it develops. Each idea is discussed openly and in detail among the various panel members. Each panel member then individually ranks each idea in terms of its perceived suitability for the particular problem. A collective rank is then developed and the ideas are listed in order of this collective rank. They are then listed and discussed again as necessary until a final ranking can be arrived at.

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Final Practice Examination 2 Please note that the type of specimen answer given is often called the 150% answer. The examiners are aware of the time constraints involved in an actual examination and take this into account when awarding marks. The key to passing the examination is to cover the key issues. Additional marks are awarded for the scope and depth of answers. Please also note that this sample paper includes 6 questions in order to cover a wide range of subject areas. The examination paper itself will comprise 4 and not 6 questions. In the examination, candidates have to answer all 4 questions. The project management examination is designed to test both knowledge and understanding of the subject. It tests knowledge by measuring the extent to which the theory from the text has been retained. It tests understanding by measuring how well the candidate can apply the theory to the content of the mini case study that appears at the start of the examination paper. The short mini case study comprises around one page of text, perhaps with some tables or related figures. It gives some basic background information about a hypothetical project and will typically include some basic details on the main people involved together with some cost and time information. The candidate should read the case study carefully and then answer the examination questions in the context of the case study. Candidates should remember the following points.

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1

Read the question carefully Answer only what is being asked. Candidates should avoid the temptation to answer the question that they wish had been asked. Some candidates include irrelevant material in the hope that extra marks will be gained. Sections of the answer that are irrelevant consume valuable time but do not earn any marks.

2

Check the marks distribution The Project Management examination comprises four questions, each of which in turn has several sections. Each section carries a certain mark. It is important that candidates allocate time to each section in relation to the marks that are available for that section. In the project management examination, it is beneficial to use diagrams as these can communicate knowledge and understanding more efficiently than words when time is strictly limited.

3

Answer all the questions Candidates should attempt each part of each question. The overall average for the paper is very quickly affected when the answer omits whole sections.

4

Knowledge and understanding Project management is very much a practical subject. It is about planning things and then doing them on time, on cost and to the required standards. It is very important that candidates demonstrate that they understand the subject as well as having developed a knowledge of the theory. Therefore candidates should try to show that they can apply their knowledge of the subject wherever possible. This could involve making Edinburgh Business School

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direct use of the case study information in developing answers, and should include example applications where appropriate. 5

Answer plan It is sometimes useful to prepare an answer plan. This gives an outline of the main areas that a candidate intends to include in his or her answer. It can act as a useful indicator to the marker where (for example) the candidate has run out of time and has not been able to complete the answer as he or she intended.

Mini Case Study Assume that you are an IT project manager in charge of the programmed upgrading of a medium-sized university administrative function. The administrative function is responsible for a range of important functions, including student admissions, applications processing and student records. None of these functions can be performed if the administrative function is out of action. The administrative function includes around eighty staff in total, housed in three different offices located throughout the university. The administrative staff use individual PC workstations driven by a central administrative server. The server and the individual PC workstations are to be replaced, together with most of the other existing equipment on the network. The various offices are also to be extensively refurbished as part of the upgrading programme. An external consultant is to advise and assist on decommissioning the existing systems, transferring files etc. The upgrading works are to be carried out over the summer so that disruption to the university will be minimised. It is imperative that the works are complete and the administrative function is operational again within seven weeks. This is necessary so that there will be sufficient time to process the applications for the forthcoming academic year. Any applications that are not processed on time will be lost, and there will be a corresponding fall in fee income for the next year. It is currently estimated that the fee income lost will be £35 000 for every week that the upgrading project runs over seven weeks – for example, if the project finished after nine weeks, the total fee income lost will be £70 000. The refurbishing works are to be carried out by a local contractor called ‘Cowboy and Co’. New PCs and peripherals are to be supplied by a local IT supplier called ‘Scunner Scanners Ltd’. The external IT consultant will be the ‘Bright Sparks Partnership’. The university’s own IT section, called ‘University IT Support’, will be involved as they are responsible for programming and maintaining all of the university IT systems. The sequence of works will be largely constant for the duration of the project. There will be an initial two-week preparation process followed by office upgrading, which in turn will be followed by IT upgrading. When all the systems are in place, there will be a recommissioning period where all systems are checked and tested prior to going back on line. The old computers are to be removed by your internal IT section. As soon as this work is complete, the existing furniture is to be removed by a firm of Project Management

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specialist removers called ‘Shifters Ltd’. As the old furniture is being removed, the office has to be inspected by the university office manager in order to ensure that the office is in a reasonable condition for commencement of the other works. The office manager has to give final approval before any further work can be carried out. Assuming that this is successful, the office refurbishment works can start. As soon as this refurbishment is complete, the IT installation can commence. On completion of the works, your internal health and safety section has to inspect the works and certify them as ready for occupation.

Questions 1 Project management organisational structures can take numerous forms, and can be mapped using an Organisational Breakdown Structure (OBS). (a) Summarise the main characteristics of functional, project and matrix organisational structures, and for each format, give an example of the type of organisation for which the format may be applicable. (5 marks) (b) For the case study project, design a full OBS showing all contractual, communication and authority links, and briefly summarise the primary characteristics of any two different contractual links. (10 marks) (c) Summarise the likely possible sources of delay to the case study project and explore their potential for disrupting the programme. (10 marks) 2 Projects are often planned and controlled using networked schedules. Among other information, schedules show individual start and finish times, float and overall completion dates. (a) Using examples, differentiate between logic-driven and resource-driven scheduling constraints. (5 marks) (b) Refer to Table A2.4. For the data shown, generate a project network schedule and calculate the project completion date. (5 marks) Table A2.4 Activity

CPM data Normal duration (weeks)

Crash duration (weeks)

Normal cost (£)

Crash cost (£)

A–B

2

1

20 000

60 000

B–C

1

1

60 000

60 000

B–D

2

1

80 000

120 000

B–E

1

1

100 000

100 000

D–F

4

1

60 000

90 000

C–F

2

2

40 000

40 000

E–F

2

1

66 000

166 000

F–G

2

1

100 000

260 000

Note: Some of the figures are intentionally different from those provided in Table A2.5.

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(c) Assume that the overall project completion date has to be reduced by four weeks. Calculate the most economic crash sequence to achieve this and represent the time–cost trade-off graphically. (15 marks) 3 Assume that some revised programme duration and cost figures have been issued and a PERT calculation is required so that a probability-of-success outcome can be generated. (a) Refer to Table A2.5. For the data provided, develop a PERT network and calculate the project mean duration. (5 marks) Table A2.5

PERT data

Activity

Optimistic duration (weeks)

Likely duration (weeks)

Pessimistic duration (weeks)

Normal cost (£)

Cost to crash by 50%

A–B

1

2

3

20 000

20 000

B–C

2

3

4

60 000

20 000

B–D

1

2

3

80 000

40 000

B–E

1

3

5

100 000

n/a

D–F

2

8

12

60 000

10 000

C–F

1

2

5

40 000

n/a

E–F

1

2

6

66 000

100 000

F–G

2

5

7

100 000

30 000

Note: Some of the figures are intentionally different from those provided in Table A2.4.

(b) Calculate the probability of completing the works by week 7. (5 marks) (c) Assume that the university is prepared to extend the project completion date to the end of week 10. Calculate the lowest crash cost for achieving this date, and give the total cost of the project (including fee income losses) if programme completion is to be achieved before the end of week 10. Assume that all activities can be crashed by 50 per cent but no optimistic, likely or pessimistic duration can be less than one week. (5 marks) (d) Discuss the applicability and limitations of using PERT-based analysis for projects of this type. (10 marks) 4 Project management cost planning and control is based on the concept of the project cost and control system (PCCS) using earned value analysis (EVA) as the basis for generating project variance analysis reporting (PVAR). (a) Summarise the main cycles and phases of a PCCS and discuss the activities that would be carried out in each phase. (10 marks) (b) Refer to Tables A2.6 and A2.7. Discuss the performance of each individual team and the project as a whole for weeks 1, 2, 3, 4 and 5. (10 marks) (c) Produce a PVAR report showing overall project performance up to and including week 5. (5 marks)

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Table A2.6 Week 1

2

3

4

5

Cumulative total cable installed Team

Cable completed

1

1000

2

500

3

1200

1

2000

2

1100

3

2600

1

3000

2

1900

3

3500

1

4000

2

2000

3

4600

1

5000

2

2500

3

5800

Note: The table shows performance figures for three teams of engineers who are installing new IT cabling in the office refurbishment programme. The engineers are paid a basic rate plus overtime. The work has been budgeted overall at £100 per metre completed, including all labour, plant and materials. The target rate of installation is 1000 metres per week.

