PROMIS

Delegates

WELCOME....
Effective Project Cost &
Scheduling
7 – 9 October 2008
Etisalat - Dubai, U.A.E.
Dr. Jamal AlBahar, AVS, PMP
PROMIS - Dubai, U.A.E.
Project Cash Flow Analysis
& Budget

Estimating Cash Flow Profiles

& Developing a Project
The Importance of Project Budget
 The importance of Project Cost Control was
recognized as early as the 60’s, when DOD and
NASA have successfully developed and implemented
a guide for incorporating the cost control into
PERT/CPM.
 The theme is the integration and interrelation of
project time and cost functions for the purpose of the
planning and control functions.
 Cost control cannot be achieved without a baseline
budget against which actual cost performance is
measured and compared, deviations are detected,
causes are investigated, and proper actions are
implemented.
The Importance of Project Budget
 In addition, the integration of time and cost enables
us to:
 Analyze the cash flow and prepare financial plans for
ensuring proper funds throughout the project duration.
 Detect and estimate financial deficits, and estimate the
cost of financing.
 This presentation focuses on integrating time and
cost for cash flow analysis and project planning.
 Project cost control and time cost relationship will be
the subject of subsequent presentations.
Types of Budgets

There are three types of budget that are usually

used:
 Strategic.
 Tactical.
 Operational.
Strategic Budgets
 Strategic budget defines the long-term activity of an
organization.
 It’s generally updated annually.
 Once the projects are underway, actual cost data are
collected and compared to the budget in order to
monitor the project performance.
 Budget review helps control both goal setting and
resource allocation.
Tactical Budgets
 Tactical – midrange - budget details the strategic
budget and usually covers a period ranging from one
to two years.
 It details the monthly expenditures in labor, materials,
and overhead costs of each activity.
 Updates are typically carried on a quarterly basis.
Operational Budgets
 Operational budget deals with costs of specific
activities that are being performed.
 It usually spans a period of at most one year, and
 covers the costs of resources required for the
completion of each activity.
Preparing the Budget
 Preparing a budget usually is performed in
one of three ways:
 a top-down approach,
 a bottom-up approach, or
 an iterative approach.
Preparing the Budget
The Top-Down Approach
 How ?
 The top-down approach starts with the strategic budget as
this defines the organization goals developed by top
management.
 It is then passed down to the functional managers to
develop both the midrange (tactical) and the short-range
(operational) budgets.
 Problems:
 The difficulty in translating the strategic budget into tactical
and operational budgets. The reason behind that is that
usually top management is not aware of every aspect of
these projects when preparing these budgets.
 Lower-level managers will compete instead of cooperating to
secure their share of the budget.
Preparing the Budget
The Bottom-Up Approach
 How ?
 Letting each project manager develop his/her own
proposal.
 These proposals are then handed to functional
managers to prepare the budget for their units, and
finally
 These are handed over to top management to
integrate these budgets into a strategic one.
 Problems:
 Reduces the top management control over the whole
process of budgeting.
Preparing the Budget
The Iterative Approach
 How ?
 This approach tries to alleviate the problems of
previous approaches in an iterative way.
 It starts at the top management level that sets a budget
framework serving as a guideline for project managers
as they prepare their budgets.
 This process can undergo several iterations in order to
fine-tune the process.
 It increases the cooperation between different levels of
management.
 Problems:
 its duration, since going through different iterations
may take a long time.
 Cost Budgeting:
 Aggregate individual activity estimates.
 Establish a total cost baseline.
 Used to measure and control cost over the project
time.
 The S-curve:
 A time phased budget that is used to measure cost
performance against.
Cumulative value ($)

Time
 Budgeting through
Time-Cost Integration
 Consider The following project schedule network and the
activities direct costs table below.
 Direct cost of each activity is assumed to be uniformly
distributed over activity duration.
 Indirect cost is estimated at $ 2,000 per week.

