Professional Documents
Culture Documents
DIPLOMA in
PROJECT MANAGEMENT
MODULE : MODULE 7:
Project Construction Management
MATRIX ID : JX78946HP702
Table of Contents
1 Introduction Summary...................................................................................................4
2 Cost Variance..................................................................................................................5
3 Causes of Negative Cost Variances................................................................................7
4 Project planning and estimation..................................................................................10
4.1 Earned Value Reporting...........................................................................................11
5 Suggestions on avoiding variances between planned and actual costs....................15
5.1 Reference class forecasting......................................................................................16
5.2 Scope Management..................................................................................................17
5.3 Project baseline........................................................................................................18
6 Conclusion.....................................................................................................................19
7 Bibliography..................................................................................................................20
8 References .....................................................................................................................20
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Module 7: Project Construction Management
1 Introduction Summary
You have been given a project to manage. It is estimated to cost about $1M and
should be completed within 12 months. Estimating the project budget is an essential
part of project planning but for a number of reasons the actual expenditure during
project implementation often exceeds the budget estimate. Explain what you
consider are the major causes of the variances between planned and actual costs.
Your explanation should include some suggestions as to how these problems might
be avoided or overcome.
Project managers have the utmost task in organizations to complete projects based
on cost, time, scope and quality. Based on these three points, the task of project
management becomes a huge task because they have to manage the constraints related to
cost, time, scope and quality of the project. A project is defined as having a finite
initiating, planning, executing, monitoring and controlling, and closing (PMBOK 1996).
However, there are instances of project failure and most times project failures are
attributed to poor fiscal management of a project. Poor fiscal management of the project
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According to the Standish group, it is found that average project cost overrun was
43 percent, 71 percent of projects were over budget, over time, and under scope, and total
waste was estimated at US$55 billion per year in the US alone in 2003 (Standish Group
and technology projects. One of the most comprehensive studies of cost overrun that
exists found that 9 out of 10 projects had overrun, overruns of 50 to 100 percent were
common, overrun was found in each of 20 nations and five continents covered by the
study, and overrun had been constant for the 70 years for which data were available
(Flyvbjerg et al 2002)
US$11 billion.
• Channel tunnel between the UK and France- 80% construction costs and 140%
financing costs.
2 Cost Variance
There is a saying in Murphy’s Law that says that “whatever can go wrong
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actual cost exceeds the planned cost. Therefore, a project manager’s main
An excess of actual cost over planned cost is known as a negative cost variance.
When the project manager is planning for the project, the cost of the project is based on
estimates and it is this estimates upon approval by management, that it becomes the
budgeted cost. Cost overruns will happen when there is an additional amount of actual
cost that goes above and beyond the budgeted cost. This is what we call cost overrun or
budget overrun. Most studies have also shown that the greatest cause of cost growth was
also due to a poorly defined scope during the establishment of the budget (Merrow et al
1981).
In organizations where they hope to seek a nett profit margin of 10 percent upon
gathering, late deliverables, and faulty judgments will erode any profit made during the
project. Instead what you have is a negative variance where the actual cost of the project
exceeds the planned cost of the project. Most cases, the projects are deemed as a loss. In
situations as such, project managers would often face the sack from the organization
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cost.
Cost overrun is known as the extra amount of actual cost over a budgeted cost. By
taking the optimistic view of projects without considering the known unknowns can be a
folly. Often times, these known unknowns can be a potential problem to a project. Below
is a list of possible problems during a project that can affect a negative variance between
• Errors and omissions in the project work scope that would take additional time as
• Miscommunications of the project work and reporting which can cause work to be
• Poor requirements gathering which mean necessary information not being relayed
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• Failure in user acceptance and quality control that can mean going back to the
drawing board.
Poor risk analysis and contingency estimating practices account for many project
cost overruns (Hackney 1997). In addition, project managers also face pressure from
their project sponsors because they have to meet the project deadlines within the time and
project sponsor. In addition, there are also other reasons why there are
• Lacking good project management skills and other tools and techniques required
sponsor can assign values to three project constraints but the project
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C = f(P, T, S)
C=Cost
f= Function
P=Performance
T=Time
S=Scope
was known of the sides of a triangle, we can compute the area. Also, if
we know the area and the value of the two sides, we are able to
compute the length of the remaining side. This is the rule in project
2007).
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In the past, project managers would only know the extent how much a project has
been overrun only when the project has been completed. The common belief that if a
project was on time and within budget, the project manager would have completed the
job as expected unless the schedule and budget were exceeded. As such, project managers
would use methods of measuring the progress of a project to ensure that they meet the
delays, labor strikes, contractual disputes between vendor and supplier, or design
changes, the project manager would have to assume that the work being completed is at a
requirements that must be met (PMBOK 1996). When the project plan
project baseline to balance the work objectives with schedule, resource, and
cost considerations. The project baseline forms the comparison point between the actual
and the planned performance of the project. The basic activities in the development of a
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• Assigning resources.
• Budgeting.