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Table A2.7

Cumulative total costs Team 1 (£)

Team 2 (£)

Team 3 (£)

Basic salary

60 000

60 000

60 000

Overtime

30 000

31 000

45 000

Materials

5 000

4 000

10 000

Plant

5 000

5 000

5 000

Total

100 000

100 000

120 000

Week 1

Week 2 Basic salary

120 000

120 000

120 000

Overtime

60 000

42 000

110 000

Materials

10 000

8 000

20 000

Plant

10 000

10 000

10 000

Total

200 000

180 000

260 000

Week 3 Basic salary

180 000

180 000

180 000

Overtime

90 000

53 000

105 000

Materials

15 000

12 000

30 000

Plant

15 000

15 000

15 000

Total

300 000

260 000

330 000

Basic salary

240 000

240 000

240 000

Overtime

120 000

60 000

145 000

Materials

20 000

20 000

35 000

Plant

20 000

20 000

20 000

Total

400 000

340 000

440 000

Basic salary

300 000

300 000

300 000

Overtime

150 000

100 000

185 000

Materials

25 000

25 000

40 000

Plant

25 000

25 000

25 000

Total

500 000

450 000

550 000

Week 4

Week 5

Note: The table shows the total costs charged against the various team cost centres up to and including the week shown. The totals shown in bold represent actual costs of works performed (ACWP), including overheads, legally committed amounts and all other relevant costs.

5 Quality Management is an essential component of any project management system. (a) Summarise the six primary components of a quality management system. (10 marks) (b) Compare and contrast fast-track and phased concurrent engineering Project Management

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approaches, and summarise their significance and applicability in relation to time-based competition. (5 marks) (c) Discuss the factors to be evaluated when considering what level of defects are acceptable within a production system. (10 marks) 6 Team building is one of the key responsibilities of a project manager. In the context of the case study, discuss the primary components of a good team building system. (25 marks)

Outline Answers 1 (a) The answer should outline the main characteristics of the three structures. The functional structure is based on vertical subdivisions within the organisation, with each section or unit concentrating on one aspect of the production system. A typical example of this would be the university administrative function itself, which will probably be based on a series of specialist departments or sections such as admissions, records, student welfare and accommodation. These units or sections will probably run as independent units under the control of individual functional managers. The project structure uses a pool of specialists that are drawn together into project teams by the project manager for the duration of the project. In the case study, an example project structure would be something like a new quality-control system that has to be implemented across all the departments within the function. Project team members would be drawn from each section, probably in the form of some kind of implementation team or committee to oversee the development and implementation of the system. The upgrading process itself is another example of a project structure within the case study. A matrix structure is a combination of the functional and project structures. (b) The OBS should show all organisational boundaries for all key players. All links, including contractual, authority and communication linkages, should be shown. All internal and external interfaces should be identified. The structure could include reasonably typical additional players, such as change control or services co-ordination. The identity of the chosen organisations should be made clear and marks should be given for the clarity of the OBS and its relevance to the chosen organisation. Any external players should be clearly linked into the internal system, perhaps through some kind of legal services or contract control section. The answer should demonstrate a clear understanding of the various links within the system, including the differences between standard forms of contract and contracts for professional services. Standard forms contain precise terms and conditions that relate clearly to specific performance. There are often clear statements for remedial action and rights in the event of non-compliance. Professional commissions tend to rely more on implied terms, and relate more to the professional A2/26

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bodies’ own codes of conduct when considering standards and specific performance. (c) The answer should demonstrate an understanding of the various likely types of delay that could affect the project. Delays could occur at any point in the system, but some delays are easier to control than others. Scunner Scanners could make a late delivery. This risk can be avoided by ordering the scanners early and if necessary putting them into storage. Supply contracts tend to have relatively little ‘come-back’ in the event of late delivery. Internal IT could cause a delay because of nonavailability of staff or bad working practices. This risk can be reduced by internal communication and informal co-ordination to make sure that the internal IT staff are properly organised and capable of carrying out their responsibilities. There will be no contractual protection here. The risks with the external contractor and consultants will be significantly greater than with internal IT. Contracts will almost certainly be required here. These will require the contractor and consultants to perform to specified or implied levels. The risks presented by Cowboy will be controlled by damages clauses within the standard form of contract. The external consultants will be covered by professional indemnity insurance in the event of negligence. In both cases the university would be looking to claim damages for breach or negligence respectively. 2 (a) The answer should explain the primary differences using examples. Logic-driven scheduling relates to work that is limited by logic, such as putting on a sock before a shoe. Resource-driven scheduling relates to resource limits acting as the driver, such as being able to do two (but not three) things at once as you only have one pair of hands. In the case study, the durations given are probably governed by the resources available, while the sequence of works defined is probably driven by the execution logic. Scheduling usually involves considerations and trade-offs between resource and logic considerations. (b) The critical path should be identified from the forward and backward passes. The critical path runs A–B, B–D, D–F, F–G. Candidates should note that there is a float of 3 weeks available on each of the two parallel paths B–C, C–F and B–E, E–F. The overall duration of the project is 10 weeks. (c) The cost per unit time of crashing each critical path activity is as shown below. A–B: 1 week available @ £40 000 B–D: 1 week available @ £40 000 D–F 3 weeks available @ £10 000 F–G 1 week available @ £160 000 The most cost effective crash sequence starts with those activities that show the greatest time saving per unit cost. In this case it would be logical to crash D–F first (3 weeks @ £10 000 = £30 000) followed by Project Management

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A–B (1 week @ £40 000). This crash sequence provided a time saving of 4 weeks at an increased cost of £70 000. It should be noted that A–B and B–D both offer the same cost per unit time saved values, but B–D cannot be crashed as the initial 3 week crash of D–F generated a triple critical path in the parallel activities. B–D can only be crashed if an activity in each of the two parallel critical paths can also be crashed. In the case of the B–C, C–F line, no crashing is possible. Crashing D–F and A–B achieves the time saving required. A further crash option of 1 day on F–G @ £160 000 is available if required. A typical graphic could be as shown below.

600 000 500 000 400 000 300 000

Estimated cost

200 000 100 000 0 5

6

7

8

9

10

Candidates could also draw a simple line graphic.

The normal project cost is £526 000. Crashing D–F increases this to £556 000 and crashing A–B takes it to £596 000. These estimate values should appear at time points 10 weeks, 7 weeks and 6 weeks respectively. 3 (a) The PERT schedule is as shown in Table A2.8. The critical path can be determined as A–B, B–D, D–F, F–G. The project mean duration (the sum of the critical path averages) is 16.5 weeks. This is the mean duration based on the optimistic, pessimistic and likely times given. (b) The project standard deviation is 1.92 weeks (see last line of Table A2.8). If the target duration = 7 weeks, then the mean difference = 7 − 16.5 = −9.5 weeks. The standardised mean difference can then be calculated as −9.5/1.92 = 4.95 standard deviations below the project mean. This equates to a probability of success of much less than 1 per cent.

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Table A2.8 Activity

PERT schedule Average

SD

2

Optimistic duration

Likely duration

Pessimistic duration

SD

A–B

1

2

3

2

0.333333

0.111111

B–C

2

3

4

3

0.333333

0.111111

B–D

1

2

3

2

0.333333

0.111111

B–E

1

3

5

3

0.666667

0.444444

D–F

2

8

12

7.666667

1.666667

2.777778

C–F

1

2

5

2.333333

0.666667

0.444444

E–F

1

2

6

2.5

0.833333

0.694444

F–G

2

5

7

4.833333

0.833333

0.694444

Total

16.5

3.68

Project standard deviation

1.92

(c) The likely project completion date can now be extended to the end of week 10. In other words the new likely duration is to be 11 weeks. The critical path is A–B, B–D, D–F, F–G. Each of these activities can be crashed by 50 per cent if required. The cost of crashing and time saved by crashing are shown below. A–B: 2.0 weeks becomes 1.1 weeks @ £20 000 B–D: 2.0 weeks becomes 1.1 weeks @ £40 000 D–F: 7.7 weeks becomes 3.9 weeks @ £10 000 F–G: 4.8 weeks becomes 2.4 weeks @ £30 000 The most cost-effective crash sequence therefore is D–F, F–G, A–B, B–D. Crashing D–F reduces the overall average project duration to 12.6 weeks. Crashing D–F by 50 per cent reduces the optimistic time from 2 weeks to 1 week, the pessimistic time from 12 weeks to 6 weeks and the most likely time from 8 weeks to 4 weeks, as shown in Table A2.9. Table A2.9 Activity