4 12
10 12
Name T Direct cost Direct cost
19
B
8
(Wk.) ($) $/Week
25
4 12 E
TF = 0 7 A 4 36,000 9,000
FF = 0
0 4 12 19 19 20
4 7 TF = 0 B 8 48,000 6,000
5 15 FF = 0 35
A C G C 3 30,000 10,000
4 3 1

0 4
9 12
10 16
19 20 D 2 24,000 12,000
TF = 5
TF = 0 FF = 3 TF = 0
FF = 0 30 FF = 0 E 7 56,000 8,000
7 10 F
6 F 6 60,000 10,000
20 13 19
D
3
TF = 3
FF = 3
G 1 6,000 6,000
9 TF = 2 12
Total 20 260,000
FF = 0
Early Schedule Cash Flow Diagram

Activity 1 2 3
A 9
300

Σ Direct $
9 9
250
Σ Indirect $
200 Σ Total $
Cost ($ 1,000)

B
150

100

50

0
0 5 10 15 20
Time (weeks)
Late Schedule Cash Flow Diagram

Activity 1 2 3
A 9
300

250
Σ Direct $
9 9
Σ Indirect $

Cost ($ 1,000)
200 Σ Total $

B
150

100

50

0
0 5 10 15 20
Time (weeks)
Baseline Schedule Cash Flow Diagram

Activity 1 2 3
A 300

250
9 Σ Direct $
9 9
Σ Indirect $
200 Σ Total $
Cost ($ 1,000)

B
150

100

50

0
0 5 10 15 20
Time (weeks)
Cash Flow Diagrams

300
Baseline
Cumulative total cost ($ 1,000)

250 Early Schedule

Late Schedule
200

150

100

50

0
0 5 10 15 20
Time (weeks)

Cumulative Cost Vs Time

Time/Cost Analysis
 It is standard practice in any project to
estimate resource demands and activity
duration in the most economical way.

 These estimates are usually determined

from the past experience or historical data
obtained from similar projects.
 Crashing a Project
 CPM includes a way of relating the project
schedule to the level of physical resources
allocated to the project.

 This allows the project manager to trade time

for cost, or vice versa.

 Two activity times & two costs are specified,

if appropriate, for each activity
 Critical Path Method - Crashing a
Project/Cont.
 The first time/cost combination is called normal,
and the second set is referred to as crash
 Normal times are “normal” time required to
accomplish activity within normal conditions.
 Crash times result from an attempt to expedite
the activity by the application of additional
resources.
 Critical Path Method - Crashing a
Project/Cont.
 Careful planning is critical when attempting to
expedite (crash) a project.

 Expediting tends to create problems; and the

solution to one problem often creates several
more problems that require solutions.

 Some organizations have more than one level of

crashing.
The Time/Cost curve
 Describes the reduction effect in the duration of an activity has on
the cost of the activity.

 The method of reducing the duration of an activity (normal point) to

a crashed point is known as crashing.

 Normal Point –The cost & time when the activity is performed in the
normal way without extra resources such as overtime, improved
equipment or other materials that could expedite the activity.

 Crash Point - The cost & time when the activity is expedited by the
use of extra resources, manpower, etc. No cost is spared to reduce
the duration of the activity as much as possible
 Example
 A manual painting operation requiring 4 days at $400 per day.

 With a special compressed airflow system, however, two workers can

complete the job in 2 days for $1,000 per day.
 The Normal point: the activity can be performed in 4 days for
$400 x 4 = $1,600
 The Crash point: in 2 days for $1,000 x 2 = $2,000.
 Normal duration is associated with the lowest-cost option for the activity.

 It is this value that is used in the preparation of the initial budget.

 Time/Cost Curve
Cost

Crash Point Minimum time

CC

Normal Point Minimum cost

NC

CT NT Time

Cost Slope = CC – NC / NT - CT
What is Crashing and How?
 The process of reducing the project duration
either to comply with contractual requirements,
external constraints, and/or to reduce the
project cost.
 Accomplished by reducing the duration of one
or more critical activities by assigning more
resources to the activities or by adopting more
productive technique/method for accomplishing
the work.
What is Crashing and How?/Cont.
 Crashing a critical activity means moving from the
activity normal point towards the crash point. I.e.,
additional direct cost.
 Among all the activities that can be crashed, the activity
or combination of activities having minimum crashing
cost are selected for crashing.
 As critical activities are crashed, the critical path may
change. None critical activities may become critical. If
this takes place, then activities on the new critical path
have also to be crashed.
Effect of Crashing a Project on the
Project Cost
 Project cost consists of Direct & Indirect costs.
 Indirect costs are usually periodic costs which
is directly related to project duration. Delay in
project completion time will increase the
indirect costs.
 When project is delayed, liquidated damages
may be applied.
 Some contracts call for incentives for early
completion time.
Effect of Crashing a Project on the
Project Cost/Cont.
 Crashing or reducing the project duration
increases the direct costs as we move from the
normal time towards the crash time of the
crashed activities.
 The total project cost is thus sensitive to the
project completion time.
 There exists a project completion time at which
the total project cost is minimum.
Project Time-Cost Relation

