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[P737]Project Management And Cost

by John Reynolds, Joh

There is usually a direct and very important relationship between time and money. If the planned timescale is exceeded, the original cost estimates are almost certain to be overspent. A project costs money during every day of its existence, working or non-working, weekday or weekend, from day on of the program right through until the last payment has exchanged hands. These costs arise for a variety of reasons, some of which I will explain in this article.
The variable or direct project costs of materials and workforce man-hours are time-related in several ways. Cost inflation is one factor, so that a job started and finished later than planned can be expected to cost more because of intervening materials price rises and increases in wages, salaries, and other costs.
There are other less easily quantifiable causes where late working implies inefficient working, perhaps through lost time or waiting time (often the result of materials shortages, missing information, or poor planning, communications, and organization). If any project task takes longer to perform than its planned duration, it is probable that the budgeted man-hours will also be exceeded. This is true not only for a single task, but also for the project as a whole.
The fixed or overhead costs of management, administration, accommodation, services, and general facilities will be incurred day by day, every day, regardless of work done, until the project is finished. If the project runs late, then these costs will have to be borne for a longer period that planned. They will then exceed their budget.
Another important time-related cost is financing. Where the contractor has an overdraft at the bank or relies on other loan financing, interest has to be paid on the loan. Even if the contractor can finance the project from internal funds, there is still a notional cost of financing, equivalent to the interest or dividends that the same funds could have earned had the contractor invested the money elsewhere (such as in a bank deposit account). If a project runs late, the financing period is extended, and the total amount of interest or notional interest payable must increase correspondingly.
Much of the finance raised for a large project is likely to be invested in work in progress. This work in progress includes not only work carried out in a factory or at a construction site, but also all the costs of engineering and design that have yet to be recovered from the customer. In many cases, the contractor is only able to charge for work actually finished and delivered to the customer, or for amounts of work done and supported by certified invoices. Such invoices are validated by certificates from an independent professional third party, which agree the amount of work done and claimed for. Certified invoices are often linked to planned events. If an event is late, or if a measurable progress stage has not been reached, a certified invoice cannot be issued. The contractor's revenue is then delayed, which means that the contractor must continue to finance the mounting costs of the project. The contractor could suffer severe cash flow problems as a result, perhaps leading to bankruptcy in the worst case.
Late completion can invoke the ignominy of contract cost penalties. Some contracts contain a penalty clause which provides the customer with the sanction of a cost penalty against the contractor for each day or week by which the contractor fails to meet the contracted delivery obligation.
All these time-cost considerations mean that delays on a large project can easily cause additional costs amounting to thousands of dollars per day. It is clear, therefore, that if work can be monitored and managed carefully so that it proceeds without disruption against a sensible, achievable plan, must of the battle to control costs will already have been won.

Suppose that an estimate is to be prepared for the manufacture of a box filled with instrumentation, but that no production drawings have been prepared. Only one box is to be made, since it will be required for a special project. The only description on which the estimates can be based is an artist's sketch showing the exterior of the box, and an engineer's written design specification which includes no detail at all of dimensions, materials or the contents of the box, other than to outline the functional performance of the completed product.

Standard estimating tables are not likely to be of any help at all in this kind of situation. Build-up of standards depends upon the establishment of production continuity, which demands in turn that a certain minimum volume of production must take place. Such standards cannot be applied to ?one-off? production, where the unknown variables take over to dominate the picture. In any case, there are no drawings from which to break the work down into operations, and so the standards ? even if they were valid ? could not be applied.

A stage in the project planning process has now been reached where many professional estimators, production engineers and work study devotees find themselves foundering well out of their normal depth. Their trusted books of standard times, with which they have worked for many years, and much of their professional training will become virtually useless when they are faced with the problem of estimating for work where no drawings exist. They have learned to regard drawings as their customary means of expression and communication. Without such aids they are rendered helpless. They feel deprived and are quite unwilling to commit themselves to giving forecasts which may require justification later.

There is no simple solution to all of these problems, but it is possible to outline a new line of approach which is more likely to yield results. Fortunately, the lack of drawings and the necessity for making estimates in a short space of time are two conditions which demand a similar handling technique. Project estimating, as has already been seen, is carried out on a much broader scale that run-of-the-mill production work. Larger work packages must be visualized. With the broader view the level of seniority of the estimators rises until the production manager himself could become involved.

With the example of a metal box filled with instrumentation, the estimating method might proceed along the following lines. First a description of the proposed box would be needed, with some idea of its contents. The engineers must provide this information since they are the only people at this stage who can possibly have any real idea what the final, detailed article will be like.

Once a description of the new box has been set down it is usually possible to find a previous piece of work which bears some resemblance to the new job. Once again the engineers are the only people who can be asked to make such comparisons at this stage. It might be said that no direct parallel exists but that one previous job was carried out which was somewhat simpler than the present object of concern. ?How much simpler?? is the question which must now be asked. The engineer may say that about 10% more components will be needed this time, giving a basis on which to approach the production department for an estimate.

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John Reynolds has sinced written about articles on various topics from Management, Family and Home. John Reynolds has been a practicing project manager for nearly 20 years and is the editor of an informational website rating project management software products. John Reynolds's top article generates over 2400 views. Bookmark John Reynolds to your Favourites.