PERT schedule after D–F crashed Pessimistic duration

Average

SD

SD

2

Optimistic duration

Likely duration

A–B

1

2

3

2

0.333333

0.111111

B–C

2

3

4

3

0.333333

0.111111

B–D

1

2

3

2

0.333333

0.111111

B–E

1

3

5

3

0.666667

0.444444

D–F

1

4

6

3.833333

0.833333

0.694444

C–F

1

2

5

2.333333

0.666667

0.444444

E–F

1

2

6

2.5

0.833333

0.694444

F–G

2

5

7

4.833333

0.833333

0.694444

Total

1.60

Project standard deviation

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Crashing A–B next increases the project cost by £20 000 and reduces the overall completion duration to 11.7 weeks. Crashing F–G increases the project cost by £30 000 and reduces the overall completion duration to 9.3 weeks, which is before the end of week 10 (as required). Table A2.10 shows the revised PERT schedule. Table A2.10 Activity

PERT schedule after three crashes Average

SD

Likely duration

Pessimistic duration

A–B

1

1

1.5

1.0833333

0.083333

0.006944

B–C

2

3

4

3

0.333333

0.111111

B–D

1

2

3

2

0.333333

0.111111

B–E

1

3

5

3

0.666667

0.444444

D–F

1

4

6

3.833333

0.833333

0.694444

C–F

1

2

5

2.333333

0.666667

0.444444

E–F

1

2

6

2.5

0.833333

0.694444

F–G

1

2.5

3.5

2.416667

0.416667

0.173611

Total

SD

2

Optimistic duration

0.977

Project standard deviation

0.998

Crashing D–F, A–B and F–G achieves the completion duration required and increases overall project costs by £60 000. The final cost of the project will therefore be as follows: Estimated normal cost of project Loss of fee income Crash cost

£526 000 £105 000 £60 000 £691 000

(d) PERT analysis has limitations in that it is a probabilistic approach. It cannot give one single answer for a project completion date or for the start and finish date of any individual activity. It is cumbersome in this kind of project as each time a PERT value is changed the project mean and standard deviation values change. This means that complex re-calculations are required each time the analysis progresses and tradeoff analysis can be somewhat complex. PERT is not widely used and people tend to be somewhat unfamiliar with it as a tool. PERT is limited in that it cannot give precise dates. These are usually demanded in most sub-contract and supply contracts. Failure to commit to precise dates leads to sub-contractors and suppliers increasing premiums and increasing contingency provisions. 4 (a) A PCCS is most often represented as a two-cycle system. The first cycle is the planning cycle. This includes all aspects of pricing, estimating, establishing targets and budgets, and setting up accurate cost plans. The second cycle is the cost control cycle. This involves a number of A2/30

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separate phases. In its most simple form, a cost control cycle contains a work initiation mechanism, a methodology for observing and collecting cost data from the system so that actual costs can be compared with targets, a comparison system and a reporting system. The reporting system initiates what is effectively a feedback loop. Each report is likely to identify areas within the project where there are cost problems, and it then acts as the basis for some form of corrective action. This is the project manager’s response to the problem. The corrective actions are initiated and any lessons learned are used to improve the efficiency of other work packages as they are released. Several cost-control-cycle phases are generally recognised so that, in overall terms, we have: •

Phase 1: cost planning;

•

Phase 2: work initiation;

•

Phase 3: cost data collection;

•

Phase 4: generation of variances;

•

Phase 5: cost reporting.

These five phases, operating within the two cycles, provide the framework for the operation of the PCCS. The concept of the PCCS accepts that cost control and cost planning are intrinsically linked and have to operate as part of the same system. Work initiation is the release process. Work is authorised or initiated in some way, either through the award of a contract or a works order or similar. Cost data collection and the generation of variances use EVA to generate CV and SV values. These demonstrate cost and schedule performance and are the basis for the PVAR reporting systems that operate within Phase 5. (b) The answer should show BCWP and BCWS calculations together with a comparison of EVA performance using the respective ACWP value provided. Values should be as shown in Table A2.11. From its CV and SV values, Team 1 is clearly performing on programme and to the anticipated cost curve. Team 2 is generally well behind programme and considerably over budget on cost. This could be due to high overtime payments that are not necessarily improving productivity. Team 3 is generally improving on programme and is showing a positive cost variance by week 3. This probably indicates that Team 3 is working more efficiently than originally anticipated. The project as a whole is over cost and behind programme. The situation could be significantly improved by addressing the problems that are being encountered by Team 2.

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Table A2.11 Week

Team

1

2

3

EVA performance figures Cable complete (m)

ACWP (£)

BCWP (£)

BCWS(£)

CV (£)

SV (£)

1

1000

100 000

100 000

100 000

0

0

2

500

100 000

50 000

100 000

−50 000

−50 000

3

1200

120 000

120 000

100 000

0

20 000

1

2000

200 000

200 000

200 000

0

0

2

1100

180 000

110 000

200 000

−70 000

−90 000

3

2600

260 000

260 000

200 000

0

60 000

1

3000

300 000

300 000

300 000

0

0

2

1900

260 000

190 000

300 000

−70 000

−110 000

3

3500

330 000

350 000

300 000

20 000

50 000

−170 000

−120 000

Total

(c) The answer should develop a suitable PVAR format, including CV and SV entries against some form of time scale, together with an analysis of variances and possible reasons and then some suggested remedial actions. There is clearly a major problem with different aspects of Team 2 and Team 3. The answer could also include reference to the actual costs (see Table A2.7). Materials costs do not appear to reflect actual installation, and overtime rates are clearly out of proportion. Additional marks can be given depending on how well the PVAR is developed. A typical layout would include: •

WBS code;

•

configuration control reference;

•

ACWP, BCWP and BCWS values;

•

SV and CV values;

•

reasons for variances and proposed courses of action;

•

previous corrective actions and tracking.

The format of the PVAR really depends on the application. It needs to identify the precise aspect of the project that it relates to. It also has to show the cost and schedule performance of that section and of any other sections that are directly related to the section being considered. It is then used to develop some form of corrective action and subsequently to monitor and control the implementation of the corrective action to make sure that it is working. A typical arrangement would be as shown in Figure A2.6.

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Project: WBS code: Cost centre/cost account code: Contractor/sub-contractor identity: Control level: Date: Responsibility: Cost Performance Data ACWP Month Project

BCWP

BCWS

CV

SV

EAC

VAR

Reasons for variance.

Proposed corrective action.

Tracking.

Originator: PM authorisation: Change control authorisation: Circulation:

Figure A2.6 Typical PVAR output

5 (a) The answer should briefly go through the ‘six pack’ and detail the primary components of each section that would be considered in assembling a real quality plan. For example, under quality objectives the answer could include a discussion on how objectives are established and set out, as might be needed for the assembly of quality objectives based on the cost of manufacture per unit and the cost of improving quality in relation to competitiveness. This is largely established and set by the price of competing manufacturers and the level of guarantees and warranties that are deemed to be acceptable without affecting the customer’s concept and appreciation of the quality of the product. The six pack itself comprises: •

quality objectives;

•

quality policy;

•

quality management;

•

quality control;

•

quality audit;

•

quality plan and review.

(b) The answer should give a clear indication of an understanding of the concepts of time-based competition and concurrent engineering. Using Project Management

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the latter, the borders between design and implementation and between life cycle stages can be blurred. This allows them to be overlapped and hence, to reduce the overall time required for design and construction. The answer given should preferably include a diagram to illustrate the concept of fast tracking and the overlapping of design and implementation (see Figure A2.7 as an example). With fast track, the design and implementation stage of each work package is overlapped. Each work package is then overlapped with other work packages. In phased applications, the design and implementation sections of each work package are kept sequential but individual work packages are overlapped.