Cost Total Costs

Indirect Costs
Direct Costs

Time
b

Point b is the project time at which the total project cost is minimum
 Crashing a Project
Case Study (20)

 Consider the following network

of a project consisting of nine
activities with a scheduled
project duration of 32 weeks.
 and the following table of time-
cost data.
Activity tn tc Cn Cc Allowable Cc/week
Crash
A 7 6 600 750 1 150
B 8 6 750 900 2 75
C 9 7 900 1100 2 100
D 11 8 1100 1400 3 100
E 8 5 850 1200 3 116.67
F 10 7 1000 1300 3 100

ES Num
G 12 10 1300 1500 2 100 Legend
H 13 11 1400 1500 2 50
Cc − Cn
I 14 10 1500 2000 4 125 Crashing cost per week =
tn − tc

0
which, for activity F means that
1,300 − 1,000
Crashing cost per day = = $100 / week
10 − 7
 Crashing a Project
Crashing by 1 Wk
 Critical Path = B-F-I
 Project time = 32 weeks.
 Direct Cost = $ 9,400
 Crashing options =
 B @ $75/wk
 F @ $100/wk
 I @ $125/wk

Activity t Allowable Cc/week

Crash
A 7 1 150
B 8 2 75
C 9 2 100
D 11 3 100

ES Num
E 8 3 116.67
Legend
F 10 3 100
G 12 2 100
H 13 2 50 Decision: Crash B by 1 week @ $75/wk

0
I 14 4 125
 Crashing a Project
Crashing by Another 1 Wk.
7 30 16 16 70 28
 Critical Path(s) = B-F-I, A-D-H 0
3 C 0 3 G 3
3
10 9 19 0 19 12 31
 Project time = 31 weeks.
 Direct Cost = $ 9,475 0 10 7 0 7 40 18
0 0
 Crashing should be of activities on 0 A 0 0 D 0
both critical paths. 0 0 0
0 7 7 7 11 18
18 80 31 31 100 31
 On each critical path, select the 0 St. 0 1 H 1
0
0 Fin 0
0 0 0 18 13 31 31 0 31
activity of minimum crashing cost. 0 20 7 7 50 15
0 B 0 3 E 3
0 3
0 0 7 7 10 8 18

7 60 17 17 90 31
0 F 0 0 I 0
Activity t Allowable Cc/week 0 0 0
6 10 18 18 14 32
Crash
A 7 1 150
B 8 1 75
C 9 2 100
D 11 3 100

ES Num
E 8 3 116.67
Legend
F 10 3 100
G 12 2 100
H 13 2 50 Decision: Crash B & H by 1 week @ $125/wk
I 14 4 125
 Crashing a Project
Crashing B & H by 1 Wk.
7 30 16 16 70 28
 Critical Path(s) = B-F-I, A-D-H 0
2 C 0 2 G 2
2
9 9 18 0 18 12 30
 Project time = 30 weeks.
 Direct Cost = $ 9,600 0 0 10 7 0 7 40 18 0
0 A 0 0 D 0
 Crashing should be of activities0 0 0
0 7 7 7 11 18
18 80 30 30 100 30
on both critical paths. 0 St. 0 0 H 0 0 Fin 0
0
 B cannot be further crashed. 0 0 0
0 20 6 6 50 14
18 12 30 30 0 30

0 B 0 4 E 4
0 4
0 0 6 6 10 8 18

6 60 16 16 90 30
0 F 0 0 I 0
Activity t Allowable Cc/week 0 0 0
6 10 16 16 14 30
Crash
A 7 1 150
B 8 0 75
C 9 2 100
D 11 3 100