This is important because with the baseline indentified in the project, the project
manager would be able to evaluate the progress on the project. This is based on a defined
workscope, and schedule, resource, and cost issues as the baseline forms the basis of the
project plan (Levine 2002). This gives the project manager an accepted cost-schedule-
quality equilibrium of the project. By changing the baseline, the equilibrium would be
changed as well because matters such as missing the original cost and schedule goals
would affect the outcome of the project. The new baseline should be close to real as
possible that reflects the actual level of performance, which would give us a new cost-
However, in order to get a real measure of the cost performance, planned and
actual costs will be compared for a negative or positive variance. In getting the real
comparison of the planned and actual costs, project managers use earned value reporting
to get real cost data based on accurate cost and schedule reporting. In reference to Figure
2 below as an example, projects can be ahead of schedule which would be good but
however can be over the budget, which is bad. However, the project can be ahead of
schedule and also meets the budget which is good for the profitability of the project
(Verzuh 2005). With earned value reporting, the project manager would have vital
information visibility with the emphasis of the variance between actual and planned.
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Figure 2: Planned versus actual cost over time. During the first three months, the
project spent money faster than forecasted, but that isn’t necessarily an indication
the project will be over budget—it might be ahead of schedule.
In addition, you can also add in additional points to ensure meeting the schedule
and budget. However, a project manager needs to fully understand the situation of the
project beyond looking at the cost and scheduling of the project. As per the diagram
example of Figure 3 below, the project manager needs to look beyond the variance of just
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Figure 3: Cost and schedule performance chart. Graphing the cost and schedule
variance of Projects A, B, C, and D quickly identifies which needs the most
immediate attention.
In measuring the variances between planned and actual cost, the Project
Management Institute (PMI), based in the United States uses these terms in tracking cost.
These terms are meant to aid the project manager to track cost using earner value
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Below at figure 4 is an example of how earned value reporting that assists the project
manager in measuring cost performance to date and to recalculate the budget (Levine
2002).
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Figure 4: Sample calculation of measuring cost and schedule performance with earned
value.
A negative variance between planned and actual costs occurs when the actual
project costs exceeds the budgeted costs. However, if the variance has been already
included as part of project budget as part of a contingency plan then the project may not
happen in a project and there are many ways that we can look to warrant against negative
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There are methods that a project manager can use to warrant against negative
variances or project cost overruns. Below is a summary of some of the methods that a
1. Reference class forecasting- a method with which the costs of a project are
2. Ensuring the scope and details of the project prior and during the project.
activity by referencing historical project activities that are similar to the project being
forecasted. This method was developed by economists, Daniel Kahneman and Amos
variances because they focus too much on the project and they do not take into account
historical information of other similar projects that can help avoid project cost overruns.
They recommend that project managers or forecasters "should therefore make every effort
information that is available" (Kahneman and Tversky 1979, p. 316). In using reference
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• Establish a probability distribution for the selected reference class for the
• Compare the project being planned with reference to the other past and similar
The project manager needs to ensure that the project is properly scoped and defined
to safeguard against a project overrun, which would lead to cost overruns or negative cost
variance. With the project scope in place as well as properly defined, this will match the
contents of an approved contract or an approved work authorization, and spells out the
In monitoring the scope, the work items will have time and effort data associated
with the project. This will include schedule dates, effort hours, and costs of the project.
From here, the project manager would be able to track the progress against the project
plan in the execution of the project (Levine 2002). Below are some recommended
• Ensuring that there is a standard practice for additions to the scope of work of the
project.
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added to the scope. From here a decision is to be made from the project budget
project information.
It is assumed that once a project has been planned, a list of work items would have
been defined to support the project charter. The list of work items would contain time and
effort data such as schedule dates, effort hours, and costs. From this information, we
would have formed the project baseline and with its formation, the project manager
would be able to track the progress of the project and also be able to measure any
variances. Any adjustments can be made to project during the early phases of the project
as long as it does not hugely affect the baseline and after valid authorization. With the
project baseline being established the project manager would also be able to manage any
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6 Conclusion
Projects that are big in scope and work tend to be challenging and difficult to
manage. This is because the project manager has to manage the cost variance as well as
the schedule variance of the project. Managing the scope as well as the establishment of
the project baseline helps the project manager in providing remedies against negative cost
variance which is project cost overrun. Also by using reference class forecasting, project
managers would be able to estimate planned costs better based on past and similar
projects.
What is most important is that putting in place the project baseline, the project
manager can use earned value reporting to monitor the actual progress of the project in
terms of cost and schedule variances. What is needed in order for this is an approved
detailed and defined project plan. From the progress, the project manager would be able
to affect any changes needed from the data received via earned value in order to maintain
the profitability as well as being on track for project completion. This requires the project
“The most effective project managers are developed day-to-day, not year-to-year or
project mistake-to-project mistake. Mistakes will happen, even with the best of
mentoring, however, project managers with strong mentors should find their people
effectiveness continually improving. The benefit is that the company and everyone
connected to the project shares in those gains.” Neal Whitten (Whitten 1999)
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7 Bibliography
8 References
3. Kukreja, Krishan: Project Cost Overrun And Its Impact. 7 Sept. 2008
<http://project-and-program-management.com/?cat=4>
Wiley, 2002
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Amacom, 3rded.
6. Luckey, Teresa and Phillips, Joseph (2006): Software Project Management For
10. Verzuh, Eric, (2005): The fast foward MBA in project management New Jersey,
Wiley, 2ed.
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