Concrete

Walls

Drainage

Electrical

Plumbing

Execution

Windows

Design

Decoration

Time

Figure A2.7 Example fast-track concurrent engineering schedule (building project)

(c) The answer should consider contemporary theory on quality management, together with more traditional approaches such as the Japanese view. The cost–quality continuum should be examined, together with a discussion on acceptable defect limits in relation to the nature of the product. Examples could include Perrier Water or White Star Line. The answer should stress that quality management systems are expensive and can only be justified if they can bring defect levels into line with what is expected by the customer base. The answer should include some reasoning on production risk, warranties, guarantees and performance bonds. Most systems have acceptable levels of defects, but there are a few exceptions to this rule. One example of an exception would be anaesthetics. These have to be perfect every time because, A2/34

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if they are not, patients could be injured or killed and the drug companies would be liable for large compensation claims. It is therefore worth spending the necessary time and effort on developing a fully reliable manufacturing process because the consequences of even a single defective batch could be considerable. Most organisations establish acceptability windows on the quality–cost continuum. A typical quality–cost trade-off curve is shown as Figure A2.8. In a manufacturing context, a company might face a choice of making products at a low price, an intermediate price or a high price; outcomes above or below these limits will be classified as unacceptable. The higher the price, the better the quality of the product but (within limits) the more difficult it becomes to sell. The mass market generally wants a reasonably priced product that offers reasonable quality. As the price increases, the attractiveness of the product to the mass market declines. Similarly, if prices are dropped, it becomes easier to sell the product in terms of sale price, but quality also falls and it becomes more difficult to sell it now because people associate the product with low quality. Most manufacturers will opt for a reasonable quality of product with (say) a 5 per cent defect rate, and then cover this possibility of defect by issuing a guarantee or warranty with the product. Most people are prepared to pay a reasonable price for a product and accept the risk of a small defect rate provided that they also get a guarantee that gives them repairs or a replacement free of charge early on.

Defect-free rate Zero-defect target?

100% 99%

Zero-defect premium

95% 85%

£800/ea

Range of unacceptable levels of defects

£950/ea

Competitive manufacturing cost per unit

£1200/ea

Low level of defects at prohibitive cost

Figure A2.8 Typical quality–cost trade-off curve

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6 Team building in a project management context is the process of taking a series of individuals from different functional specialisations and welding them together into a unified project team. Although these individuals may belong to a range of organisations, it is the project manager’s responsibility to ensure they work as a team. This is important in the case study as a lot of the work is to be controlled by organisations that originate outside the project. Team building is always more difficult when it has to include external organisations over which the project manager has no direct control. There is an on-going team-building requirement throughout all stages of the project lifecycle because people join and leave the project team, and the project requirements change at the various stages. The early stages are perhaps the most critical, as these stages are when the team ‘culture’ or way of doing things is established. No matter how the project evolves and how fluid the team remains, the initial culture often continues to prevail throughout the lifecycle of the project. Generally, there are ten primary sections in any good team building process.

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1

Establishing commitment: In order for any team building process to work, the team members must have a level of commitment. The acceptable minimum will vary between teams and projects, but generally, it is desirable that team members share the overall aims and objectives of the project. This will of course vary. It may be easier to develop collective objectives in an internal project management system where all the individuals in the project work for the same organisation and therefore (at least to some extent) have common objectives. In an external system, the various participants all work for different organisations and hence may have different loyalties and responsibilities. In some cases, commitment has to be ensured through some kind of reward system, such as bonus payments or profit sharing. In other cases it can be linked to individual and group motivation drivers. In yet other cases, commitment can be linked to individual interests and external factors. In the case study, internal commitment should not be a problem. External commitment will be largely a professional responsibility.

2

Developing team spirit: Generally, the more competitive and interactive the project, the greater the need for a good team spirit. Team spirit cannot easily be defined. It is a measure of the motivation of the team and the extent to which its members can work effectively together. The effects of team spirit are apparent in many project examples. For example, one could cite several examples of football matches or other sporting events where a better team has been beaten by an inferior one, because the inferior team had better team spirit. This could include desire to win, attacking spirit etc. Team spirit is not the same as team commitment.

3

Obtaining the necessary resources: A common reason for many project teams failing to meet objectives is the lack of necessary resources. This applies particularly in systems where team success generates growth. In such cases, it is very important that resources are introduced into Edinburgh Business School

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the system so that increases in workload are matched by resource investment. Inadequate matching between success criteria and resource investment is one of the main reasons why project teams tend to suffer from quality compromises as productivity increases. Senior management tend to be happy to see project output increasing, but they often are less happy to invest in the project team in order to allow continued increases in productivity. In the case study, maximum possible resources should be secured in order to reduce down time to a minimum.

Project Management

4

Establishment of clear goals and success/failure criteria: Another common problem area in team building is a lack of clearly defined individual and team goals and success/failure criteria. Again, most people could cite examples where managers have set an objective and then ‘changed the goalposts’ (criteria) for project success. There are many reasons why this could occur, for example as organisations strategic objectives evolve and change. If there is a strategic change, it is essential that this is relayed in detail to the project manager so that he or she can re-establish project objectives. This should not be a problem in the case study as the objective is clearly to get the new lines operational as quickly as possible and to minimise downtime. These are unlikely to change as they are central to the overall objectives of the organisation.

5

Formalisation of senior management support: The project team has to operate within the context of the overall organisation. The project will be one aspect of the organisation’s overall efforts and will feature somewhere within the overall equation which determines the organisation’s strategic management policy. It is very important, both to the success of the project as an entity, and to the perceptions of the project team members, that senior management are seen visibly to be backing the project. This can be achieved by becoming actively involved with it and concerned for its satisfactory performance, for example, by attending major project review meetings. This should be relatively easy in the case study as the upgrading programme is central to the operational capability of the company, and senior managers will probably already be focussed on the programme of works.

6

Demonstration of effective programme leadership: The project manager has to be able to lead the team. This involves many duties and responsibilities, including some that overlap with other team building headings (such as motivation). The success of the project will depend on the accuracy of its planning and on the efficiency of its monitoring and control systems. The project team recognise that these are essential to the success of the overall project and will expect the project manager to take a strong on-going interest in their development and application. The PM will also be expected to take personal ownership of larger problems and issues as they arise and to ensure these are resolved.

7

Development of open communications: In most teams, output and efficiency can be related to communications; larger teams and more complex projects tend to have greater requirements for good communi-

Edinburgh Business School

A2/37

Appendix 2 / Practice Final Examinations

cations. It is also an important motivator because people usually work better if they feel able to communicate with other people in the system, and in particular with the section heads or managers. This provides them with a direct sense of how the project is progressing and of the priorities and concerns at all stages of the project lifecycle. It contributes towards creating feelings of team membership that encourages taking personal ownership of issues and problems as they arise, and commitment to overcoming them.

A2/38

8

Application of reward and retribution systems: Team members have different skills and abilities. However, in most systems at one time or another, bad feeling will arise because some people appear to be working harder and making a bigger contribution than others. The project manager has to set up monitoring and control systems to make sure that good performers are recognised and rewarded, and the poor performers are checked and reprimanded. Failure to do this will generally result in a proliferation of bad feeling, with consequent effects on motivation and a tendency towards team fragmentation with its associated increase in individualistic behaviours such as ‘every person for themselves’. To some extent, these characteristics will be set in the case study as internal company policy will determine organisational approach and the terms and conditions of the various contracts will determine external systems.

9

Control of conflict: Conflict arises in most human systems. Construction project teams with their multidisciplinary characteristics, high degrees of sentience and interdependency, and pressure to meet timescales in the face of unexpected problems that arise, tend to be particularly prone to conflict. Conflict between incompatible individuals is likely to occur whenever numbers of people are in contact with one another but the high degree of pressure associated with most projects exacerbates this. The potential for conflict in the case study is significant because of the timescales and considerably degree of sentience that will be present.

10

Development of heterogeneity control and cohesiveness: These measures define the extent to which the project operates as a single entity and how well it bonds together.