ES Num
E 8 3 116.67
Legend
F 10 3 100
G 12 2 100
H 13 1 50 Decision: Crash F & H by 1 week @ $150/wk
I 14 4 125
 Crashing a Project
Crashing F & H by 1 Wk.
7 30 16 16 70 28
 Critical Path(s) = B-F-I, A-D-H 0
1
8
C
9
0
17 0
1
17
G 1
12 29
1
 Project time = 29 weeks.
 Direct Cost = $ 9,750 0 0 10 7 0 7 40 18 0
0 A 0 0 D 0
 Crashing should be of activities0 0 0
0 7 7 7 11 18
18 80 29 29 100 29
on both critical paths. 0 St. 0 0 H 0
0
0 Fin 0
0 0 0 18 11 29 29 0 29
 H & B cannot be further crashed 0 20 6 6 50 14
0 B 0 4 E 4
0 4
0 0 6 6 10 8 18

6 60 15 15 90 29
0 F 0 0 I 0
Activity t Allowable Cc/week 0 6 9 15 0 15 14 29 0
Crash
A 7 1 150
B 8 0 75
C 9 2 100
D 11 3 100

ES Num
E 8 3 116.67
Legend
F 10 2 100
G 12 2 100
H 13 0 50 Decision: Crash D & F by 1 week @ $200/wk
I 14 4 125
 Crashing a Project
Crashing D & F by 1 Wk.
 Critical Path(s) = B-F-I, A-D-H, 7 30 16 16 70 28

and A-C-G 0
0
7
C
9
0
16 0
0
16
G 0
12 28
0

 Project time = 28 weeks.

 Direct Cost = $ 9,950 0 0
0
10
A
7
0
0 7
0
40
D
17
0
0

 Crashing should be of activities 0 0 0

0 7 7 7 10 17
17 80 28 28 100 28

on the three critical paths. 0

0
St.
0
0
0
0
17
H 0
11 28 0
0 Fin 0
28 0 28
0 20 6 6 50 14
 A is located on 2 critical paths. 0 B 0
0
3 E 3
3
0 0 6 6 9 8 17

6 60 14 14 90 28
Activity t Allowable Cc/week 0 F 0 0 I 0
Crash 0 6 8 14 0 14 14 28 0

A 7 1 150
B 8 0 75
C 9 2 100
D 11 2 100
E 8 3 116.67

ES Num
F 10 1 100 Legend
G 12 2 100
H 13 0 50 Decision: Crash A & F by 1 week @ $250/wk
I 14 4 125
 Crashing a Project
Crashing A & F by 1 Wk.
 Critical Path(s) = B-F-I, A-D-H, 6
0
30
C
15
0
15
0
70 27
G 0
and A-C-G 0
6 9 15 0 15 12 27
0

 Project time = 27 weeks.

0 10 6 0 6 40 16
 Direct Cost = $ 10,200 0
0 A 0 0 D 0
0

 Crashing should be of activities 0 0 0

0 6 6 6 10 16
16 80 27 27 100 27
on the three critical paths. 0
0
St.
0
0
0
0
16
H 0
11 27 0
0 Fin 0
27 0 27
 A & F cannot be further crashed 0
0
20
B
6
0
6
2
50
E
6
14
2
0 2
0 0 6 6 8 8 16

6 60 13 13 90 27
Activity t Allowable Cc/week 0 F 0 0 I 0
0 0 0
Crash 6 7 13 13 14 27

A 7 0 150
B 8 0 75
C 9 2 100
D 11 2 100
E 8 3 116.67

ES Num
F 10 0 100 Legend
G 12 2 100
H 13 0 50 Decision: Crash I, D, & (C or G)
I 14 4 125 by 1 week @ $325/wk
 Example
Project Time-Cost Trade-offs
 Consider: 18000

16000
 Indirect Cost of $200
14000
per week, 12000

Project Cost ($)

 Liquidated damages 10000

of $500 per week for 8000

project duration 6000

beyond 30 weeks, 4000 Direct Cost ($)

and 2000
Indirect Cost ($)
Liquidated Damages ($)
Total Cost ($)
 No incentive plan 0
25 26 27 28 29 30 31 32
Project Duration (w eeks)

Project Duration (wk) 26 27 28 29 30 31 32

Direct Cost ($) 10,525 10,200 9,950 9,750 9,600 9,475 9,400

Indirect Cost ($) 5,200 5,400 5,600 5,800 6,000 6,200 6,400
Liquidated Damages ($) 0 0 0 0 0 500 1,000

Incentives ($) 0 0 0 0 0 0 0

Total Cost ($) 15,725 15,600 15,550 15,550 15,600 16,175 16,800
Earned Value Management (EVM)

 EVM is a project performance measurement

technique that integrates scope, time, and cost data.
 Given a baseline (original plan plus approved
changes), you can determine how well the project is
meeting its goals.
 You must enter actual information periodically to use
EVM.
 More and more organizations around the world are
using EVM to help control project costs.
The EV System
 To set up the EV system
1. Establish the WBS to divide the project into
manageable portions.
2. Identify the activities to be scheduled that
represent the entire project.
3. Allocate the costs to be expended on each
activity.
4. Schedule the activities over time.
5. Tabulate, plot & analyze the data to confirm that
the plan is acceptable.
To use the information generated by
the EV calculations:
1. Update the schedule by reporting activity
progress.
2. Enter the actual costs on the activities.
3. Execute the Earned Value calculations, print
and plot the reports and charts.
4. Analyze the data & write the performance
narrative.
Earned Value Technique:
 Compares reality to what was planned
originally (baseline).
 Used for cost and schedule control.

 Given project status today, report actual

progress variances.
 Forecast future outcomes

(expectations).
 Used for ETC and EAC.
 Output is performance measurements values.
 Earned Value Management Terms
 The planned value (PV), formerly called the budgeted cost
of work scheduled (BCWS), also called the budget, is that
portion of the approved total cost estimate planned to be
spent on an activity during a given period.
 Actual cost (AC), formerly called actual cost of work
performed (ACWP), is the total of direct and indirect costs
incurred in accomplishing work on an activity during a given
period.
 The earned value (EV), formerly called the budgeted cost
of work performed (BCWP), is an estimate of the value of
the physical work actually completed.
 EV is based on the original planned costs for the project or
activity and the rate at which the team is completing work on
the project or activity to date.
 Rate of Performance
 Rate of performance (RP) is the ratio of actual work
completed to the percentage of work planned to have been
completed at any given time during the life of the project or
activity.
 Brenda Taylor, Senior Project Manager in South Africa,
suggests using this approach for estimating earned value.
 For example, suppose the server installation was halfway
completed by the end of week 1. The rate of performance
would be 50 percent (50/100) because by the end of week
1, the planned schedule reflects that the task should be 100
percent complete and only 50 percent of that work has been
completed.
TRADITIONAL COST ANALYSIS
Back to our S-curve
Budget At Completion
(BAC)
Cumulative value ($)

Planned Value (PV)

Actual cost
(AC)
Earned Value (EV)

Time
Earned Value
Performance Measurement

EV measurement should enable a:

 Clearer measure of the project work
accomplished,
 Better forecasts of the likely task &
project completion dates & associated
costs.
 Earned Value Principles
 EV also known as the Budgeted Cost of Work
Performed (BCWP).
 EV is based on assigning a value to the
achievement of project work.
 Ideally, achievement is in terms of milestones &
deliverables.
 The value is usually monetary but can be expressed
in any appropriate units such as man-hours.
Cost Performance Analysis

 Cost Variance (CV) = EV - AC

EV
 Cost Performance Index (CPI) =
AC

Where:
 AC is the actual cost of work performed; and

 EV = Planned Value to Date * RP

Schedule Performance analysis

 Schedule Variance (cost-based) = EV - PV

 Schedule Variance (time-based) = OD - ATE
 Schedule Performance Index (SPI)
EV
Cost based SPI =
PV
OD
Time based SPI =
ATE
Where:
 PV is the budgeted (planned) cost of work scheduled.