Edinburgh Business School

Project Management

Index

activity-on-arc (AOA) networks 5/34–39 activity-on-node (AON) networks 5/34–39 actual cost of works performed (ACWP), variance analysis 6/67–83, 6/87–93, 6/96–104 actual time for work performed (ATWP), variance analysis 6/69 administration, organisational structure selection criterion 4/48 aims planning process 5/4–6 All Goes According to Plan (AGAP) philosophy, risk handling 3/35 allegiance, organisational structure selection criterion 4/47 Alternative Dispute Resolution (ADR), contracts 3/57, 5/20 alternatives phase, procurement 3/61 analogue control, cost planning and control 6/14–15 analysis tools, quality control 7/56–61 application characteristics, CMS 7/74 Artemis Views 4 software 5/102–104 Association for Project Management (APM) 1/19–20 BoK 4/56–57, 4/59–63 Conditions of Engagement 4/37 origin 1/26 attention, risk management 3/8 audit CMS 7/79 quality 7/36–38, 7/45–46 authorisation system, cost planning and control 6/7–8 authorising function, project managers 2/11, 2/14 authority CMS 7/77 project managers 2/5 TRM 2/12–13 authority links, non-contractual linkages 4/41–43, 4/43, 4/45, 4/54 award phase procurement 3/62 award stage case study 8/14–15 backward pass

Project Management

Edinburgh Business School

CPM 5/44–51 PERT 5/53, 5/57 baselines, CMS 7/79–80 batch production 1/3–5 behavioural theory, organising function 2/16–17 benchmarking CPM 5/41 generic benchmarks 1/20, 4/57–59 quality assurance plan and review 7/48 benefits, potential, project management 1/24, 1/30 bias, risk management 3/11 bidding process 4/24 bidding strategy, cost planning and control 6/42–45 bids, contracts 3/56–59 Body of Knowledge (BoK) APM 4/56–57, 4/59–63 bonds and warranties, cost planning and control 6/19 bottom up estimating 6/38–39 boundaries, organisational 4/19–25 bidding process 4/24 cost centre charging 4/24–25 functional boundaries 4/19 interfaces 4/23–24 organisational islands 4/10–11, 4/20, 7/26 power boundaries 4/20 project management chair 4/22–23 project sponsors 4/20–22 status boundaries 4/20 time recording 4/24–25 bounded rationality, risk management 3/9 brainstorming quality control 7/52–54, 7/58 risk identification 3/37–38 breach of contract 3/58 breakthrough and implementation phase, TQM 7/63, 7/65–66 bridge example, CPM 5/47–51, 5/86–88, 5/94 British Standard BS6709 4/57–59, 4/63–66 generic benchmarks 1/20, 4/57–59 origin 1/26 SPP 1/27, 4/63–66 budget at completion (BAC), variance analysis 6/71–74 budget, project 6/7, 6/48–58

I/1

Index

changes 6/56–58 development 6/51–56 layout 6/51–56 plan 6/48 preparation sequence 6/48–50 role 6/50–51 budgeted cost of works performed (BCWP), variance analysis 6/67–83, 6/87–93, 6/96–104 budgeted cost of works scheduled (BCWS), variance analysis 6/68–69, 6/87–93, 6/96–104 building in quality 7/24 business skills, project managers 2/10 case study (Oldcastle Station) 8/1–54 aims 8/1–2 consultants 8/20 contractor agreements 8/17–19 cost planning and control 8/41–52 first supplement 8/22–27 individual and team issues 8/10–17 issue and supplements 8/2 objectives 8/1–2 organisational structures 8/27–29 preliminary evaluation 8/9–10 project information 8/3–8 quality management 8/52–54 risk grids 8/21 second supplement 8/30–33 strategic focus 8/11–12 suppliers 8/19 tenants 8/20 time planning and control 8/33–41 train operating companies 8/19 catastrophic risk 3/20 cause and effect analysis, quality control 7/58–61 censorship, groupthink 2/51 certainty conditions, risk management 3/25–33 challenges, potential, project management 1/24, 1/30 change consequences 5/7–9 opportunity for 5/7–9 change control 2/49 and concurrent engineering 7/88, 7/89 change notices, contracts 3/65 change–cost curves, CMS 7/70 characteristics project management 1/16–23, 1/29 projects 1/5–8 checkpoints, CMS 7/78

I/2

claims risk, contracts 3/65–67 classical theory, organising function 2/15 client risk 3/66–67 client to local authority agreements 4/39 client to main contractor agreements 4/38 client to nominated subcontractors agreements 4/39–40 client to project manager agreements 4/38 client to service authorities agreements 4/38 Cobra software 5/101 cognitive process, risk management 3/8–11, 3/68–69 cohesiveness, team 2/36 commissioning phase, project life cycle 1/22 commitment 2/21 quality management 7/22, 7/30, 7/32 commitment phase, TQM 7/63–64 common purpose, quality management 7/23 communications barriers 2/59–62, 7/26 CMS 7/28 developing open 2/24 formal/informal 2/59–62 internal/external 2/62 links, non-contractual linkages 4/43–45, 4/54 organisational barriers 4/10 organisational structure selection criterion 4/47 projects 2/58–59 quality management 7/26–28 skills 2/27 team 2/44, 2/58–63, 2/77–78 company specific tables, cost planning and control 6/32 company-wide quality management 7/13, 7/20, 7/22 compensation, contracts 3/66–67 competitive contracts 4/34 competitor risk 3/22 completion contracts 4/34 complexity project management driving force 1/10–11 time planning and control 5/15–16 computer-based planning and control 5/109, 5/95–104 advantages 5/96–97 disadvantages 5/97 general factors 5/98–100 software, commercial 5/100–104 software features 5/99 system critical success factors 5/99–100 Computerised Database Estimating Systems (CDES) 5/23

Edinburgh Business School

Project Management

Index

budget preparation 6/48–50 cost planning and control 6/45–47 description libraries 6/45–46 conception phase, project life cycle 2/47 concurrent engineering advantages 7/88–91 concept 7/81–85 disadvantages 7/88–91 fast track 7/85–88 phased 7/85–88 quality management 7/80–91, 7/97 Conditions of Engagement, APM/JCT 4/37 conditions of risk, decision making 3/25–33 conditions of risk, decision-making 3/70 configuration management systems (CMS) 4/43, 7/96–97 baselines 7/79–80 communications 7/28 components 7/72–79 configuration changes control system 7/76–78 cost planning and control 6/7–8 format 7/72–73 identification specification 7/74–76 layout 7/72–73 quality management 7/70–80 configuration status accounting and reporting (CSAR), CMS 7/78 conflict approaches to 2/70–71 characteristics 2/69–70 controlling 2/25, 2/26, 2/39 identifying 2/68–74, 2/78 management 2/72–73 resolving 2/68–74, 2/78 sources 2/68 considerations, contracts 3/58 consultants, case study 8/20 contingencies, cost planning and control 6/17, 6/54–56 contract administration phase, procurement 3/63 contractor agreements 4/39–40 case study 8/17–19 contracts basic theory 3/56–59 breach 3/58 change notices 3/65 characteristics 3/63–64 claims risk 3/65–67 compensation 3/66–67 considerations 3/58 disputes 3/57, 5/20 documents 3/56

Project Management

Edinburgh Business School

express terms 3/64 frustration 3/59 implied terms 3/64 PII 3/64 rectification 3/59 rescission 3/59 and risk 3/55–67, 3/72–73 risk transfer 3/65 termination 3/59 variation orders 3/65 void 3/59 contractual arrangements, project life cycle 1/22 contractual linkages 4/33–40 non-contractual linkages 4/41–45, 4/54 contributor categories, quality control 7/59 control charts, quality control 7/56 controlling function, project managers 2/11, 2/18–20 conviction, groupthink 2/51 co-ordination 2/21 organisational structure selection criterion 4/48 correcting, controlling function 2/20 corrective action quality control 7/60–61 quality management 7/33 Cost Account Codes (CAC) 5/23–24, 6/55, 6/58–60 cost account variation notices (CAVN) 6/57 cost centre charging 4/24–25 cost data collection, PCCS 6/60–77 cost objectives 2/7–9, 2/11 cost or cost plus contracts 4/35 cost planning and control 6/1–11 as management functions 6/5 case study 8/41–52 CMS 6/7–8 life cycle costs 6/21–26 PCCS 6/107–111, 6/27–104 requirements 6/6–9 system types 6/10–16 systems 6/2–26, 6/104–107 cost reporting, PCCS 6/93–104 benefits 6/93–95 information overload 6/93–95 problems 6/93–95 report types 6/95 cost variance (CV), variance analysis 6/69–83, 6/87–93, 6/96–104 cost variance index (CVI), variance analysis 6/78–83 cost–performance trade-off 5/72–73 cost–quality curves, multiple objectives 1/16–19