 OD is the Original Duration planed for the work to

date;
 ATE is the Actual Time Expended for the work to
date.
 Forecasting Cost
Based on Earned Value Statistics

 EAC = AC + BAC - EV
CPI

Where:
 EAC is the estimated cost at completion

 BAC is the budget at completion

(total planned cost of work).
Forecasting Time
Based on Earned Value Statistics

 Planned Total Project Time = PTPT

 Schedule Variance (time) = OD - ATE
 Planned Time to Complete (PTC) = PTPT - OD
PTC
Estimated Actual Time to Complete =
SPI
PTC
Estimated Total Project Time = ATE + SPI
Time & Cost Forecasting

ECTC = Estimated Cost To

Complete

BAC = Budget At Completion

BCWP = Budget Cost of Work

Performed

ACWP = Actual Cost of Work

Performed

BCWS = Budget Cost of Work

Scheduled

OD = Original Duration
planned for work to date

ATE = Actual Time Expended

for work to date

PTPT = Planned Total Project

Time
Project Portfolio Management
 Many organizations collect and control an entire suite
of projects or investments as one set of interrelated
activities in a portfolio.
 Project portfolio management has five levels:
1. Put all your projects in one database.
2. Prioritize the projects in your database.
3. Divide your projects into two or three budgets based on
type of investment.
4. Automate the repository.
5. Apply modern portfolio theory, including risk-return
tools that map project risk on a curve.
Benefits of Portfolio Management

 Schlumberger saved $3 million in one

year by organizing 120 information
technology projects into a portfolio.
Using Software to Assist in Cost
Management

 Spreadsheets are a common tool for

resource planning, cost estimating, cost
budgeting, and cost control.

 Many companies use more sophisticated and

centralized financial applications software for
cost information.
 EV Analysis - Example
Budget Actual at end of day10 2 19 Target Schedule:
Activity Cost Start Duration % Complete Cost B
A 1,000 0 2 100 900 17
B 3,400 2 8 60 2,000
TF=FF= 0
C 9,000 6 4 50 3,200
D 5,000 Total = 6,100 0 2 8 11 13 19 19 20
E 12,000
A C E G
F 1,000 Activity C is expected to start after3 days from
2 3 5 1
G 1,000 now and is expected to last for5 days at a cost
Total = 32,400 of 2,000 $ per day. TF=FF=0 TF=FF=2 TF=FF=0 TF=FF=0

4 9 11 13
D F
5 2
TF=4, FF=2 TF=FF= 6

Efficiency Variance
Activity BT BC % BCWP BTWP ATWP ACWP ST BCWS Time Cost Schedule TV CV SV
A 2 1,000 100 1,000 2 2 900 2 1,000 100% 111% 100% 0 -100 0
B 17 3,400 60 2,040 10 8 2,000 8 1,600 128% 102% 128% -2.2 -40 -440
C 3 9,000 0 0 0 0 0 2 6,000 0% 6000
D 5 5,000 50 2,500 3 4 3,200 5 5,000 63% 78% 50% 1.5 700 2500
E 6 12,000 0 0 0 0 0 0 0
F 2 1,000 0 0 0 0 0 0 0
G 1 1,000 0 0 0 0 0 0 0
Totals: 32,400 5,540 6,100 13,600 91% 41% 560 8060

Table of Efficiencies and Variances of Activities and of the Project

.
 EV Forecast - Example

Time to complete the project = 14

Cost to complete the project =
= 1,333+10,000+2,000+12,000+1,000+1,000
= 27,333
0 5

B
5

TF=FF=8
0 0 13 14
3* 8 8 13

C E G
DD
5 5 1
0
TF=FF=0 TF=FF=0 TF=FF=0

0 4 4 6

D F
4 2
TF=4, FF=0 TF=FF=7
 Performance Analysis Plot

A useful way of using

earned value data is
to plot CPI as a
function of SPI (cost
based) through time,
to:
• reveal the direction
of the task and of
the whole project.
• demonstrate the
effect of recovery
action.
Projects Selection
 Remember: PM are not accountants!
But…
 Need to do some cost related duties.
 Selection between alternatives techniques
are very useful to know.
 Uncertainty makes risk management an
essential and important task from onset of
project to finishing date.
Some Project Selection Methods
1. Net Present Value (NPV)
2. Internal Rate of Return (IROR)
3. Payback Period (PBP)
4. Benefit Cost Ratio (BCR)
 Selection Methods
 Net Present Value (NPV)
 Considers the time value of money.
 NPV= PV (income)- PV (cost).
 Always chose the one with higher NPV.
Formula

F
P = (1 + r)n

where
F =future value of the investment at the
end of n periods
P =amount invested at the beginning,
called the principal
r =periodic interest rate (discount rate)
n =number of time periods for which the
interest compounds
Selection Methods Cont….
 Internal Rate of Return
 Maths is complex.

 i at which

PV of inflows = PV of outflows.
 Always chose the one with highest IRR

EOY CASH PV IR (i) NPV

FLOW ( i = 12% )
0 - 5000 -5000 0 2600
1 800 714.29 5 1368.5
2 900 717.67 8 763.00
3 1500 1067.67 10 404.61
4 1200 762.62 12 77.82
5 3200 1815.77 15 -360.47
NPV = 77.82 18 -745.03

20 975.57
Selection Methods Cont….
 Payback Period (PBP)
 Simple method.
 When do I get my money back?

 Ignores the time value of money.

 Chose the one with shortest PBP.

Inflows above $2m/month to break even

 Selection Methods Cont….

 Benefit to Cost Ratio (BCR)

 Usually used for public projects.
 Calculate all benefits and costs and work
out the ratio between them.
 BCR could be =, > or <1
 Would like a BCR = 1.3
The Exit Strategy
 Steps in completing the project
 Controlling costs & schedule late in the
project
 Scope verification
 Schedule Control
 Cost Control
 Contract closeout
 Administrative closure
 Contract Closure
 Completing & settling each contract
 Resolution of any open items
 Closing each project or project phase
contract
 Contract Closure
 Involves both product verification &
administrative closeout.
 During contract closeout, the PM must
perform:
 Product verification: insuring that all of the
work was completed.
 Administrative closure: documenting &
archiving final results.
 Procurement Audits
(tools & Techniques)

 Can provide valuable lessons learned by

identifying successes & failures that warrant
transfer to other procurements within the
project & other projects.
 Contract Administration
 Managing the contract & relationships
between the buyer & seller
 Reviewing & documenting how a seller is
performing or has performed
 Managing contract-related changes
 Managing contractual relationship with the
project outside buyers
Contract Change Control System
(tools & Techniques)

 Includes:
 Supporting paperwork
 Tracking systems (such as the change control
log)
 Dispute resolution procedures (such as when
to escalate)
 Approval levels required (based on cost of the
change, impact, etc.)
 Buyer-Conducted Performance
Review (tools & Techniques)
 This is a meeting where all the available data is brought
together to see if the seller is performing.
 Often the seller is present to review the data and most
importantly talk about what the buyer can do differently
to help the work along.
 The purpose of this review is to determine &
recommend needed corrective & preventive actions and
to request formal changes.
 Claims Administration
(tools & Techniques)

 A claim is an assertion that the buyer did

something that has hurt the seller and the
seller asking for compensation.
 Another way of looking at claims is that they
are a form of seller’s change requests.
Claims can get nasty.
 Many claims are not resolved until the work
is completed.
Record Management System
(tools & Techniques)

 On many projects, every e-mail, every payment,

every written and oral communication must be
recorded, kept and stored.
 On other projects the weather each day & the
number of people on the buyer’s property each day
may also be required.
 Whatever is appropriate for the particular industry
and project is kept.
 Helpful to unresolved claims, legal actions, or even
to satisfy insurance needs.
Administrative Closure
 Must be done any time a project or phase
ends.
 For example, if a project is canceled prior
to completion, the project needs to enter
administrative closure.
 This is often a good test as to how
committed an organization is to the
disciplines of project management.
 Administrative Closure

Several key things must happen in this

process, including:
 Documenting performance
 Assembling all project documentation, memos,
communications, etc.
 Finalizing all payments
 Collecting and documenting lessons learned
 Releasing resources
 Administrative Closure Includes:

 Project Archives

 Creating a complete set of indexed project

records for the project.
 Project Closure

 Verifying that the project has met all or the

customer's requirements.
 Lessons Learned
Lessons Learned Include:

 Documenting what variances occurred on

the project, and what the underlying
causes were.
 Documentation should also include
 what was done to correct the project, and
 what was learned by the performing
organization to avoid the problems that
were encountered.
Results from Lessons Learned
Include:
 Update of the lessons learned knowledge
base
 Input to knowledge management system
 Updated corporate policies, procedures, &
processes
 Improved product & service improvements
 Update to the risk management plan
Over time, lessons learned are
often incorporated into
best practices.
THANK YOU ALL …