I/3

Index

cost–quality–time continuum 1/9–11 cost-efficiency, and concurrent engineering 7/90 costs direct/indirect 6/16 and quality 7/5–8, 7/33 costs and allowances, cost planning and control 6/16–20 crash analysis, project replanning 5/61–71 creeping scope 2/8–9, 7/89 critical path, crash analysis 5/61–71 critical path method (CPM) 5/31, 5/39–51, 5/58–59 bridge example 5/47–51, 5/86–88 origin 1/25 critical ratios, cost planning and control 6/83–87 Crosby, Philip B, quality management 7/32–34 cross functional management (CFM), TQM 7/67 currency fluctuations, cost planning and control 6/20 customer phase, TQM 7/63, 7/64 customers expectations, exceeding 7/22, 7/22 quality management education 7/14 cybernetic control, cost planning and control 6/10–14 daily application management (DAM), TQM 7/66 data analysis and classification, CMS 7/75–76 data gathering estimating 6/32–33 PCCS 6/60–77 dayworks, budget 6/51–56 decision making risk management 3/25–33, 3/70 team issues 2/25 decision theory, organising function 2/17 decommissioning phase, project life cycle 1/23, 2/47–48 defects cost of 7/7–8 defect rate vs. manufacturing cost 7/6–7 employee 7/20 process 7/20 zero-defects 7/33 definitive estimate, cost planning and control 6/34 definitive project product baseline, CMS 7/79 Delphi method, brainstorming 7/53 Deming, W Edwards, quality management 7/23–30 derisory attitudes, groupthink 2/51 description libraries, CDES 6/45–46

I/4

design stages, case study 8/13–14 development review reports 6/95 direct costs, cost planning and control 6/16 direct payments, cost planning and control 6/19, 6/51–56 directing function, project managers 2/11, 2/20–21 disputes, contracts 3/57, 5/20 documentation phase, procurement 3/62 Draft Master Schedule (DMS) 5/29–60 CPM 5/47 dummy activities, network diagrams 5/35–39 earliest event time (EET), CPM 5/43–51 earliest start time (EST), CPM 5/43 earned value analysis (EVA) 6/1, 7/44 example 6/87–93 multi level 6/74–77 PCCS 6/60–104 education programmes, quality management 7/33 empirical theory, organising function 2/15 Enterprise PM software 5/101 Enterprise Resource Planning (ERP) 5/102 environmental characteristics, CMS 7/74 environmental issues time planning and control 5/10–13 equity theory, motivation 2/56–57 error cause removal, quality management 7/34 estimate at completion (EAC), variance analysis 6/71–74, 6/96–104 estimated cost to complete (ECTC), variance analysis 6/96–104 estimated time at completion (ETC), variance analysis 6/96–104 estimating, cost planning and control 6/6, 6/28–58 accuracy, developing 6/34 bidding strategy 6/42–45 bottom up estimating 6/38–39 CDES 6/45–47 data gathering 6/32–33 elements 6/30–32 iterative estimating 6/39–41 presentation, estimate 6/33–35 procedure 6/28–35 project estimating 6/35–45 skill and knowledge 6/32 top down estimating 6/36–38 evaluating, controlling function 2/19 evolution, project teams 2/46–53, 2/76 exception reports 6/95, 6/95 exchange rates, cost planning and control 6/20

Edinburgh Business School

Project Management

Index

existing organisations projects external to 4/28–46 projects within 4/6–27 expectancy theory, motivation 2/57 exposure phase, procurement 3/61 exposure risk 3/23 express terms, contracts 3/64 external control, and concurrent engineering 7/91 external linkages, external project management 4/33–45 external project management 1/15–16, 4/2–5, 4/28–46 characteristics 4/29–33 example 4/54–56 extended system 4/29 fee structures 4/31–33 typical system 4/29 external project managers 2/10–11 external risk 3/22–24 external/internal communications 2/62 staffing 2/36–39, 4/30 factor balancing skills 2/27 fast-track concurrent engineering 7/85–88 feasibility phase, project life cycle 1/21, 2/47 fee structures, external project management 4/31–33 feedback CMS 7/79 organisational structure selection criterion 4/47 quality management 7/34 filters, groupthink 2/53 final account 4/32 finance, organisational structure selection criterion 4/48 financial risk 3/20 fixed costs, cost planning and control 6/16 fixed-price contracts 4/35 fluctuations, cost planning and control 6/18, 6/20 football grandstand, cost–quality example 1/19 forecasting, risk 3/9–11 formal procedures, quality assurance plan and review 7/48 formal/informal communications 2/59–62 forming, project team evolution 2/49 forward pass CPM 5/44–51 PERT 5/53, 5/57 frustration, contracts 3/59 full design development phase, project life cycle

Project Management

Edinburgh Business School

1/22 functional arrangements, organisations 1/12–16, 2/10–11 functional boundaries 4/19 functional organisations, project teams within 2/30–33 functional structure, organisations 4/7–11, 4/16, 4/48–50 games consoles example, concurrent engineering 7/84 Gantt charts 5/109 origin 1/25 resource utilisation 5/86–88, 5/95 time planning and control 5/31–34 gateways, CMS 7/78 generation of variances, PCCS 6/77–93 generic benchmarks, project management characteristic 1/20 goals establishing 2/23 quality management 7/34 graphical evaluation and review technique (GERT), origin 1/25 group processes, project teams 2/34–35 groupthink 2/51–53 gurus, quality management 7/20–36, 7/93 heterogeneity issues, team 2/33–34, 2/36 history, project management 1/25–26, 1/31 human cognitive process, risk management 3/8–11, 3/68–69 Hurwicz criterion, decision making 3/29 identification and analysis tools, quality control 7/58–61 identification tools, quality control 7/51–56 Imai approach, quality management 7/35 impact, risk 3/24, 3/38 implied terms, contracts 3/64 inception phase, project life cycle 1/21 increased risk, and concurrent engineering 7/90 indicative estimate, cost planning and control 6/34 indirect costs, cost planning and control 6/16 individual and team issues 2/2–78 case study 8/10–17 project managers 2/4–30 informal/formal communications 2/59–62 information, CMS 7/74–75 information overload, cost reporting, PCCS 6/93–95

I/5

Index

information systems, computer-based planning and control 5/99 Informed Risk retention 3/50–51 innovating and researching, quality management 7/25, 7/89 innovation risk 3/23, 7/89 insurance cost planning and control 6/20 risk management 3/51–52, 3/64, 3/67 integration, team 2/26 interdepartmental management 7/67 interface management skills 2/27 interface management system (IMS) 2/9 interfaces 4/23–24, 4/53–54 internal control, and concurrent engineering 7/90 internal project management systems 4/2–5, 4/18–27 example 4/50–54 internal project managers 2/10–11 internal risk 3/24–25 internal/external communications 2/62 staffing 2/36–39, 4/30 International Project Management Association (IPMA) 1/19, 4/56–59 international, project management characteristic 1/19 interpersonal skills 2/26 intuition, risk management 3/11 invincibility, groupthink 2/52 ISO10006 generic benchmarks 1/20, 4/57–59 origin 1/26 ISO9000 7/16–20 guide to 7/17–19 requirements 7/17–19 sections 7/16–17 iterative estimating 6/39–41 Japanese view, quality management 7/4–15 Joint Contracts Tribunal (JCT), Conditions of Engagement 4/37 Juran, Joseph M, quality management 7/30–32 knowledge risk 3/20 labour costs, cost planning and control 6/31–32 Laplace criterion, decision making 3/31–32 latest event time (LET), CPM 5/43–51 leadership function, project managers 2/11, 2/24, 2/25–30 leadership phases, team 2/27–29

I/6

leadership skills, project managers 2/9 learning, organisational structure selection criterion 4/47 legal issues legal services, procurement 3/61 Unfair Contract Terms Act (1971) 3/52, 3/65 life-cycle costing (LCC), cost planning and control 6/21–26 life-cycle leadership function, project managers 2/11, 2/27–29 linkages, external 4/33–45 logic driven evaluation 5/25–29 loyalty, characteristics 4/30 McGregor, X/Y motivation theories 2/53–56 management, senior, support 2/23 managerial skills, project managers 2/9 manufacturing companies, layout, typical 4/7–11 manufacturing cost, vs. defect rate 7/6–7 manufacturing phase, project life cycle 1/22 market demand risk 3/22 market risk 3/20–22 Maslow’s hierarchy 2/53–56 mass production 1/3–5 matrix structure, organisational structure 4/4, 4/16–26, 4/48–50 maximax/maximin criteria, decision making 3/30 measured works, cost planning and control 6/17, 6/51–56 measuring, controlling function 2/19 Micro Planner X-Pert software 5/101 Micro-Planner Manager software 5/101 Microsoft Project software 5/101 milestone monitoring, PCCS 6/60–62 Milestone Simplicity software 5/102 mind-set, quality management 7/24 minimax criterion, decision making 3/30 mission phase, TQM 7/63, 7/64 modular approach, CPM 5/40 motivation 2/21 equity theory 2/56–57 expectancy theory 2/57 Maslow’s hierarchy 2/53–56 project teams 2/53–58, 2/76–77 X/Y motivation theories 2/53–56 multi-discipline issues, team 2/33–34 multi-industry/disciplinary, project management characteristic 1/20 multidisciplinary loyalty 4/30 multi-functional working, and concurrent engineering 7/90 multilevel EVA 6/74–77

Edinburgh Business School

Project Management

Index

multiple objectives, project management characteristic 1/16–19 negotiated contracts 4/35 network critical path, PERT 5/57 network diagrams, time planning and control 5/34–39 networking, time planning and control 5/29–60 nominal group technique, brainstorming 7/54 non-contractual linkages 4/41–45, 4/54 norming, project team evolution 2/50 objective phase, procurement 3/61 objectives case study 8/1–2 cost 2/7–9, 2/11 multiple 1/16–19 and organisational structure 4/48–50 planning process 5/4–6 projects 2/7–9 quality 2/7–9, 2/11, 7/36–38, 7/39–41 time 2/7–9, 2/11 Open Plan software 5/101 operating cycle, PCCS 6/58–104 operation phase, project life cycle 1/23, 2/47 operational risk 3/19 order of magnitude estimate, cost planning and control 6/33, 6/43 organisation structure, projects 2/32–33 Organisational Breakdown Structure (OBS) 4/2, 4/50–53 risk mapping 3/43 organisational islands 4/10–11, 4/20, 7/26 organisational structures 4/1–56, 4/68–74 case study 8/27–29 criteria for selecting 4/46–50 examples 4/50–56 functional structure 4/7–11, 4/16, 4/48–50 matrix structure 4/4, 4/16–26, 4/48–50 organisational theory 4/5–50, 4/68–73 pure project structure 4/11–16, 4/48–50 organisations, functional arrangements 1/12–16, 2/10–11, 2/30–33 organising function, project managers 2/11, 2/14–18 outline proposals phase, project lifecycle 2/47 output standards, quality management 7/28 parametric technique, CPM 5/42 pareto analysis, quality control 7/51–52 pattern recognition 3/8 payoff matrices, decision making 3/27–33

Project Management

Edinburgh Business School

people issues 4/5–6 quality 7/10–12 time planning and control 5/14–15 percentage fees 4/32–33 performance project teams 2/36 trade-off analysis 5/82–83 performance measurement quality management 7/32 performance targets, quality assurance plan and review 7/48 performing, project team evolution 2/50 personal skills, project managers 2/9, 2/26 phased concurrent engineering 7/85–88 planning cycle, PCCS 6/28–58 planning function, project managers 2/11, 2/12–13 planning phase, TQM 7/63, 7/65 planning process, aims/objectives 5/4–6 planning, quality management 7/12–13 political risk 3/23 post-control, cost planning and control 6/15 post-contract work 4/32 potential benefits and challenges, project management 1/23–24, 1/30 power and authority, CMS 7/77 power boundaries 4/20 Power Project Planner 5/101 Power Project Professional, project planning software 5/95–104 pre-contract work 4/32 predictable risk 3/25 preliminaries, budget 6/51–56 previous project data, cost planning and control 6/32 pride, encouraging 7/29 Primavera Project Planner software 5/101 Primavera Suretrak software 5/101 prime cost sums, cost planning and control 6/18–19, 6/51–56 proactive planning, quality management 7/12–13 probability vs. impact, risk 3/14 problem solving 2/26 process phase, TQM 7/63, 7/64 procurement legal services 3/61 phases 3/59–63 and risk 3/55–67, 3/72–73 procurement strategy quality management 7/25 production phase, project life cycle 2/47 Professional Indemnity Insurance (PII), contracts

I/7

Index

3/64 professional services contracts 4/37 profit, estimating, cost planning and control 6/44 pro-forma contracts 4/38 program evaluation and review technique (PERT) 5/51–59 example 5/55–59 programme evaluation and review technique (PERT) origin 1/25 time planning and control 5/31 programmes, vs. projects 1/5 project (non-repetitive) production 1/3–5 project allocated baseline, CMS 7/79 project commissioning, case study 8/17 project cost control systems (PCCS) 6/1, 6/107–111, 6/27–104 cost data collection 6/60–77 cost reporting 6/93–104 generation of variances 6/77–93 operating cycle 6/58–104 planning cycle 6/28–58 work initiation 6/58–60 project design baseline, CMS 7/79 project execution, case study 8/15–16 project functional objective baseline, CMS 7/79 project life cycles 2/46–48 time planning and control 5/7–10 project lifecycles project management characteristic 1/21–23 Project Logic Evaluation (PLE) 5/25–29 project management benefits, potential 1/23–24, 1/30 challenges, potential 1/23–24, 1/30 characteristics 1/16–23, 1/29 defined 1/8–11 history 1/25–26, 1/31 overview 1/7–10, 1/28–29 structures 1/12–16 today 1/27, 1/31 project management chair 4/22–23 PRoject management IN a Controlled Environment (PRINCE2) generic benchmarks 1/20, 4/57–59 PRoject management IN a Controlled Environment (PRINCE2) 1-20, 4/66–68 Project Management Institute (PMI) 1/19 origin 1/26 standards 4/56–57 project managers 2/4–30, 2/74–75 authorising function 2/11, 2/14 authority 2/5

I/8

central position 2/6–7 concept 2/5–6 controlling function 2/11, 2/18–20 directing function 2/11, 2/20–21 external 2/10–11 functional arrangements 1/12–16, 1/21 influence sources 2/6 internal 2/10–11 leadership function 2/11, 2/24, 2/25–30 life-cycle leadership function 2/11, 2/27–29 organising function 2/11, 2/14–18 planning function 2/11, 2/12–13 requirements 2/11–30 role 2/5–6, 2/7–10 selecting 2/4–11 skills 2/9–30 team building function 2/11, 2/21–25 Project Master Schedule (PMS) 5/30 CPM 5/47 project objectives 2/7–9 project operational baseline, CMS 7/79 project replanning, time planning and control 5/108, 5/60–71 project sponsors 4/20–22 project teams 2/30–36, 2/75–76 communications 2/58–63, 2/77–78 evolution 2/46–53, 2/76 formation 8/12–13 functional organisations, within 2/30–33 group and team processes 2/34–35 mix 2/40 motivation 2/53–58, 2/76–77 operation 2/42–46 performance 2/36 profile 2/40–42, 2/76 staffing 2/20, 2/36–39 staffing profile and operation 2/36–46, 2/76 stress 2/63–68, 2/78 team building function, project managers 2/11, 2/21–25 team communication 2/44 team heterogeneity issues 2/33–34, 2/36 team leadership phases 2/27–29 team leadership, planning 2/43 team mechanics, planning 2/43 team membership 2/44 team multi-discipline issues 2/33–34 team multi-discipline/heterogeneity issues 2/33–34, 2/36 team spirit 2/22 team targets, planning 2/43 typical 2/40–42

Edinburgh Business School

Project Management

Index

uniqueness 2/40–42 virtual 2/45 project variance analysis reporting (PVAR) cost planning and control 6/96–104 Project Vision software 5/102 projects characteristics 1/5–8 communications 2/58–59 described 1/1–8 organisation structure 2/32–33 and other production systems 1/3–5 vs. programmes 1/5 ProjectView (Artemis) software 5/102–103 proposals phase, project lifecycle 2/47 prototype phase, project life cycle 1/22 provisional sums, cost planning and control 6/18–19, 6/51–56 purchasing, cost planning and control 6/31–32 pure project structure 4/11–16, 4/48–50 quality awareness 7/33 and costs 7/5–8, 7/33 defined 7/2 dividends 7/8–10 importance 7/15 people issues 7/10–12 value of 7/5–7 quality assurance 7/36–38, 7/41–42 plan and review 7/36–38 quality assurance plan and review 7/46–50 quality audit 7/36–38, 7/45–46 quality control 7/31, 7/36–38, 7/42–44 tools 7/51–61 quality councils 7/34 quality management 7/2–97 case study 8/52–54 commitment 7/22, 7/30, 7/32 concept 7/3–20, 7/92 concurrent engineering 7/80–91 Crosby, Philip B 7/32–34 customers, educating 7/14 Deming, W Edwards 7/23–30 enterprise-wide consideration 7/13, 7/20, 7/22 gurus 7/20–36, 7/93 Japanese view 7/4–15 Juran, Joseph M 7/30–32 proactive planning 7/12–13 quality improvement 7/31 quality planning 7/31 quality standards 7/15–20

Project Management

Edinburgh Business School

six pack 7/36–61, 7/94–95 teamwork 7/22, 7/32 time-based competition 7/80–91, 7/97 WBS approach 7/21–22 quality objectives 2/7–9, 2/11, 7/36–38, 7/39–41 quality policy 7/36–39 quality–time–cost continuum 1/9–11 Quick Gantt software 5/102 rectification, contracts 3/59 recycling phase, project lifecycle 1/23 regret tables, decision-making 3/30 reimbursement contracts 4/36 removal phase, project lifecycle 1/23 replanning, cost planning and control 6/8 reporting development review reports 6/95 exception reports 6/95, 6/95 risk reporting 3/53–54 routine reports 6/95 subject-specific reports 6/96 rescission, contracts 3/59 researching and innovating, quality management 7/25, 7/89 reserve, cost planning and control 6/17 resource driven evaluation 5/25–29 resource scheduling 5/109 quality assurance plan and review 7/48 resource aggregation 5/86–88 resource levelling 5/89–95 resource smoothing 5/89–95 resource utilisation 5/89 time planning and control 5/85–95 resources, obtaining 2/23 responsibility, organisational structure selection criterion 4/47 retribution systems 2/24 reward systems 2/24 quality management 7/34 risk assessment 3/11–16 catastrophic 3/20 client risk 3/66–67 concept 3/2–8, 3/64–68 and contracts 3/55–67, 3/72–73 control 3/11–16 controllable 3/63–64 estimating, cost planning and control 6/44 external 3/22–24 forecasting 3/9–11 internal 3/24–25

I/9

Index

map 3/14 predictable 3/25 prediction momentum 3/9–11 probability vs. impact 3/14 and procurement 3/55–67, 3/72–73 project cf. strategic 3/16–19 types 3/19–25, 3/38, 3/69 uncontrollable 3/63–64 unpredictable 3/25 risk grids case study 8/21 risk management 3/46 risk management 3/2–73 areas 3/34 background to risk 3/2–11 case study 8/17–21 concept 3/33–54, 3/70–72 contracts 3/55–67 decision making 3/25–33 insurance 3/51–52, 3/64, 3/67 phase, TQM 7/63, 7/65 procurement 3/55–67, 3/72–73 risk analysis 3/40–46 risk attitudes 3/41, 3/46–48 risk classification 3/38–40 risk conditions 3/25–33, 3/70 risk control 3/53–54 risk distribution 3/48–49 risk grids 3/46, 8/21 risk handling 3/11–19, 3/69 risk identification 3/34–38 risk mapping 3/41–46 risk migration 3/42 risk policy 3/53–54 risk reduction 3/51 risk reporting 3/53–54 risk response 3/48–53 risk retention 3/50–51 risk transfer 3/51, 3/65 risk types 3/19–25, 3/38, 3/69 strategy 3/33 risk transfer, external project management 4/28 routine reports 6/95 Royal Institute of Chartered Surveyors (RICS) 1/27 safety standards 2/11 Savage criterion, decision making 3/30 scatter diagrams, quality control 7/56 schedule limits, CMS 7/77 schedule variance (SV), variance analysis 6/69–83, 6/87–93, 6/96–104

I/10

scheduled time for work performed (STWP), variance analysis 6/69–74 scheduling time planning and control 5/29–60 scope cost planning and control 6/7 creeping 2/8–9, 7/89 senior management, support 2/23 server example, project characteristics example 1/7 service-level agreements (SLA) 4/34 shared loyalty 4/30 shareholder risk 3/23 six pack, quality management 7/36–61, 7/94–95 skills project management 1/7 project managers 2/9–30 specific provision, project management characteristic 1/21 staffing computer-based planning and control 5/98 functional arrangements 1/12–16 internal/external 2/36–39 profile and operation 2/36–46, 2/76 project teams 2/20, 2/36–46, 2/76 staff development 7/25 stakeholders, managing 2/42 standard forms of contract 4/36 standard tables, cost planning and control 6/32 standards procedures standardisation 7/49 project management 4/56–68, 4/73–74 quality 7/15–20 quality management 7/28 statement of work (SOW) cost planning and control 6/6 planning process 5/19–21 static risk 3/20–22 status boundaries 4/20 statute risk 3/23 storming, project team evolution 2/49 strategic cf. project risk 3/16–19 strategic focus case study 8/11–12 quality assurance plan and review 7/47 Strategic Project Plan (SPP) BS6709 1/27, 4/63–66 time planning and control 5/6 strategic risk 3/19 strategy displacement, risk 3/18–19 strengths, weaknesses, opportunities and threats (SWOT) analysis, quality control 7/54–56

Edinburgh Business School

Project Management

Index

stress management 2/66–68 origins 2/63–65 project teams 2/63–68, 2/78 symptoms 2/65–66 structures project management 1/12–16 subcontract agreements 4/37 subject-specific reports 6/96 success/failure criteria establishing 2/23 negotiating 2/42 supervision 2/20 quality management 7/26 supply contracts 4/37 support, organisational structure selection criterion 4/48 systems management theory, organising function 2/17 targeting, controlling function 2/19 target-price contracts 4/36 targets, planning team 2/43 Task Responsibility Matrix (TRM) accountability 3/54 authority 2/12–13 case study 8/12–13 risk mapping 3/43 technical skills, project managers 2/10 technology computer-based planning and control 5/98 organisational structure selection criterion 4/47 telephone systems complexity example 1/11 tendering phase case study 8/14–15 procurement 3/62 project life cycle 1/22 tenders, contracts 3/56–59 term contracts 4/34 termination, contracts 3/59 time objectives 2/7–9, 2/11 time planning and control 5/2–11 case study 8/33–41 communicating the plan 5/17 complexity, large projects 5/15–16 concept 5/2–10 data sources 5/10–13 environmental issues 5/10–13 people issues 5/14–15 planning variations 5/10 process 5/10–60, 5/104–108 project life cycle 5/7–10

Project Management

Edinburgh Business School

project replanning 5/108, 5/60–71 resource scheduling 5/85–95 software, project planning 5/95–104 and SPP 5/6 trade-off analysis 5/108, 5/60–85 uncertainty 5/16 uniqueness, project 5/13–14 time recording 4/24–25 time–cost–quality continuum 1/9–11, 5/3, 7/44 time-based competition (TBC), quality management 7/80–91, 7/97 time–cost curves concurrent engineering 7/81–82 time-cost curves project replanning 5/60–71 tooling up phase, project life cycle 2/47 top down estimating 6/36–38 top down planning approach 5/18–19 total quality management (TQM) 7/61–70, 7/95–96 advantages 7/68–70 commitment 7/22 concept 7/61 defined 7/62–63 disadvantages 7/68–70 implementation 7/65–67 people issues 7/10–12 structure 7/63–65 tracking, cost planning and control 6/9, 6/81–83 trade-off analysis 5/108, 5/60–85 and concurrent engineering 7/81–82 crash analysis 5/61–71 methodology 5/74–78 quality assurance plan and review 7/49 trade-off classification 5/78–81 trade-off curves examples 5/81–85 training and development 2/20 computer-based planning and control 5/98 quality management 7/29 trend analysis, quality control 7/61 uncertainty conditions, risk management 3/25–33 Unfair Contract Terms Act (1971) 3/52, 3/65 unpredictable risk 3/25 value, of quality 7/5–7 variable costs, cost planning and control 6/16 variance analysis, cost planning and control 6/9, 6/60–104 variance at completion (VAC), variance analysis 6/73 variance envelopes

I/11

Index

cost planning and control 6/77–78 risk 3/18–19 variance interpretation, cost planning and control 6/78–83 variances, generation of, PCCS 6/77–93 variation orders, contracts 3/65 virtual project teams 2/45 vision phase, TQM 7/63, 7/64 void, contracts 3/59

handling 3/35 Work Breakdown Structure (WBS) cost planning and control 6/3–5 PVAR 6/96–104 quality management 7/21–22 risk mapping 3/43 time planning and control 5/21–25 work initiation, PCCS 6/58–60 work packages, cost planning and control 6/3–5

Wald criterion, decision making 3/30 warranties and bonds, cost planning and control 6/19 WHIF (What Happens IF) philosophy, risk

X/Y motivation theories 2/53–56

I/12

zero-defects 7/34

Edinburgh Business School

Project Management